Econ - Theme 1: Intoductions to markets and market failure

What is the scientific method?

A logical, systematic approach to the solution of a scientific problem

What are laws?

Theories which gain universal acceptance

Why is the scientific method hard to use in economics?

In economics it is often not possible to set up experiments to test hypothesis and it is often not possible to establish control groups or to conduct experiments in environments which enable one factor to be varied whilst other factors are kept constant

Why is it sometimes argued that economics cannot be a science?

Because it studies human behaviour and human behaviour cannot be reduced to scientific law

What is the difference between an economic theory and an economic model?

An economic theory is generally expressed in looser terms than a model.
Theories can often be expressed in words but economic models because they require greater precision in the specification are often expressed in mathematical terms

Why are the series and models are useful in science?

The universe is a complex place and somehow we have to make sense of the things around us.
We want to know why something is as it is

What are the two types of investigations in economics?

Positive and normative

What is positive economics?

The scientific and objective study of the subject

What are positive statements?

Objective statements that can be tested, amended or rejected by referring to the available evidence.

What is normative economics?

Concerned with value judgements. It deals with the study of and presentation of policy prescriptions about economics

What are normative statements?

Subjective statement states that carry value judgements about what ought to be

What is economics the study of?

Choices people take under the conditions of scarcity and uncertainty

What was the traditional economic theory?

That consumers seek to maximise their own satisfaction and that businesses aim to maximise profit

What are value jugements?

statements in economics that are based on opinions rather than facts

What is the basic economic problem?

It is that there are infinite wants and limited economic resources

What can economic resources be categorized into?

Land, Labour, Capital, Enterprise

What is a capital good?

manufactured (MANMADE) good used to produce other goods and services

What are the different agents in economics?

Rational customers
Producers/Firms
Government

What assumptions are made about rational customers in economics?

We assume that they wish to maximise their utility from consumption by correctly choosing how to spend their limited income.

What assumptions are made about firms and producers in economics?

That they wish to maximises their profits, by producing at lowest cost the good and services that are desired by customers.

What assumptions are made about the government in economic?

That they wish it improve the economic and social life and welfare of the citizen.

What do behavioural economic theories challenge in economy?

They challenge the assumptions of rationality in our decisions in the economy

What is opportunity cost?

Measures the cost of a choice made in terms of next best alternative foregone or sacrificed.

What a re the most common type of opportunity costs?

Work leisure choices, Government spending priorities, Investing today for consumption tomorrow, Use of scarce farming land

What are factors of production

They are the input avaliable to supply goods and services in an economy

What are the factor of production?

Land, Labour, Capital and Enterprise

What are factor rewards?

Describes the income that flows to each of the main factors of production when there are brought into productive use

What a are the different ways of rationing scarce resources?

By market price
By consumer income
By assessment of need
By household postcode
By nationality
By gender
By age
By education level

What is rationing?

Is a way of allocating scarce goods and service was when market demand out weights the available supply

What are capital goods?

Goods that are used to make consumer goods and services

What are some examples of capital inputs?

Fixed Plants and machinery, hardware, software, new factories and other buildings

What are goods and services?

Goods and services which satisfy our need was and wants directly

What are the sub divisions of consumer goods and services?

Consumer durables
Consumer non-durables
Consumer services

What are consumer durables?

products that provide a steady flow of satisfaction/utility over their working life

What are consumer non-durables?

products that are used up in the act of consumption

What are consumer services??

services that help individual consumers

What are non-renewable resources?

a natural resource that cannot be replaced when used up

What does the rate of extraction of finite ressources depend on?

Depends in part on the current market price as businesses with rights to extract will have a greater incentive to do so when prices are high because of the profit motive

What are renewable resources?

Renewable resources are replaceable over time

What does the rate of extraction of reneweable resource depend on?

That the naturalist source is being replenished in time for it to be extracted

What are free goods?

They do not use up any factor inputs when supplied and have zero opportunity cost

What does it mean for a product to have zero opportunity cost?

The marginal cost for supplying an extra unit is zero

What is an economic system?

a network of organisations used to resolve the problem of what, how much, how and for whom to produce

What are the different economic systems?

Free market
Mixed economy
Command economy

What is the free market economy?

An economy in which companies compete and people, buyers and sellers, make their own economic decisions with only a limited role for government

What are the chracteristis of the free market economy?

Market allocate resources, Driven by the profit motive, Limited role for state, Private sector dominates

What are some examples of free market economies?

US
Singapore
Ireland
Switzerland

What is a mixed economy?

An economy in which private enterprise exists in combination with a considerable amount of government regulation and promotion.

What are the characteristics of a mixed economy?

Mix of state and private ownership, Government intervention in markets, Mix will vary from country to country

What are some examples of mixed economies.

China
Norway
Vietnam

What is the command economy?

an economy in which production, investment, prices, and incomes are determined centrally by a government.

What are the characteristics of a command economy?

Most resources are state owned
Planning allocates resources
Little role for market prices

What are examples of command economies?

Cuba
North Korea

What are the advantages of a free market economy?

efficient response to change marketplace conditions
variety of goods and services
freedom of choice for consumers and producers
growth and innovation

What are the disadvantages of a free market economy?

