1.1 Nature of Econmics

Question 1

ceteris paribus

Answer 1

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

Question 2

Positive statement

Answer 2

objective. They can be tested with factual evidence

Question 3

Normative statements

Answer 3

based on value judgements. These are subjective and based on opinion rather than factual evidence

Question 4

basic economic problem

Answer 4

Wants are unlimited and resources are finite, so choices have to be made

Question 5

opportunity cost

Answer 5

opportunity cost of a choice is the value of the next best alternative forgone.

Question 6

Factors of production

Answer 6

CELL
capital 
Enterprise 
land 
Labour

Question 7

Capital

Description and rewards

Answer 7

• Physical: goods which can be used in the production process
• Interest

Question 8

Enterprise

Description and reward

Answer 8

• someone who takes risks, innovates, and uses the factors of production
• Profit

Question 9

Land

Description and reward

Answer 9

• Natural resources such as oil, coal, wheat, water.

- rent

Question 10

Labour

Description and rewards

Answer 10

• human capital

- wages

Question 11

Renewable resource

Answer 11

Renewable resources can be replenished, so the stock level of the resources can be maintained over a period of time

Question 12

Non renewable

Answer 12

Non-renewable resources cannot be renewed. For example, things produced from fossil fuels such as coal, oil and natural gas are non-renewable

Question 13

PPF

Answer 13

productive potential of an economy, using a combination of two goods or services

Question 14

Outward shift PPF

Answer 14

Economic growth

Question 15

Specialisation

Answer 15

when each worker is completes a specific task in a production process. The concept was famously stated by Adam Smith

Question 16

Advantages of specialisation

Answer 16

o Higher output and potentially higher quality, since production focusses on what people and businesses are best at.
o There could be a greater variety of goods and services produced.
o There are more opportunities for economies of scale, so the size of the market
increases.
o There is more competition and this gives an incentive for firms to lower their costs, which helps to keep prices down

Question 17

Disadvantage of specialisation

Answer 17

o Work becomes repetitive, which could lower the motivation of workers, potentially affecting quality and productivity. Workers could become dissatisfied.
o There could be more structural unemployment, since skills might not be transferable, especially because workers have focussed on one task for so long.
o By producing a lot of one type of good through specialisation, variety could in fact decrease for consumers.
o There could be higher worker turnover for firms, which means employees become dissatisfied with their jobs and leave regularly.

Question 18

Functions of money

Answer 18

• medium of exchange
• measure of value
• store of value
• method of defferd payment

Question 19

Medium of exchange

Answer 19

without money, transactions were conducted through barterin

Question 20

method of deferred payment

Answer 20

Money can allow for debts to be created

Question 21

Free market economies

Answer 21

Economic decisions are taken by private individuals and firms, and private individuals own everything. There is no government intervention.

Question 22

Advantage of free market

Answer 22

o Firms are likely to be efficient because they have to provide goods and
services demanded by consumers. They are also likely to lower their average costs and make better use of scarce resources. Therefore, overall output of the economy increases.
o The bureaucracy from government intervention is avoided.
o Some economists might argue the freedom gained from having a free
economy leads to more personal freedom.

Question 23

Disadvantage of free market

Answer 23

o The free market ignores inequality, and tends to benefit those who hold most
of the wealth. There are no social security payments for those on low incomes.
o There could be monopolies, which could exploit the market by charging higher prices.
o There could be the overconsumption of demerit goods, which have large negative externalities, such as tobacco.
o Public goods are not provided in a free market, such as national defence. Merit goods, such as education, are underprovided.

Question 24

Command economy

Answer 24

government allocates all of the scarce resources in an economy to where they think there is a greater need

Question 25

Advantage of command economy

Answer 25

It might be easier to coordinate resources in times of crises, such as wars. o The government can compensate for market failure, by reallocating
resources. They might ensure everyone can access basic necessities.
o Inequality in society could be reduced, and society might maximise welfare
rather than profit.
o The abuse of monopoly power could be prevented.

Question 26

Disadvantage of command economy

Answer 26

o Governments fail, as do markets, and they may not be fully informed for
what to produce.
o They may not necessarily meet consumer preferences. o It limits democracy and personal freedom.

Question 27

Mixed economy

Answer 27

has features of both command and free economies