1.1 Nature of economics

Question 1

what is ceteris paribus?

Answer 1

the assumption that only two factors will change and all others will stay the same

Question 2

what are positive statements?

Answer 2

objective statements that can be tested eg a reduction in income will increase the number of people shopping in pound shops

Question 3

what are normative statements?

Answer 3

subjective statements which contain a value judgement (opinion) eg fossil fuels should be taxed more heavily than renewables ➡️ important as influence decision making + govt policy

Question 4

what is the economic problem?

Answer 4

there are unlimited wants and finite resources (land, labour,capital,enterpirse) ➡️forces economic agents to make choices

Question 5

how is the economic problem solved?

Answer 5

1. deciding what to produce
2. deciding how to produce
3. for whom we should produce these products

Question 6

whats the opportunity cost?

Answer 6

the benefit lost from the best alternative forgone (cost of choice)

Question 7

what does a production possibility frontier show?

Answer 7

the maximum potential output of an economy when all resources are fully employed

Question 8

whats pareto efficiency?

Answer 8

its impossible to make one thing better without making someone else worse off

Question 9

where is the opportunity cost on a diagram?

Answer 9

look at how much the other axis has decreased (this is how much of one product has been given up in order to make more of another)

Question 10

what does it mean if the PPF curve has been pushed out?

Answer 10

the economy has grown by either;
- getting more of something
- making more of what they’ve got

• the graph is also pushed outwards when there is an efficient allocation of resources

Question 11

how can you see possible and unobtainable production on a PPF curve?

Answer 11

• point lies within or on the curve is it possible
• point lies outside the curve it is impossible as production can’t be above max
  ➡️countries aim to be as close to the curve

Question 12

what are capital goods?

Answer 12

goods used to make consumer goods eg machinery

Question 13

what are consumer goods?

Answer 13

used/consumed by the consumer and do not further aid production eg a slice of pizza

Question 14

what’s specialisation?

Answer 14

when we concentrate on a product or task

Question 15

whats division of labour?

Answer 15

specialisation by individuals

Question 16

advantages to the business of specialisation and division of labour?

Answer 16

✅
- more motivated (and quicker) ➡️ increase output
- better quality + range of products
- reduced training costs

Question 17

advantages to the employee of specialisation and division of labour?

Answer 17

✅
- higher wages as business makes more profit
- sense of achievement to be specialised in something
- improved skills of the job

Question 18

disadvantages to the business of specialisation and division of labour?

Answer 18

❌
- employees less motivated as job repetitive and boring
- employees expect higher wages as more experiences
- inflexibility as workers can’t do multiple jobs
- countries will be less self sufficient

Question 19

disadvantages to the employee of specialisation and division of labour?

Answer 19

❌
- repetitive and boring having to do the same task everyday
- replace by machinery
- difficult to find other jobs

Question 20

whats productivity?

Answer 20

a way of measuring how effectively a firm is producing its output

Question 21

formula for productivity?

Answer 21

output(producers)/input(workers)

Question 22

whats the free market?

Answer 22

based on consumer buying decisions
✅
efficient, only best value demanded so firms have incentive to make goods as efficient as poss
entrepreneurship, rewards taking risks
choice

❌
inequalities of wealth
non profitable businesses wouldn’t; exist as firms won’t make any profit
monopolies, successful firms dominate the market making them the only choice
illegal things can be sold

Question 23

whats a command economy?

Answer 23

the state/gov controls all resources
✅
welfare maximised as govt can redistribute income fairly
low unemployment, govt tries to provide everyone with a job
prevent monopolies

❌
poor decision making by govt
restricted choice
lack of risk taking and efficient as not motivated to make profits
state slow to adapt to consumer wants

Question 24

whats a mixed economy?

Answer 24

combination of command and free market
- govt role ;
- change laws
- change tax levels
- buying/selling
➡️try and maximise the benefits of the free market and the command economy

Question 25

who was Adam Smith?

Answer 25

supported the free markets
- believed consumer and producer get what they want and due to demand and supply prices will work for both
- invisible hand

Question 26

whats the invisible hand model?

Answer 26

factors of production move to where they are needed in the economy (self interest balanced with competition)
- when people are free to engage in voluntary transactions and pursue their own economic interests, the invisible hand of the market guides their actions to collectively benefit the entire society

Question 27

who was Karl Marx?

Answer 27

believed an economy should exist for the benefit of the workforce
- critiqued the desire for profits, owners always trying to make money as they will take this too far and lower costs so workers will be paid as little as possible
- specialisation = loss of creativity

Question 28

what are the functions of money?

Answer 28

• a medium of exchange
• a store of value
• a unit of account
• a standard of deferred payment

Question 29

characteristics of money?

Answer 29

• durability
• portable
• divisible
• hard to counterfeit
• accepted
• valuable

Question 30

what is automation?

Answer 30

production which uses technology to replace or enhance human labour

Question 31

what are non-renewable resources?

Answer 31

finite in supply, can’t be replenished at a faster rate than they are used
- crude oil
- natural gases

Question 32

what are renewable resources?

Answer 32

are replaceable if the rate of extraction is less than the natural rate at which a resource renews
- wind turbines
- solar pannels

Question 33

who was Friedrich Hayek?

Answer 33

strongly advocated for free-market
- Hayek said that government intervention in money and financial markets was one of the main causes of instability
- the only role of the government should be to maintain law and order
- strongly argues against the command economy because a small number of people cannot have enough knowledge on what consumers want