Inequality due to wealth staying the hands of the people who can by up the scare factors of production
product quality falls as firms lower quality standards in order to increase profits
Workers and consumers get exploited
Resource depletion, environmental concerns
Monopolies develop as firms increase market power through mergers

What are the advantages of the command economy?

Capable of dramatic change in a short time
Many basic education, public health, and other public services available at little or no cost

What are the disadvantages of the command economy?

Does not meet wants and needs of many consumers, Lacks effective incentives to get people to work, Requires large bureaucracy which can be inefficient, Has little flexibility to deal with small, day-to-day changes, New and different ideas discouraged, no room for individuality

What are the advantages of the mixed economy?

-Market failure can be accounted for
-Improved equality
-Government try and reduce market failure
-Stabilise economy
-Investment can shift AD right
-Good standard of living

What are the disadvantages of the mixed economy?

include too much government interference, too much or too little freedom of choice, the government restricting competition, and the country going into debt because of government intervention

What are the advantages of free market competition?

An efficient allocation of scarce resources
Competitive prices for consumers and supplies look to increase and protect their market share
Drives innovation in markets which can bring higher profits for businesses and better products for consumers.
The profit motive stimulates capital investments which encourages economies of scale and lower prices in the long run
Competition in the form of international trade in goods and services helps to reduce domestic monopoly power and increase choices

What is free market competitions?

Free market competition is a type of economic system where businesses compete with each other to attract consumers in a market with few or no government regulation

In a mixed economy, what is the state split into?

State owned industries
Welfare State
Government spending on public services

What are state owned industries?

Industries such as oil production companies and airlines that are owned wholly or partly by the state because they are through to be vital to the national economy

What is a recession?

a period of economic activity characterized by negative growth, which reduces demand for goods and services.
It's 2 consecutive economic quarters of a falling economy w

What does marginal mean?

extra or additional

What is the rate of unemployment in the UK?

3%

What is specialisation?

When an individual, firm, region or country concentrates on the production of a limited range of goods and services incorporation with other so that together a complete range of good is produced

What is agglomeration?

the clustering of businesses, industries, or economic activities in a specific urban area

What is an example of agglomeration in the uk?

London - its hosts thousands of interconnected firms in finance, tech and media.

What are the benefits of agglomeration?

Drives innovation, economics of scale so lower cost, better infrastructure, attracting investment

What is division of labour?

Occurs where production is broken down into many separate tasks

What is an example when specialisation occurs between nations?

A country like Honduras produces bananas and trades it for cars produced in the United States

What is output per person?

The amount of products made by an individual person

What is the link between output per person and division of labour

Division of labour can raise output per person as people become proficient through constant repetition of task

What is learning by doing?

Achieving greater productivity and lower average total cost through gains in knowledge and skill that accompany repetition of a task; a source of economies of scale.

In theory, what can reduce supply cost lead to?

Reduce supply costs in theory lead to lower prices for consumers of goods and services causing gains in economic welfare

What are the disadvantages of specialisation and division of labour?

unrewarding repetitive work can cause lower productivity, job apathy, workers may take less pride in their work, reduction in quality, increased rate of absenteeism, high turnover businesses, structural unemployment, occupational immobility, lack variety for customers

What is structural unemployment

When jobs no longer exist in the economy as there is a lack of demand for it

What is occupational immobility?

Refers to the inability of workers to move easily between different occupations because of a lack of transferable skills.

Is the rate of unemployment in the UK?

3%

What are advantages of specialisation?

higher labour productivity and business profits, creates surplus output that can then be traded internationally, lower prices, higher real incomes and GDP growth

What is the short run

the time period in which at least one input is fixed

What is the long run?

the period in which all inputs (factors of production) can be varied

What is regional deprivation?

This is when certain regions within a country are poorer than other regions

What is PRODUCTION

Production is a measure of the value of the output of goods and services

What is productivity?

A measure of the efficiency of factors of production

How is production measured?

Measured by national GDP or an index of production in specific industry

How is productivity measured?

Measured by output per person employed or by output per person hour

What is over specialisation

When a country becomes too dependent on producing a narrow range of goods or services, often to the exclusion of others.

Give two example of over specialisation?

The UK’s reliance on the financial services sector especially in London and Saudi Arabia’s reliance on oil prices

What is the relation between production and productivity?

An increase in production does not automatically mean an increase in productivity

What is the target rate for inflation

2%

What are some factors that affect labour productivity?

Advances in production technology, Specialisation, business investments in a new capital inputs, Investments in apprenticeship/ training, Quality of the management in a business, having a high quality national infrastructure, level of demand for a product in a market, using up spare capacity

What should the rate of economic growth be each year?

2.5% to 3.5%

What does china specialise in?

Clothing, textiles and machinery

Why does china specialise in textiles and mach8inery?

Low cost of labour and no restriction in minimum wage

What does Saudi Arabia specialise in?

Petrol and oil

Why does Saudi Arabia specialise in petrol and oils?

They have large oil reserves

What does Silicon Valley (California ) specialise in?

Technology and IT

Why does Silicon Valley specialise in technology?

Skilled labour