1.1

Question 1

Ceteris paribus

Answer 1

All other factors remain equal

Question 2

Economics as a social Science

Answer 2

Economics involves the study of humans as individuals, groups and how we interact with each other. Conditions cannot be controlled.

Question 3

Positive statements

Answer 3

Objective , factually based and can be tested. They are not influenced by opinion.

Question 4

Normative statements

Answer 4

Subjective, questionable comments that are difficult to test. Influenced by opinion and require a value judgement.

Question 5

The economic problem

Answer 5

There are finite resources available to supply unlimited wants. Therefore, decisions must be made on how these scarce resources should be allocated.

Question 6

Three questions for the economic problem.

Answer 6

What to produce?
How to produce?
Who to produce for?
(decided by supply and demand in a free market economy)

Question 7

The purpose of economic activity

Answer 7

To satisfy the wants and needs of society.

Question 8

Opportunity costs

Answer 8

The benefit lost of the next best alternative when making a decision. - There is an opportunity cost for all decisions made by economic agents.

Question 9

Trade-offs

Answer 9

All the other alternatives when making a decision. Not just the best one.

Question 10

Factors of production

Answer 10

Land, Labour, Capital, Enterprise

Question 11

Production Possibility Frontier (PPF)

Answer 11

PPF is used to show different combination of output for 2 different products. This illustrates the economic problem. If production isn’t on PPF, then it isn’t efficient. Outside the line is impossible at that period of time.

Question 12

PPF opportunity cost

Answer 12

changing the position on PPF has an opportunity cost as you’re producing more of one good and less of another.

Question 13

Marginal analysis and PPF

Answer 13

Marginal analysis looks at the opportunity cost between 2 goods on PPF.

Question 14

Shift inwards of PPF

Answer 14

Economic shrinkage occurs when PPF shifts inwards. Decreasing PPF.
Possible cause: Disaster, civil unrest, Emigration, obsolete equipment, Ageing population.

Question 15

Shift outwards of PPF

Answer 15

Economic growth is caused by a shift out of PPF. This increases PPF.

Question 16

Productively efficient

Answer 16

When an economy is producing as much as it possibly can. Shown by the PPF line.

Question 17

Allocatively efficient

Answer 17

When production represents consumer preferences.

Question 18

Specialisation

Answer 18

Economic units concentrate on producing specific goods and services.

Question 19

Division of labour

Answer 19

When workers specialise in specific tasks.

Question 20

Problems with the division of labour

Answer 20

work become monotonous leading to less motivation and more sick days.
Reduces the flexibility of the workforce
May limit the size of the market as smaller firms cant afford to specialise workers.

Question 21

Advantages of the division of labour

Answer 21

Increases productivity and efficiency which reduces costs.
Production time decreases
Improves quality of products as workers become more skilled in their field.
PPF shifts out.

Question 22

Benefits of specialisation by countries

Answer 22

• Allows for trade
• Improved GDP
• Better quality goods
• Economies of scale
• Greater choice for consumers
• Better relationships between countries

Question 23

Costs of specialisation by countries

Answer 23

• reliance on countries
• risk of structural unemployment
• Threat of external factors (natural disasters)
• LEDS will be discouraged

Question 24

Functions of money

Answer 24

• a medium of exchange
• A store of value (saved for later use)
• A unit of account (measure the value of products)
• A standard of deferred payment

Question 25

Free market economies

Answer 25

The basic economic problem is solved by market forces (supply and demand).
Consumers act to maximise personal welfare
Producers act to maximise profit
No government intervention.

Question 26

Free market characteristics

Answer 26

Private sector ownership
Free enterprise
Limited government intervention
Firms compete for market share
society competes for employment and salaries
allocation of resources are determined by market forces.

Question 27

Adam Smith and the invisible hand

Answer 27

Individuals seek to maximise personal gain, firms wish to maximise profit. This self interest benefits society as a whole.
Classical economists follow a laissez-faire approach - no government intervention.

Question 28

Advantages of a free market

Answer 28

Competitive market
Consumer choice
Rewards entrepreneurship
Encourages innovation
Productively efficient
Economic growth

Question 29

Disadvantages of a free market

Answer 29

Inequalities in wealth
Little regulation
provision of demerit goods
Little control of negative externalitites.

Question 30

Friedrich Hayek

Answer 30

Believed the state should not interfere with the free market and should just maintain the law.
Although believed in a safety net such as government health care etc.

Question 31

Command economy

Answer 31

Resources are allocated by the governments including labour.

The government answer the basic economy problem - decide what to produce and for who.

Question 32

Advantages of command economies

Answer 32

• Greater equality
• Removal of demerit goods
• Control on negative externalitites

Question 33

Disadvantage of a command economy

Answer 33

• Doesn’t encourage innovation

Question 34

Karl Marx

Answer 34

Was against capitalism and advocated communism.

Question 35

Mixed economy

Answer 35

Resources are allocated by both market mechanism and the government.
Enterprise is encouraged

Question 36

The role of the government in a mixed economy

Answer 36

Provide public goods e.g. defence
Control macroeconomics variables such as inflation
Reduce negative externalitites
Encourage free trade
restrict monopolies
Reduce customer exploitation