1.1 Nature of Economics (1.1.4 - 1.1.6)

Question 1

What do PPFs show?

Answer 1

the maximum possible production of something, when an economy’s resources are fully and efficiently used

Question 2

What happens to the PPF when there is economic growth and why?

Answer 2

it shifts outwards, as the productive capacity of the economy has increased

Question 3

Why could the productive capacity of the economy have increased?

Answer 3

due to improvements in technology

Question 4

Why could the productive capacity of the economy increasing (e.g. improvements in technology) not be equal across all products?

Answer 4

As the improvement in technology to produce cars isn’t necessarily going to affect the ability to produce butter

Question 5

When do trade-offs occur?

Answer 5

when producing on the PPF

Question 6

Why do trade-offs occur?

Answer 6

to produce more of one good, you must produce less of another

Question 7

If a point is outside the PPF, what does this mean?

Answer 7

it is not currently possible to produce at this point

Question 8

If a point is on the PPF, what does this mean?

Answer 8

all available factors of production are being fully used.

Question 9

What are all points on the PPF in terms of efficiency?

Answer 9

productively efficient

Question 10

If a point is inside the PPF, what does this mean?

Answer 10

there are factors of production being underemployed

Question 11

What do movements across the PPF mean?

Answer 11

the reallocation of resources

Question 12

What are capital goods?

Answer 12

goods that are used to produce other goods

Question 13

What are consumer goods?

Answer 13

goods bought and used by consumers

Question 14

What is the division of labour?

Answer 14

when a firm splits up the production process into smaller, separate tasks and assigns different workers to each of these tasks

Question 15

How can workers specialise through the division of labour?

Answer 15

because workers are only focussing on one task, they can become incredibly efficient at it and specialise in it

Question 16

What does specialisation through division of labour allow firms to take advantage of?

Answer 16

economies of scale. as production increases, average unit cost decreases

Question 17

Who proved through example that division of labour could increase productivity?

Answer 17

Adam Smith (pins example)

Question 18

What is specialisation?

Answer 18

when a worker, firm or economy concentrates on producing a limited range of goods and services

Question 19

State two advantages of Specialisation

Answer 19

• reduces the cost to train workers as they only need to be trained for their particular job
• increases labor productivity

Question 20

State two disadvantages of Specialisation

Answer 20

• workers may struggle to adapt to a new role quickly
• workers may become bored and therefore work slower

Question 21

State 2 advantages of specialising in the production of goods and services to trade?

Answer 21

• a greater variety of products can be enjoyed
• there is greater output globally

Question 22

State a disadvantage of specialising in the production of goods and services to trade?

Answer 22

• high interdependence, which may cause problems if trade is prevented, for example, because of war

Question 23

What are the four main functions of money?

Answer 23

1. Medium of Exchange
2. Store of Value
3. Unit of account
4. Deferred payment

Question 24

What was Barter trading?

Answer 24

trading one good for another good

Question 25

What was the problem with Barter?

Answer 25

People could only trade if there was a double coincidence of wants, where both parties want the good the other party offers

Question 26

How is money a medium of exchange?

Answer 26

As it can be used to buy and sell goods and services and is acceptable everywhere

Question 27

How is money a unit of account?

Answer 27

As it can compare the value of two goods

Question 28

How is money a store of value?

Answer 28

As it is able to keep its value and can be kept for a long time

Question 29

How is money a method for deferred payment?

Answer 29

As money can allow for debts to be created. People can therefore borrow money to buy goods now, and then pay the money back in the future

Question 30

What are markets?

Answer 30

Where goods and services are exchanged

Question 31

What is a free market economy?

Answer 31

where all resources are allocated by the price mechanism and there is no government intervention

Question 32

What is price mechanism?

Answer 32

the interaction of demand and supply in a free market, in which this interaction determines prices

Question 33

What is a command economy?

Answer 33

Where the government is in charge of resource allocation

Question 34

What is a mixed economy?

Answer 34

• the government forms the public sector
• firms form the private sector
• together, they are responsible for the allocation of scarce resources

Question 35

What are 2 points on Adam Smith’s view on the economy?

Answer 35

• he thought consumers and producers were both driven by self-interest
• he believed that the interaction between profit-maximizing firms and consumers would lead to a mutually beneficial allocation of resources

Question 36

What are 2 points on Karl Marx’s view on the economy?

Answer 36

• Marx argued that the free market creates inequality and a situation where the working class are exploited
• He said that this would lead to a revolution where means of production would be seized

Question 37

What are 2 points on Friedreich Hayek’s view on the economy?

Answer 37

• He believed that firms and consumers know best, and they should use the price mechanism to interact effectively
• Hayek was skeptical of command economies and argued that asymmetry of information stopped them from making good decisions about resource allocation