1.1 Nature of Economics

Question 1

Economics

Answer 1

The study of the allocation of scarce resources.

Question 2

‘Ceteris Paribus’

Answer 2

‘all other things being equal’ - all other variables are held constant

Question 3

Why is Econ considered a social science?

Answer 3

-inability to conduct scientific experiments due to complexity of human nature and significant number of social interactions that are taking place in an economy

Question 4

Economic models

Answer 4

-simplified version of reality
-due to complexities economists build models
-based on range of assumptions
-social scientific method - models are developed by economists, once a hypothesis has been repeatedly proven or rejected in different circumstances

Question 5

Positive statement

Answer 5

A statement based on facts which can be proved or disproved

Question 6

Normative Statement

Answer 6

A statement based on value judgements and are subjective so cannot be tested true or false.

Question 7

Basic Economic Problem

Answer 7

Resources are scarce but wants are infinite, therefore choices must be made.

Question 8

Choices to make by societies to face problem of scarcity

Answer 8

-What to produce and how much to produce it?
-How should the goods and services be produced?
-How should the goods produced be allocated?

Question 9

Factors of Production

Answer 9

Land, Labour, Capital, Enterprise

Question 10

Renewable resources

Answer 10

A resource whose stock level can be replenished naturally over a period of time.

Question 11

Non-renewable resources

Answer 11

A resource whose stock level decreases over time as it is consumed.

Question 12

Opportunity cost

Answer 12

The next best alternative foregone.
-scarcity means choices and each choice involves an opportunity cost.
-real cost measured

Question 13

Economic goods

Answer 13

-goods created from resources that are scarce (limited in supply)

Question 14

Free goods

Answer 14

Goods that are unlimited in supply and therefore have no opportunity cost.

Question 15

Production Possibility Frontier

Answer 15

The maximum potential output of a combination of goods an economy can produce when all its resources are fully and efficiently employed

Question 16

Capital Goods

Answer 16

goods required to produce other goods

Question 17

Consumer goods

Answer 17

Goods designed for use by final consumers/give satisfaction (utility).

Question 18

Any point on or inside the PPF is

Answer 18

obtainable - all resources fully employed

Question 19

outside PPF is

Answer 19

unobtainable , because PPF shows the maximum potential output using all available resources

Question 20

Inside PPF

Answer 20

-unemployed resources or resources not being allocated efficiently

Question 21

marginal increase in the output of capital goods

Answer 21

means some consumer goods must be sacrificed

Question 22

if PPF were a straight line

Answer 22

then opportunity cost would be constant

Question 23

More Fop shown by

Answer 23

rightward shift of PPF - increase in productive capacity of economy - economic growth

Question 24

movement along PPF

Answer 24

-change in combination of the two goods being produced - causes opportunity cost

Question 25

outward shifts in PPF

Answer 25

-new natural resources
- increase productivity E.G technology
-improvement in education
-productivity of workforce
-increase in the size of workforce

Question 26

Inward shift in PPF

Answer 26

-natural disaster -destruction of productive capacity -depletion of natural resources
-reduction in size of workforce
-decrease and productive capacity e.g recession

Question 27

division of labour

Answer 27

-occurs when the work is split up into small specialised tasks

Question 28

Adam Smith

Answer 28

The Father of Economics;
- The Invisible Hand (workings of the Price Mechanism)
- Specialisation
- Division of Labour

Question 29

specialisation

Answer 29

Process wherein a company/individual focus on labour on a specific type of production limited scope of products so becomes more efficient

Question 30

Productivity

Answer 30

Output per unit of input

Question 31

Advantages of specialisation/division of labour

Answer 31

-Each worker become specialised
-set for only training in one task
-cost of production is lower
-less time is wasted
-increased productivity

Question 32

Disadvantages of specialisation/division of labour

Answer 32

• boredom of workers decrease productivity
  -limited skillset of workers
  -strike can lead to standstill
  -lack of variety in products

Question 33

advantages of specialisation/ division of labour for countries

Answer 33

-comparative advantage
-increased output, greater choice and lower prices

Question 34

disadvantages of specialisation/ division of labour for countries

Answer 34

-country becomes over-dependent on imported g/s
-if uncompetitive , unemployment could result

Question 35

limits to division of labour

Answer 35

-size of market -e.g small= difficult to specialise
-type of product- e.g designer/unique isn’t suited for dol
-transport costs - high costs/large scale = dol may not be possible,

Question 36

functions of money - helps to facilitate specilisation/division of labour

Answer 36

-Medium of exchange (pay for g/s with money earned)
-store of value (save for future)
-a measure of value (assess the value)
-a means of deferred payments (buy and pay later -credit)

Question 37

Free market Economies

Answer 37

Refers to an economic system in which prices are determined by supply and demand with no government intervention

Question 38

Free market features

Answer 38

-determined by market forces
-resources allocated by price mechanism
-private ownership of resources
-firms aim to maximise profit
-consumers - utility

Question 39

Free market advantages

Answer 39

-consumer sovereignty
-flexibility
-no bureaucracy
-efficiency/competition/profit motive
- increase variation
-rights to own resources

Question 40

Free market disadvantages

Answer 40

-inequality
-trade cycles i
-imperfect information
-monopolies (exploit consumers/workers)
- externalities

Question 41

Who supports free market economy?

Answer 41

-Friedrich Hayek - Road to serfdom
-argues govs unable to efficiently cater for wants/need
-govs unable to answer q’s effiecntly

Question 42

Command economy

Answer 42

Is one in which resources are allocated by the state

Question 43

Command economy features

Answer 43

-state= central planner
-Public state ownership of resources / allocates resources
-state determines price
-produces aim to meet production target set by the state - -greater equality of income/wealth
-abolishment of property

Question 44

Command economies advantages

Answer 44

-greater equality (minimum standard of living) -macroeconomic stability
-external benefits/costs
-no exploitation
-full employment
-resources maybe allocated to maximise social welfare

Question 45

Command economies disadvantages

Answer 45

-Inefficiency
-lack of incentive to take risks (no profit motive)
-lack of variation
-shortages/surpluses bureaucracy
-no consumer sovereignty
-inflexibility

Question 46

Who supports command economies?

Answer 46

-Karl Marx
-capitalism unstable because workers exploited

Question 47

Mixed economies

Answer 47

-is a combination of a free-market economy and a command economy

Question 48

Mixed economy features

Answer 48

-some resources are allocated by the price mechanism -others are allocated by the state
-difference between countries is the degree of mix
-most countries = this
-State role depends on political priorities:
-defence/internal security
-provision of public goods/services e.g education/health
- closing inequality gap

Question 49

Who supports mixed economies?

Answer 49

Adam smith - wealth of nations 1776
-individuals follow own self interest indirectly do good for soceity
-producers response to changes in demands
-role of gov limited to defence/justice/public goods