econ flashcards theme 1 definitions

What is economics?

The social science studying how scarce resources are allocated to satisfy unlimited human wants.

What is positive economics?

Statements based on facts that can be tested or verified using evidence.

What is normative economics?

Statements involving value judgements/opinions about what should happen. They cannot objectively be proven true or false.

Why can economists reach different policy conclusions from the same evidence?

Because policy recommendations often involve normative judgements, so economists may value different objectives differently.

What is the economic problem?

Resources are finite/scarce, while human wants are unlimited, forcing choices about what, how and for whom to produce.

What are the four factors of production and their rewards?

Capital, Enterprise, Land, Labour

What is opportunity cost?

The value of the next best alternative forgone when a choice is made.

What is a PPF?

A production possibility frontier shows the maximum combinations of two goods/services an economy can produce with its existing resources and technology.

What does a point ON a PPF represent?

Productive efficiency — available resources are being fully utilised.

What does a point INSIDE a PPF represent?

Productive inefficiency — some resources are unemployed or underutilised.

What does a point OUTSIDE a PPF represent?

A combination of output currently unattainable with existing resources/technology.

What does an outward shift of a PPF represent?

An increase in the economy's productive capacity/potential economic growth.

What can shift a PPF outwards?

An increase in the quantity or quality of factors of production, e.g. migration, investment, education or technological improvement.

What is specialisation?

When an individual, firm, region or country concentrates on producing a narrow range of goods/services.

What is division of labour?

Splitting production into smaller individual tasks, with workers specialising in particular tasks.

What is a free-market economy?

An economy where resources are allocated mainly through the price mechanism, with minimal government intervention.

What is a command/planned economy?

An economy where resources are allocated primarily by a central government/planning authority.

What is a mixed economy?

An economy where resources are allocated partly by the price mechanism and partly through government intervention.