chapter one: economic methodology and the economic problem

what are positive economic statements

objective statements that can be tested against facts to be declared either true or false ( it doesn’t necessarily have to be true)

what are normative economic statements

subjective opinions or value judgements that cannot be tested against facts (what you should do based upon people’s ethical moral or political views

what is a need

something humans require to survive

what is a want

not essential for survival but which people believe improves their economic welfare

what is the purpose of economic activity

to satisfy needs and wants

what is economic welfare

the standard of living of individuals in society

what is the c in the four factors of production + what is the reward

capital

man made physical equipment used to make other goods and services

reward=interest. savings, dividends

what is the e in the factors of production

entrepreneurs are individuals who take a business risk in combining the three other factors of production in order to produce a good or service

reward=profit

what is the l in the factor of production

land all naturally occuring resources such as minerals, the sea, fertile land and the environment

reward=rent

what is the second l in the factors of production

labour

the people involved in productions sometimes referred to as human capital

reward=wage and salaries

what are the three fundemental questions of the economic problem

1. what to produce and in what quantities

2. how should goods and services be produced?

3. to whom should these goods and services be allocated?

how are decisions made in a free market economy:

decisions are made solely by the interactions of consumers and firms

how are decisions made in the command/centrally planned economy

decisions are made solely by the planning departments of governments

what is the basic economic problem

scarce economic resources compared with societies unlimited wants

what is opportunity cost

the cost of the next best alternative that you give up when you have to make a choice

economic gooods

are those that use up scarce goods in their production, includes most consumer goods

free goods

a good that does not have an opportunity cost in consumption because it doesn't use up scarce resources

what is a ppf diagram

a curve depicting the various combinations of 2 products that can be produced when all available resources are fully and efficiently employed

productive efficency

producing goods and services with the optimal combination of inputs to produce maximum output for the minimum cost

to be productively efficent means the economy must be producing on its ppf

allocatively efficent

is a state of the economy in which production reflects consumer preferences

pareto efficency

Pareto efficiency (or Pareto optimality) is a state of resource allocation where it is impossible to make any one individual or group better off without making at least one person worse off. [1]

what causes the ppf to shift outward

a rise in a nations productive capacity causes the ppf to shift out and allows increased supply both of consumer goods and capital goods

what is a mixed economy

part of the economy is left to the free market and part of it is managed by the government

the gov interevene in certain areas of the economy e.g providing public services

what did adam smith say

‘wealth of nations’

gov prevents exploitation of monopoly power

what is a feature of mixed economies in terms of private enterprise

individuals can set up businesses and make a profit

usually progressive taxes and means tested benefits to reduce inequality

what is a feature of mixed economies in terms of prices

free market prices

prices are determined by invisible market forces (invisible hand)

the government may regulate some goods e.g higher taxes on cigarettes

what is a feature of mixed e economies

economic cycle

largely driven by private investment and enterprise, government may intervene to reduce fluctuations in the economic cycle e.g fiscal policy

wha is a feature of mixed economies: government regulation

gov regulation of natural monopolies e.g tap water, electricity, gas

a degree of redistribution through progressive taxation and spending

what are the advantages of a mixed economy: 8 reasons

1. incentives to be efficient: private firms tend to be more efficient as they have a profit incentive to cut costs and be efficient

2. limits gov interference

3. reduces market failure

4. regulation on the abuse of power

5. taxation and regulation of goods with negative externalities (an unintended cost imposed on a third party who is not involved in the economic transaction or activity) e.g prevent mergers

6. subsidy or state support for goods and services which tend to be under consumed e.g healthcare

7. macroeconomic stability e.g expansionary fiscal policy in times of a recession

8. a degree of equality: provides a safety net for people living in absolute poverty

what are the disadvantages of mixed economies (3 reasons)

1. how much should the gov intervene?

2. too much inequality→ criticised by socialists for allowing too much market forces

3. government failure- allowing too much government intervention ( by free market economists)

4. libertarians argue governments make poor managers of the economy.

   1. why? political motives and short term factors

free market vs free market vs command economy table:

Ownership of resources?

role of gov?

price mechanism?

provision of public goods?

inequality

What are 4 factors causing the outward shift of a ppf

1. technological improvements—> increased productivity of capital equipment

2. discovery of new resources e.g oil and gas

3. improvements in education and training —> more productive workforce

4. changes that lead to an increase in working population e.g immigration, raised retirement age

3 factors causing an inward growth of the ppc

1. wars

2. natural disasters- devastate productive resources

3. prolonged recession: may lead to permenant loss of productive capacity if businesses close down/workers lose skills

what is productive efficency

when maximum output is produced from the available factors of production and when it is not possible to produce more of one good or service without producing less of another

increase in productive capacity diagram ppt

allocative efficency

an economy factors of production that are used to produce the combination of goods and services that maximises society’s welfare