1.1 and 1.2 (nature of economics and how markets work)

Question 1

define ceteris paribus

Answer 1

“other things being equal” .used to focus on changes in one variable while holding the others constant.

Question 2

what is a positive statement?

Answer 2

.A statement or fact that can be scientifically tested to see if it is correct or incorrect. (objective)

Question 3

what is a normative statement?

Answer 3

.A statement that includes a value judgement and cannot be proved wrong just by looking at the evidence, also it is normally and opinion and contains the word “should”. (subjective)

Question 4

what is the basic economic problem?

Answer 4

There are infinite wants but there is finite resources to meet the wants.

Question 5

what is opportunity cost?

Answer 5

. The cost of giving up the next best alternative when making a decision.

Question 6

what is a production possibility frontier (PPF) ?

Answer 6

. PPF’s show the maximum possible output and shows the options that are available when you consider the production of just two types of goods or services.

Question 7

define trade-offs

Answer 7

. when you have to choose between conflicting objectives because you cant achieve all your objectives at the same time.

Question 8

what are mixed economies?

Answer 8

. mixed economies have a private and public sector and are controlled by governments

Question 9

what is a free market?

Answer 9

. A market that allocates resources based on supply and demand and the price mechanism, meaning anything can be sold at any price that people will pay for it, also in free market economies there is no government intervention.

Question 10

what are the pros and cons of a free market economy?

Answer 10

pros:
.efficiency= because any product can be bought and sold
.entrepreneurship= the rewards for good ideas in a market economy would make entrepreneurs a lot of money.
.choice= The incentives for innovation can lead to an increase in choice for consumers.

cons:
.inequalities= market economies can lead to huge differences in income. (uneven distribution of income)
.non-profitable goods may not be made, for example ; drugs to treat rare medical conditions
.monopolies= successful business can become the only suppliers , this dominance can be abused.

Question 11

what was karl marx’s economic theory?

Answer 11

(command economies)
karl marrx believed that free markets lead to capitalism, in which the owners of the factors of production exploited the workers.
.karl marx was a communist
.karl marx criticised the private ownership of factors of production to avoid capitalism and exploitation

Question 12

what was Adam smith’s economic theory?

Answer 12

(free markets)
. Adam smith advocated for free markets with low levels of government intervention.

Question 13

what was Fredrick hayek’s economic theory?

Answer 13

(free markets)
. Fredrick believed that command economies were flawed because he identified gaps which he said would lead to shortages or surpluses of goods and services in command economies.

Question 14

what are command economies?

Answer 14

where the government is in charge of resources allocation. (centralised economies)= decision making is done by a member at the top of the organisational structure.

Question 15

define specialisation + and - s

Answer 15

is the focus on the production of a good or service by a country, region or area.

+ .increased production/output
+. increased quality
+. a bigger market( opportunities for economies of scale)

-.vulnerability from over dependence on other countries
-. structural unemployment
-.competition
-.;overuse and exploitation of natural resources.

Question 16

define division of labour + and - s

Answer 16

when production is broken down into many different tasks.
+.increased productivity
+.higher quality goods
-.employee demotivation/ boredom
-.if one process is delayed, every other task must stop

Question 17

what are the 4 functions of money?
+ brief definitions

Answer 17

.Deferred payment= buying now and paying later(loans)
.Unit of account=used to compare the price of one good with another
.medium of exchange= purchasing goods and services.
.Store of value= saved or invested and retains its purchasing power which can be spent in the future (real estate)

Question 18

what is herd behaviour?

Answer 18

when decisions are made based on the decisions of other around you.

Question 19

what is habitual behaviour?

Answer 19

when decisions are influenced by previous habits, even of there is a cheaper alternative.

Question 20

what is computational weakness?

Answer 20

this occurs when consumers find it difficult to calculate the probability of something happening

Question 21

what is diminishing marginal utility?

Answer 21

the satisfaction gained from consuming or producing a product from each unit consumed or produced, as you consume more the less satisfaction you get.

Question 22

define marginal utility

Answer 22

satisfaction gained from consuming each additional unit.

Question 23

what are the factors that affect demand

Answer 23

P population
I income
R related goods
A advertising
T taste/fashion
E expectations
S seasons

Question 24

define demand

Answer 24

The willingness and ability to purchase a good or service

Question 25

define the price elasticity or demand and the values

Answer 25

PED= the responsiveness to quantity demanded due to a change in price.(value is always negative)
.if PED= 0, demand is perfectly inelastic
.if PED is between 0 and 1, demand is inelastic
.if PED>1, demand is elastic

PED= % change in Quantity/ % change in price

Question 26

define income elasticity of demand and the values

Answer 26

YED= the responsiveness of quantity demanded, due to a change in income.
.YED > 1 (Income Elastic)

The good is a luxury/normal good.
Demand increases more than proportionally to an increase in income.
Example: High-end electronics, designer clothing, holidays.
.0 < YED < 1 (Income Inelastic)

The good is a necessity.
Demand increases less than proportionally to an increase in income.
Example: Basic groceries, utilities.
.YED = 0

Demand is perfectly income inelastic.
Changes in income have no effect on demand.
Example: Essential medicines or goods with fixed demand.
.YED < 0

The good is an inferior good.
Demand decreases as income rises.
Example: Budget brands, instant noodles, second-hand goods.
YED=% change in QD/ % change income

Question 27

define cross elasticity of demand and its values

Answer 27

XED= measures the responsiveness to the quantity demanded of good a, due to a change in price of good b.

.XED > 0 (Positive Cross Elasticity)

The goods are substitutes.
A rise in the price of one good causes an increase in the demand for the other.
Example: Coke and Pepsi. If Coke’s price rises, Pepsi’s demand increases.
Strength of Substitutes:
A high positive XED (e.g., 3) indicates close substitutes.
A low positive XED (e.g., 0.5) indicates weak substitutes.

.XED < 0 (Negative Cross Elasticity)

The goods are complements.
A rise in the price of one good causes a fall in the demand for the other.
Example: Printers and ink cartridges. If printers become more expensive, demand for ink falls.
Strength of Complements:
A highly negative XED (e.g., -3) indicates strong complements.
A low negative XED (e.g., -0.5) indicates weak complements.

.XED = 0

The goods are unrelated.
A change in the price of one good has no effect on the demand for the other.
Example: Bread and bicycles.

XED= % change in quantity of good A / % change in price of good B

Question 28

define supply

Answer 28

the willingness and ability to produce a good or service at a given price at a point in time.

Question 29

define Price elasticity of supply and its values?

Answer 29

PES= the responsiveness of quantity supplies due to a change in price.
.When price increases Quantity supplied increases
.PES is always +
PES > 1 (Elastic Supply)
PES < 1 (Inelastic Supply)
PES = 1 (Unitary Elastic Supply)
PES = 0 (Perfectly Inelastic Supply)
PES = ∞ (Perfectly Elastic Supply)

.PES= %change in QS/ %change in price

Question 30

what is meant by market equilibrium?

Answer 30

when the quantity demanded is equal to the quantity supplied, so there is no shortage or surplus in supply and demand.

Question 31

what are the 3 factors of the price mechanism and what do they mean?

Answer 31

signalling=Prices act as a signal to both producers and consumers about the changing conditions in a market.

rationing=Prices help allocate scarce resources by rationing goods and services to those willing and able to pay the most.

incentives=Prices create incentives for producers and consumers to adjust their behaviour in response to changes in the market.