Nature of economics

Both 1 + 2 flashcards

Social science

The scientific study of societies and social interaction. 

Ceteris paribus

Latin for “all other things held constant”. Economists assume ceteris paribus to simplify their models.

Positive statement

A statement that can be tested using evidence to see if it’s true or false.

Normative statement

A statement that involves a value judgement

Opportunity cost

The benefit given up of the next best alternative

The economic problem (or problem of scarcity)

Humans have infinite wants but scarce resources

Economy

Any system that tries to solve the economic problem

Capital

The technology or machinery we use to make goods

Enterprise/Entrepreneurship

An entrepreneur combines and organises land, labour and capital to produce a good

Land

All the earth's natural resources i.e. physical land but also raw materials

Labour

Human workers used to produce a good

Factors of production (CELL)

Capital, Enterprise, Land, Labour

PPF

Shows all possible combinations of two goods that can be produced, using all resources efficiently

Capital good

Goods we use to produce consumer goods e.g. an oven

Consumer good

Goods we consume e.g. a pizza

Division of labour

When a firm splits up its production process into smaller separate tasks, and assigns different workers to each of these tasks.

Specialisation

When a worker, firm or economy concentrates on producing a limited range of goods and services.

E.g. Farmers specialise in producing fruits and veg, Domino’s specialises in producing pizzas, Saudi Arabia specialises in producing oil

Functions of money (DUMS, Donald Uses Money Shopping)

Deferred Payment

Unit of account

Medium of exchange

Store of value

Deferred payment

You can borrow money to buy goods now, and then pay the money back in the future

Unit of account

Money helps us compare prices of different products

Medium of exchange

We can use money to trade goods and services.

E.g. Domino’s pays its workers money for their services, the workers then use the money to pay for the goods and services they want

Store of value

You can store your money and save it for later.

Pros and cons of division of labour

**Pros**

Can increase productivity and output by specialising and using specialist equipment

Can increase quality because workers master their craft

Can decrease unit costs because workers are more efficient

Can help firms save on training costs because each worker needs to be trained in fewer skills

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**Cons**

Demotivation can decrease productivity and output

Demotivation can decrease quality because workers will take less pride in their work

Can increase absenteeism, staff turnover and recruitment costs

Specialised workers will have only one skill so may end up unemployed if they lose their jobs

Pros and cons of specialisation and trade

**Pros**

Wider variety of goods and services from trade

Can increase overall output

Can increase trade

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**Cons**

If a region over-specialises and their specialist industry shuts down, workers will have no other work, leading to unemployment e.g. miners in the 1980s after the mines were shut down

Countries can over-specialise and deplete their natural resources e.g. Saudi Arabia is slowly running out of its oil reserves

We become vulnerable because if people specialised in producing a certain good or service go on strike or stop trading, we’re left without the goods and services we need E.g. when train drivers strike the rest of us can’t get to work or school

Rational decision making for consumers

Economists assume that consumers want to maximise their utility.

Rational decision making for firms

Economists assume that firms want to maximise their profit

Utility

In economics, utility means happiness/benefit/satisfaction

Profit

Profit = Total Revenue - Total Cost

Total revenue

Total revenue is how much money a business receives from its sales.

Total revenue = price x quantity

Herd behaviour

Consumers are influenced by the behaviour of others.

E.g. consumers may start smoking just because they see friends and celebrities smoking.

Habitual behaviour

When consumers are in the habit of making certain decisions.

E.g. consumers may continue to buy car insurance from their current provider out of habit, even if there are cheaper car insurance providers available.

Weakness at computation

Consumers are bad at making calculations, estimating probabilities and working out future benefits/costs.

E.g. consumers may miscalculate which mobile phone contract offers the best value for money.

E.g. consumers overestimate the probability of a plane crash (it’s more likely that you will die wrestling a vending machine than in a plane crash).

E.g. consumers overestimate the future health benefits of “superfoods” and underestimate the future health costs of smoking.