Econ flashcards theme 1 mechanism cards

Why does scarcity create opportunity cost?

Resources finite + wants unlimited → choices must be made → choosing one use of resources prevents their next-best use → therefore every economic choice involves opportunity cost.

PPF: what happens if an economy produces more capital goods?

Resources are scarce → resources transferred towards capital goods → fewer resources available for consumer goods → consumer-good output falls → this lost output is the opportunity cost.

How can improved education cause economic growth?

Education ↑ → worker skills/human capital ↑ → labour productivity ↑ → productive capacity ↑ → PPF shifts outward.

How can migration cause potential economic growth?

Net migration ↑ → size of labour force ↑ → quantity of factors of production ↑ → productive capacity ↑ → PPF shifts outward.

Why can division of labour increase productivity?

Tasks divided → workers repeatedly perform specialised task → learning-by-doing/expertise ↑ → productivity ↑ → output per worker ↑ → average cost per unit can fall.

Benefits of specialisation — analysis chain?

Specialisation → resources concentrated on what producers are relatively best at → efficiency/productivity ↑ → output from given resources ↑ → costs can fall → potentially lower prices/higher living standards.

Why can specialisation create structural unemployment?

Workers acquire narrow specialised skills → industry/task declines or is automated → skills may not transfer to expanding industries → occupational immobility ↑ → structural unemployment.

Why can specialisation create dependency?

Producers stop making everything themselves → depend on trade with others → supply-chain/trade disruption occurs → essential inputs/goods may become unavailable.

How does a free market allocate resources?

Changes in S&D → prices change → prices signal scarcity/preferences → profit incentives encourage firms to alter output → prices ration scarce products → resources move between uses.

Why might a free market encourage innovation?

Firms compete for consumers/profit → incentive to improve products/reduce costs → innovation/productivity ↑ → potentially greater consumer choice and efficiency.

Advantage of a command economy?

Government controls resource allocation → resources can be directed towards social priorities regardless of profitability → potentially greater provision of essential services/reduced inequality.

Why can command economies suffer shortages/surpluses?

No competitive market prices → planners receive weaker information about preferences/scarcity → production decisions may not match demand → persistent shortages or surpluses.

Why might command economies have weaker innovation?

Less competitive pressure → weaker incentive to minimise costs/innovate → productivity and innovation may be lower.