1.1 Nature If Economics

Question 1

What is ceteris Paribus

Answer 1

This assumption is that other things are being held equal or constant, so nothing else changes

Question 2

Why do economists develop models. Examples of some

Answer 2

Economists develop models to explain how the economy works, for example the theories of supply and demand and the circular flow of income

Question 3

What is a positive statement

Answer 3

A positive statement is a statement which is objective and made without any obvious value judgements or emotions. They can be tested to be proven or disproved and they are often expressed in the form of a hypothesis that can be analysed or evaluated

Question 4

What is a normative statement

Answer 4

A normative statement is one which is subjective and based on opinion, so cannot be proven or disproved. It often includes word such as ought, maybe, should.

Question 5

Why do economists use positive and normative statements

Answer 5

Economists tend to use positive statements to back up normative statements.
For example, the government should increase their interest rate is a normative statement backed up by ‘the inflation rate is 5%

Question 6

What is the economic problem

Answer 6

The problem of scarcity. People have finite needs, but infinite wants. Although wants are infinite, resources are finite and limited

Question 7

What is scarcity and examples of it

Answer 7

Scarcity is a relative concept as resources are not necessarily scarce in themselves but they are scarce in relation to the demands placed upon them

Water in china and India and food shortages around the world

Question 8

What is a renewable resources

Examples

Answer 8

A renewable resource is a resource of economic value that can be replenished or replaced in a level equal to consumption

For example, oxygen, solar power and fish are renewable

Question 9

What is a non-renewable resource

Examples

Answer 9

A non-renewable resoucre is a resource of economic value that cannot be readily replaced by natural means on a level equal to consumption

Fossil fuels such as coal and gas

Question 10

What is opportunity cost

Answer 10

Opportunity cost is the cost of one thing in terms of the next best option which has been given up

Question 11

How will consumers and producers make their choices in terms of opportunity cost

Answer 11

Consumers will make choices in how to use their limited income based on what gives them the greatest level of satisfaction. Producers must choose what to do with their limited resources based on what maximises profit

Question 12

4 factors of production

Answer 12

Land - all the natural resources used in production. Such as raw materials, minerals, land.

Labour - all productive human effort, both physical and mental, paid and unpaid

Capital - refers to all man-made resources that are used to produce goods or services in the future.

Entrprenurship - the willingness and ability to take risks of combining the other 3 factors.

Question 13

What does the PPF show

Answer 13

Production possibility frontier

The PPF shows the maximum possible combinations of capital and consumer goods that the economy can produce with its current resources and technology

Question 14

Why is it usually a curve. What are the axis

Answer 14

It tends to be drawn as a curve because the first resources switched from capital to consumer good production are resources that are not adding much to capital goods but will be much more productive in the production of consumer goods, and vice versa.

Y-axis capital goods
X-axis consumer goods

Question 15

Where on the curve is maximum potential of an economy

Answer 15

Any point in the curve represents maximum productive potential of the economy

Question 16

How to tell if the economy has grown or shrunk

Answer 16

The curve will expand out if grown

The curve will retract in if shrunk

Question 17

What does a movement along the PPF curve mean

Answer 17

A movement along the curve indicates a change in the combination of goods produced

Question 18

What does a shift in the PPF curve mean

Answer 18

A shift in the curve indicates a change in the productive potential of the economy

Question 19

What are capital goods

Answer 19

Capital goods are goods that are produced in order to aid the production of consumer goods in the future. Some good can be both capital and consumer. E.g. computers

Question 20

What are consumer goods

Answer 20

Consumer goods are goods that are demanded and bought by households and individuals

Question 21

What is specialisation

Answer 21

Specialisation is the production of a limited range of goods by a company/individual/country which means that trade is essential as it is the only way they are able to access all that they need

Question 22

What is division of labour

Answer 22

The division of labour is when labour becomes specialised in a particular part of the production process

Question 23

Which economist was specialisation and division of labour and what did he say it did

Answer 23

Adam smith said that the concept of specialisation and division of labour showed how it can increase labour productivity, allowing firms to increase their efficiency and lower their costs of production

Question 24

Advantages of specialisation division of labour

Answer 24

• enables labour productivity to be increased
• higher quality of goods and services
• most cost effective to develop specialist tools, improving speed or quality
• time is not wasted moving between jobs
• workers only need to be trained to do one specific task

Question 25

Disadvantages of specialisation and division of labour

Answer 25

• one job whole time can be boring and lead to poor quality of work
• there is a reduction of craftsmanship
• no wide industrial training and therefore could suffer from structural umemployment

Question 26

Advantages of countries specialising

Answer 26

• the theory of comparative advantage which means that they specialise in good that they have a lower opportunity cost in

Question 27

Disadvantages of countries specialising

Answer 27

• countries may become over-dependent on one particular export and if it fails the economy may collapse
• there will be high interdependence and this will cause problems if trade is prevented
• some say it means there will be more competition to cut costs and therefore wages will fall. Not necessarily true tho

Question 28

What is a medium exchange

Answer 28

It can be used to buy and sell goods and services and is acceptable everywhere. Example is money

Question 29

What is a measure of value in terms of the functions of money

Answer 29

It can compare the value of two goods, such as table and a shift. It is also able to put a value on labour.

Question 30

What is a store of value in terms of the function of money

Answer 30

It is able to keep its value and can be kept for a long time. With barter, goods such as fruit often went out of date so could not keep their value

Question 31

What is a method for deferred payment in terms of the function of money

Answer 31

Money can allow for debts to be created. People can therefore pay for things without having money in the present, and can pay for it later. reliant on money holding value

Question 32

What is a free market economy and its features
Economist thinker too

Answer 32

In a free market economy, individuals are free to make their own choices and own factors of production without government interference.
Resources allocated through price mechanism
Consumers make decisions based on satisfaction and producers based on profit

Adam smith believed in free market and laissez-faire

Question 33

Advantages of free market economy

Answer 33

• the system is automatic due to the invisible hand
• consumers have freedom of choice, called consumer sovereignty
• high motivation
• political freedom
• production at lowest costs, leading to allocative efficiency
• tend to have higher growth

Question 34

Disadvantages of free market economy

Answer 34

• tends to be high levels of inequality
• lack of merit goods and little control of demerit goods
• resources could be wasted in unproductive expenses such as advertising
• may be monopolies who could charge high
• problem of externalities

Question 35

Features of a command economy

Answer 35

• All factors of production, except labour, is owned by the state and labour is directed by the state
• No private property
• Everyone assumed to be working for a common good
• resources are allocated by the government

Question 36

Advantages of command economy

Answer 36

• the state provides a minimum standard of living
• there is less wastage of resources
• long term planning means industry doesn’t have to keep changing and shifting resources
• standardised products means that they are produced cost effectively.

Question 37

Disadvantages of a command economy

Answer 37

• Impossible for state to make so many decisions correctly, this could lead to over or under supply and a waste of resources
• could be an increase in bribery or corruption
• less motivation and efficiency
• consumers lose their freedom as often led by dictators

Question 38

Features of a mixed economy

Answer 38

• Mix of command and free market economy
• where both free market mechanism and the government planning process allocate a significant amount of the total resources in the country

Question 39

Government role in a mixed economy

Answer 39

• Creating a framework of rules
• supplements and modified the price system
• redistributes income
• stabilised the economy