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Economics is...
the scientific study of the choices made by individuals and societies in regard to the alternative uses of scarce resources which are employed to satisfy wants.
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The three main economic questions are:
- What to produce.
- Where to produce.
- For whom to produce.
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What is 'positive economics'?
To use positive economics is to be scientific about our observations, that is, to avoid using opinions or value judgements. The tools of positive economics are reason, logic and empiricism.
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What is normative economics?
Economics using value judgements (opinions). For example - the government SHOULD build more hospitals, expresses a value judgement.
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What is the main economic problem?
Resources are scarce but wants are unlimited.
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Define a free good and give an example.
A free good has no opportunity cost, for example air.
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Define opportunity cost.
the benefit foregone (given up) from the next best alternative to a particular choice. For example the opportunity cost of building a hospital may be the benefit foregone from building two new schools.
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What is an economic good.
A good that does have an opportunity cost.
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Name the four factors of production.
Land, labour, capital and enterprise.
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Name the rewards for each of the four factors.
- land - rent
- labour - wages
- capital - interest
- enterprise - profit
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A production possibility frontier shows....
the maximum possible output of a combination of two different goods or services.
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Define a traditional economy.
Where the 3 main economic questions are decided by tradition. There is limited division of labour, very little surplus production and not much trade.
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Define a command (centrally planned) economy.
Wher the three main economic questions, how, what and for whom to produce, questions are decided by a central authority. E.g. North Korea, or an historic example is the USSR. Both the UK and USA and Germany used a lot of central planning during WWII.
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Define a market economy.
Where the three main economic questions are decided by the interactions of producers and consumers with minimal state intervention. Prices are decided by the interaction of supply and demand. Adam Smith's invisible hand.
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A mixed economy is
an economy where the three main economic questions are decided partly through the free market and partly by central authorities.
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