1.1 Nature of economics

Question 1

what is economics?

Answer 1

The study of how groups of individuals make decisions about the allocation of scarce resources, it is a social science.

Question 2

social science

Answer 2

The study of societies and human behaviour using a variety of methods including the scientific method.​

Question 3

scientific method

Answer 3

A method of acquiring knowledge through proposing and testing ideas.​

The method involves generating abstract models to help explain how a complex, real world operates.​

Question 4

steps of the scientific method

Answer 4

1. Postulate a theory or model (put forward a hypothesis, capable of refutation).​
2. Gather evidence to support or refute the theory.​
3. Accept, modify or refute the theory.

Question 5

the role of assumptions

Answer 5

Make the world easier to understand.​

Assumptions allow Economists to make models to answer different questions.

Question 6

Ceteris paribus

Answer 6

Latin phrase meaning ‘all other things remaining equal’.​

An important assumption in economics because in the real world it is usually hard to isolate all the different variables.​

Question 7

pros of using models

Answer 7

Forecast activities and help future analysis/ policy. ​
Gives a clear and mathematical representation of the data.​
helps broaden understanding.​

Simplifies otherwise complex data. ​
answers become accessible.​

Quickens the pace of analysis.​
Helps to isolate the effect of a variable.​
looks at causality (helps to consider which factors are relevant and irrelevant).

Question 8

cons of using models

Answer 8

The bias of the creator of the model will then bias the results.​
Assumptions may not be valid in different settings.​

Models assume complete rationality however individuals have bounded rationality.​
Humans may not act in different ways despite the predictions of the model.​

Output quality is determined by input quality.​
Data and analysis may be overly simplified.​
Incorrect results.​

Question 9

difficulties in conducting scientific experiments in economics

Answer 9

1) lack of sterile environment
2) ethical objections
3) No universal laws of human behaviour exist

Question 10

positive economics statements defenition + role

Answer 10

A factual/objective statement which can be proved true or false (‘What is’) ​

Positive economics deals with objective explanation and the testing and rejection of theories, i.e. provable causal relationships​
Identifies relationships between economic variables, which can be verified by referring to data (you can be positive about a positive statement)​

Question 11

normative economics statements defenition + role

Answer 11

Value judgements which cannot be proved true or false (‘What ought to be’)​

Often concerned with ethical issues such as ‘fairness’​
Indicated by words such as ‘should’, ‘ought to’, etc. Often used when considering policy options ​

Question 12

Human needs

Answer 12

the minimum that is necessary for human survival- finite

Question 13

Human wants

Answer 13

desires for non-essential consumption. INFINITE

Question 14

the basic economic problem

Answer 14

SCARCITY (there aren’t enough resources to meet everyone’s wants)

Question 15

3 fundamental choices that must be answered to solve the economic problem

Answer 15

WHAT is to be produced?​

HOW is production to be organised?​

FOR WHOM is production to take place?

Question 16

opportunity cost

Answer 16

The benefit lost from the next best alternative forgone.​

Question 17

opportunity cost assumption

Answer 17

Available choices can be ranked in terms of the benefits to be gained. One choice will be the “best” and the others are given up.​

Answer 18

A good which has an opportunity cost.​

Question 19

free good

Answer 19

where there is no opportunity cost. This as there is zero degree of scarcity, but abundance. Free goods cannot be traded because nobody would ever pay for them– there is no point. (air, wind, sea).​

Nothing must be foregone to consume them.​

Question 20

factors of production defenition

Answer 20

the resources used in the production of goods and services
aka factor inputs, inputs, resouces

Question 21

4 factors of production

Answer 21

land- raw materials used to make goods
capital- man made resources used in the production of other g&s. financial capital refers to money that will be used by a firm to purchase resources later on.
labour- human input into the production process (skilled,unskilled,educsted,uneducated)
enterprise- providing the initial ideas and taking risks with their own money

Question 22

renewable vs non-renewable

Answer 22

Non-Renewable: a natural resource which cannot be replenished (produced, grown or generated) E.g. include Coal, Oil, Gold, Gas and Copper​

Renewable: resources replaced by natural processes consequently they can be used and replaced. E.g. fish, forests, wind, solar power​

Question 23

fixed capital vs working capital

Answer 23

Fixed Capital: Includes factories, offices, machinery. Fixed in the sense that it will not be transformed into a final product
Working Capital: Includes raw materials, semi-manufactured and finished goods waiting to be sold. ​

​

Question 24

factor incomes defenition

Answer 24

The income derived from selling the services of the factors of production​

Question 25

the 4 factor incomes

Answer 25

Rents: Income from selling/leasing natural resources​

Interest: Income generated by the use of capital​

Wages: Income as a reward for labour​

Dividends: Income that goes to the entrepreneurs​

Question 26

factor intensity

Answer 26

Capital intensive: Firms which use a higher proportion of capital than labour​

Labour intensive: Firms which use a higher proportion of labour than capital​

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Question 27

PPF

Answer 27

a curve showing the max. potential ouput level of one good for a given level of production of another,for the current state of technology

Question 28

Role of PPF’s in economics

Answer 28

Allow us to show all the combinations of goods that can be produced if an economy’s factors of production are fully employed and used at their maximum efficiency

Question 29

consumption goods

Answer 29

g&s used by people to satisfy their needs and wants

Question 30

capital goods

Answer 30

g&s used in the production of other goods

Question 31

why does the PPF have a negative slope?

