1.1 Nature of Economics (1.1.5-1.1.7)

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 are the factors of production?

Answer 2

• Land
• Labor
• Capital
• Enterprise

Question 3

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

Answer 3

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

Question 4

Why could the productive capacity of the economy have increased?

Answer 4

due to improvements in technology

Question 5

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

Answer 5

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

Question 6

When do trade-offs occur?

Answer 6

when producing on the PPF

Question 7

Why do trade-offs occur?

Answer 7

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

Question 8

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

Answer 8

it is not currently possible to produce at this point

Question 9

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

Answer 9

all available factors of production are being fully used.

Question 10

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

Answer 10

productively efficient

Question 11

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

Answer 11

there are factors of production being underemployed

Question 12

What does efficiency refer to?

Answer 12

A lack of waste

Question 13

What does static efficiency refer to and what types of efficiency can it be separated out into?

Answer 13

• efficiency at a point in time
• allocative and productive efficiency

Question 14

What do movements across the PPF mean?

Answer 14

the reallocation of resources

Question 15

When does the PPF shift?

Answer 15

When the total level of resources change, as this effects output (increasing amount of resources or decreasing resources, so increasing output or decreasing output)

Question 16

What are capital goods?

Answer 16

goods that are used to produce other goods

Question 17

What are consumer goods?

Answer 17

goods bought and used by consumers

Question 18

What is the division of labour?

Answer 18

dividing up the labour force, e.g. waiters, cooks, managers

Question 19

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

Answer 19

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

Question 20

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

Answer 20

Adam Smith (pins example)

Question 21

State two advantages of Specialisation

Answer 21

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

Question 22

State two disadvantages of Specialisation

Answer 22

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

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 are markets?

Answer 24

Where goods and services are exchanged

Question 25

What is a free market economy?

Answer 25

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

Question 26

What is price mechanism?

Answer 26

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

Question 27

What is a command economy?

Answer 27

Where the government is in charge of resource allocation

Question 28

What is a mixed economy?

Answer 28

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

Question 29

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

Answer 29

• 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 30

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

Answer 30

• 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 31

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

Answer 31

• 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