Nature of economics (Full)

Economics

Define Economics

A science that studies how individuals, firms, and societies use scarce resources to satisfy unlimited wants

What are the 2 main branches of economics

• Microeconomics

• Macroeconomics

Explain Microeconomics

Studies individual decisions of consumers & producers

Explain Macroeconomics (6)

Studies the economy as a whole, including employment, income, money, interest rates, taxes, and government spending.

Why is economics considered a social science

Because it studies behaviour relating to scarcity, choice, and cost. It predicts how people react to change in price or income

What is an economic model

It's a simplified framework that makes a few assumptions and leaves out unimportant details to help people understand how people behave with money, price, and resources

What are the methods used to develop economic laws (2)

• Deductive methods

• Inductive methods

Explain deductive methods

It begins with a theory and seeks evidence / data to support it

Explain inductive methods (& e.g.)

It begins with data, identifies patters, and makes predictions based on past behaviour (e.g. stock market analysis)

Name the 3 main schools of economic thought

• Neoclassical

• Institutional

• Marxian

What is the other terms that can be used to describe the schools of economic (3)

• Neoclassical = free market

• Institutional = mixed economy

• Marxian = Centrally planned / communist

What determines a country’s economic system

The level of government interference in the economy

Explain the free market economy

An economy where the government does very little to control the business, businesses are privately owned, and prices are set by supply and demand.

Advantages of a free market

• Freedom of choice (consumers decide what to buy, businesses decide what to make)

• Incourages innovative businesses ideas for competitive advantages (customers get better products / options)

Disadvantages of a free market (2)

• Inequality between rich and poor

• Vital service may not be provides if unprofitable

Define a centrally planned economy

The government owns the factors of production and decides what, how, and whom to produce for.

Advantages of centrally planned economy (2)

• Vital service provided even regardless if profitable or not

• More equal wealth distribution

Disadvantages of a centrally planned economy (2)

• Lack of innovation

• Frequent shortages and inefficiency (due to gov involvement, products take longer to make, stores ran out)

Explain a mixed economy ? (& e.g.)

An economy combining free market elements with government intervention (e.g. Ireland)

Define scarcity

The imbalance between limited resources and unlimited wants

What are the factors of production (4)

• Land

• Labour

• Capital

• Enterprise

Define Land (& 3 e.g.)

Natural resources used in production (land, rivers, minerals, climate, forest)

Define Labour

Human effort used in production

How does productivity increase (2)

• Training

• Education

Define Capital (& e.g.)

Man - made items used to produce goods/services (e.g. → machinery, tools)

True of False

Is money a capital ?

False

Define enterprise

Is an act involving an entrepreneur combining other factors of production (land, labour, and capital), taking risks, to seek profits.

Define opportunity cost

The value of the next best alternative you give up to make a choice

Opportunity costs are also called

Trade-offs

Give an example of opportunity cost

If you spend €20 on pizza, the opportunity cost is the cinema trip

What does PPF stand for

Production Possibility Frontier

What does the PPF show

shows the most a country can produce with what it has. If you want more of one thing, you must produce less of something else.

Why is the PPF downward sloping?

Because producing more of one good requires sacrificing some of the other (opportunity cost).

Explain every “point of sight” in a (PPF graph) and what they mean. (3)

• On then PPF = Efficient

• Inside PPF = Achievable but inefficient

• Outside PPF = Unachievable

What cause PPF to shift outward

• Better education / training

• New technology

• Discovery of new resources

What causes the PPF to shift inward ? (3)

• Natural disasters

• Recession

• Destruction of infrastructure

• Emigration

Opportunity cost describes

The lost benefits of the next best alternative

Scarcity exists because

people want more than the world can produce.

Building a prison instead of a motorway illustrates

Opportunity cost

Define the PPF

Shows the maximum possible combinations of two goods an economy can produce using all available resources efficiently

What happens to the PPF if efficiency improves?

It shifts outward because more output can be produced with the same resources.