Answer 31

when all resources are employed at their most efficient, increasing the production of 1 good requires resources to be freed from producing another good.

Question 32

why does opportunity cost vary along the ppf

Answer 32

resources are not equally efficient at producing both types of goods/services. ie factor inputs are not perfectly substitutable

Question 33

what does a straight line ppf indicate

Answer 33

perfect factor substitutability of resources between the 2 goods. OC is constant

Question 34

potential econ growth

Answer 34

an increase in an economy’s productive potential. production of both goods can now be increased without having to cut production of the other

Question 35

causes of potential econ growth

Answer 35

increase in quality/quantity of FoP

Question 36

actual econ growth

Answer 36

An increase in the actual (value of) output of the economy

Question 37

causes of actual econ growth

Answer 37

utilising mor FoPs , or using them more productively

Question 38

Negative actual econ growth

Answer 38

a decrease in the actual (value of) output of the economy

Question 39

causes of negative actual econ growth

Answer 39

utilising fewer resources for production or using them less productively

Question 40

Negative potential econ growth aka hysteresis

Answer 40

a reduction in an economy’s productive potential. max production of both goods is decreased

Question 41

causes of negative potential econ growth

Answer 41

decrease in quality/quantity of FoP

Question 42

shift of the PPF in one good

Answer 42

horizontal/vertical stretching of the PPF; an outward shift on one axis in the production possibility frontier.

Question 43

causes of the shift of ppf in one good

Answer 43

changes in technology/ increases in factor inputs that can only be used in one of two goods.

Question 44

productive efficiency

Answer 44

when each unit of output uses the fewest number of resources possible for that unit. this occurs anywhere on the ppf curve

Question 45

Pareto efficiency

Answer 45

where it is impossible to make one person better off without making another worse off. anywhere on the ppf curve

Question 46

allocative efficiency

Answer 46

production of those goods and services that are most desired by society in the quantity that they desire. point on ppf depends on preferences of population

Question 47

inefficient

Answer 47

combinations of output where there are unemployed resources or when resources are not used to their full potential. we could increase the total ouput of g&s by moving towards the PPF. producing more of both goods with the same resources represents an improvement in welfare and a gain in allocative efficiency.

Question 48

unattainable

Answer 48

combinations that require increased resources/productivity to achieve. these exist outside the ppf

Question 49

specialisatioin

Answer 49

When economic agents are not self-sufficient but concentrate their factors of production on a task to produce specific goods or services and trade the surplus with others. ​

Question 50

division of labour

Answer 50

The specialisation of labour. Production is broken down into many separate tasks which are divided up among the workers

Question 51

pin factory- adam smith

Answer 51

The pin making process can be split into 18 distinct steps, including the packaging the pins​

Adam Smith visited a pin factory employing 10 men who produced 48,000 pins per day​

If these workers did every step themselves, he reckoned they could each produce 10-20 pins per day. ​

The specialisation replaces up to 4,800 pin makers!​

Labour productivity (output per person per day) in the factory is almost 500 times that of individual pin makers!​

​

Question 52

DoL advantages

Answer 52

increased output per worker:
Improved productivity through “Learning by doing”.​

Lower cost per unit
Increases business profits.​

Lower prices for consumers:

Increased international Trade:

​

Question 53

DoL disadvantages

Answer 53

less productivity

Absenteeism-workers less puncutal

High worker turnover

little training-workers may struggle to get new jobs

over-reliance

low choice- lack of variety for customers due to mass production of certain goofs

Question 54

why does specialisation require trade

Answer 54

People can only specialise in the production of one good or service if they can exchange/trade their good or service to fulfil their needs and wants for the goods and services they do not produce.​

If people can’t trade their output they won’t have a very good quality of life – most will die!

Question 55

bartering

Answer 55

Trading goods and services through swapping one good for another.​

But: This is costly as you must spend time searching for people willing to exchange with you

Question 56

why has money developed?

Answer 56

To reduce the costs of exchange/trade from bartering, and thus by encouraging trade it has allowed greater specialisation.​

Question 57

money

Answer 57

Any item which fulfils the following four functions:​

A Medium Of Exchange. ​

A Measure Of Value/Unit Of Account. ​

A Store Of Value. ​

A Method Of Deferred Payment. ​

​

Question 58

a medium of exchange

Answer 58

Money can be used to buy goods and services ​

Eliminates the requirement of a double coincidence of wants. ​

People accept payment in money because they know that they will be able to use that money to buy other goods and services.​

Question 59

a measure of value/unit of account

Answer 59

Money allows the value of something to be expressed in an understandable way, and in a way that allows the value of items to be compared. ​

Question 60

a store of value

Answer 60

his can refer to any asset whose “value” can be used now or used in the future. This means that people can save now to fund spending at a later date. ​

Assets that deteriorate would not make good money​

Question 61

a method of deferred payment

Answer 61

Money is a unit of account across time, expressing the value of a debt.​