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Economics Edexcel A Level > 1.1 Nature of Economics > Flashcards

1.1 Nature of Economics Flashcards

1
Q

What is a model?

Why are models used?

A

A simplified representation of reality used to provide insight into economic decisions and events.

They make reality more manageable for analysis.

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2
Q

Why can we not construct scientific investigations in economics?

A

Because the real world is too complicated and has too many influencing factors

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3
Q

What does ceteris paribus mean?

When do we use it?

A

‘Other things being equal’

We use it to focus on only one variable whilst holding other influences constant.

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4
Q

What is a positive statement?

A

A factual statement, which can be tested.

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5
Q

What is a normative statement?

A

A statement that involves valued judgement about what ought to be

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6
Q

Define the problem of scarcity

A

A situation that arises when people have unlimited wants in the face of limited resources

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7
Q

Define opportunity cost

A

In decision making, it is the value of the next best alternative foregone

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8
Q

What are free goods?

What are economic goods?

A

Goods that aren’t regarded as scarce.

Goods which are scarce.

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9
Q

Define marginal analysis

A

An approach to economic decision making which involves considering the additional (marginal) benefits and costs of a change in behaviour

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10
Q

Discuss the importance of opportunity cost for households

A

Households, as consumers, have to make choices about their expenditure. To buy goods and services, they will need an income, so they must also make choices about the supply of their labour

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11
Q

Discuss the importance of opportunity cost to firms

A

Firms have to make choices on what to provide, how they should produce it, and must also decide on the prices at which they should sell their goods and services.

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12
Q

Discuss the importance of opportunity cost to the government

A

The government must make choices on expenditure, how to go about taxation, and how to regulate markets.

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13
Q

Define factors of production

What are the main 4 FOP?

A

Resources used in the production process.

Labour, Capital, Entrepreneurship, Land

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14
Q

What are renewable resources?

A

Resources that can be replenished and are not used up

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15
Q

What are non-renewable resources?

A

Natural resources that once used cannot be replenished

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16
Q

What are the main three economic questions asked because of scarcity?

A

1) What goods and services should be produced?
2) How to produce them
3) For whom they be produced for

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17
Q

What is a production possibility frontier (PPF)?

A

A curve showing the maximum combinations of goods and services that can be produced in a given period with available resources

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18
Q

What are the labels of the axis on a typical PPF?

A

Capital goods and Consumer goods

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19
Q

What is the difference between a capital good and a consumer good?

A

Capital goods are goods used to increase the productive capacity of the economy.

Consumer goods are present for use.

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20
Q

What does a typical PPF look like?

A
  • Y-axis is capital goods
  • X-axis is consumer goods
  • Curve touching each axis (like a quarter of a circle)
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21
Q

Why can PPFs be curved?

A

Because not all factors of production are equally suited to producing two different goods

22
Q

What does a point beyond the PPF curve show?

A

It is an unobtainable point given the present resources, so the economy cannot produce that combination of goods.

23
Q

What does a point inside the PPF curve show?

A

The economy is not using its resources efficiently, so there are unemployed FOP.

24
Q

How can an economy move towards the PPF?

A

By making better use of the resources available

25
Q

What does a point lying on the PPF curve show?

A

Production is being undertaken efficiently in the sense that all resources are being fully utilised

26
Q

Why does economic growth occur due to PPFs, and how can this be shown on a diagram?

A

As more capital goods are produced, in the next period, the productive capacity of both consumer and capital goods would increase.

Shift outwards of the PPF curve.

27
Q

What form of growth does a shift outwards in the PPF show?

Define this phrase

A

Potential economic growth.

An expansion in the productive capacity of the economy.

28
Q

How is the total output in an economy measured?

Define this phrase,.

A

Gross domestic product

A measure of economic activity carried out in an economy over a period of time

29
Q

What did Adam Smith discover about the division of labour?

A

It takes 10 workers to make a pin. If only 1 worker produces them, he’d make around 20 a day. However, if 10 workers were each assigned a specific role in the production process, they could produce 45,000 a day.

30
Q

What is the division of labour?

A

It is a process whereby the production procedure is broken down into a sequence of stages, and workers are all assigned to a particular stage

31
Q

What are the benefits of the division of labour in organising production?

A

Individual workers become more skilled at a specific task, so become more efficient during production

32
Q

What are the benefits of specialisation?

A

Give workers are producing what they are most suited to producing, productivity will increase, meaning that production can operate on a larger scale.

33
Q

What are some disadvantages of specialisation? (3)

A

Workers may become bored and careless due to the repetitive nature of their job.

It may be difficult to find cover when a worker is ill.

Could cause structural unemployment.

34
Q

Define the term market

A

A set of arrangements that allow transactions to take place

35
Q

What is a barter economy?

A

An economy in which you trade tangible goods with one another.

36
Q

What is a double coincidence of wants?

A

When someone who wants what you have has what you want

37
Q

What are the four functions of money?

A

1) Acts as a medium of exchange
2) Serves as a measure of value
3) Severs as a store of value
4) Method of deferred payment

38
Q

How does money act as a standard of deferred payment?

A

You can agree to pay for something which may be delivered in the future, for example, workers are paid at the end of each month.

39
Q

How does money serve as a measure of value?

A

It allows the value of goods and services to be compared.

40
Q

How does money act as a store of value?

A

Money can be used for future transactions and will keep its value

41
Q

What is meant by a medium of exchange?

A

An acceptable form of payment for both buyers and sellers.

42
Q

What is a free-market economy?

A

An economy in which market forces are allowed to guide the allocation of resources

43
Q

How did Adam Smith explain a free-market economy?

A

He argued that there is an invisible hand that would be able to allocate resources efficiently.

44
Q

What did Karl Marx believe?

A

That in a capitalist society of private ownerships, capitalists would exploit their position at the expense of labour.

45
Q

What is a command economy?

A

A centrally-planned economy in which decisions on resource allocation are guided by the state.

46
Q

What were Freidrich van Hayek’s beliefs?

A

He saw that after WW2, there was a move towards more government intervention.

He argued that such intervention would be damaging, and that free-markets would be effective because they rely on people responding to signals and incentives.

47
Q

Define a mixed-economy?

A

An economy in which resources are allocated partly through price signals and partly through the basis of intervention by state.

48
Q

How are incentives important in economic systems?

A

In a market economy, prices and profits provide incentives, whereas in planned economies, these incentives are replaced by state directives.

49
Q

What is microeconomics?

A

The study of economic decisions taken by individual economic agents, including households and firms.

50
Q

Define macroeconomics

A

The study of the interrelationships between economic variables at an aggregate level.

51
Q

What country’s economy is the most free-market?

A

USA

52
Q

Give an example of a country with a command economy.

A

North Korea

Economics Edexcel A Level (10 decks)

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