1.1: Nature Of Economics

Question 1

What is Opportunity Cost?

Answer 1

The next best alternative given up when making a choice

Question 2

What is a positive statement?

Answer 2

Statements that are based on factual observations or evidence and can be tested and verified through empirical analysis. Positive statements are objective and do not involve value judgments or personal opinions.

Question 3

What is a normative statement?

Answer 3

Statements that involve value judgments or express personal opinions about what ought to be or what should be. They are not based on factual observations or evidence and cannot be tested or verified through empirical analysis. Normative statements often involve subjective evaluations of what is considered good, bad, right, or wrong.

Question 4

What is money?

Answer 4

P/H

Question 5

What are the 4 functions of money?

Answer 5

-A medium of exchange
-A measure of value
-A store of value
-A method of deferred payment

Question 6

Explain:

What is the difference between renewable and non-renewable resources?

Answer 6

Renewable resources can be replenished naturally over time; non-renewables cannot be replaced naturally within a human timescale.

Question 7

What is the basic economic problem?

Answer 7

How to best use scarce resources to satisfy unlimited wants.

Question 8

Explain:

What is the distinction between capital goods and consumer goods?

Answer 8

Capital goods are man-made products used by a business to produce consumer or other capital goods. Consumer goods are products used by consumers.

Question 9

Explain:

What is Specialisation?

Answer 9

The process of focusing on a specific task or area of production.

Question 10

Explain:

What is division of labour?

Answer 10

The breakdown of a larger task into smaller, specialised tasks that can be performed by different workers in order to increase efficiency.

Question 11

State:

Which economist stated the concepts of specialisation and division of labour first?

Answer 11

Adam Smith

Question 12

State:

Benefits of Division of Labour

Answer 12

-Higher productivity and efficiency
-Lower unit costs leading to higher profits
-Encourages investment in specific capital: economies of scale

Question 13

State:

Disadvantages of Division of Labour

Answer 13

-Risk of worker alienation
-Risk of disruptions to production process
-Risk of structural unemployment due to occupational immobility

Question 14

State:

Benefits of a country specialising

Answer 14

-Allows a country to make full use of their economic resources
-Increases the scale of production: leads to lower costs and prices
-Surplus can be exported, an injection into the circular flow of income

Question 15

State:

Disadvantages of a country specialising

Answer 15

-World prices for a product might fall leading to declining revenues
-Risk of over-specializing and structural unemployment
-Might lead to over-extraction of a country’s natural resources

Question 16

Economic decisions are primarily made by private individuals and firms (e.g. USA)
Envisioned by Adam Smith with his “invisible hand” theory.

Answer 16

Free market economies

Question 17

The government or central authority makes all economic decisions. (e.g. North Korea)
Envisioned by Karl Marx

Answer 17

Command/planned economies

Question 18

Both the private sector and the government play significant roles in economic decision-making. (e.g. UK)

Answer 18

Mixed Economies

Question 19

State:

What are the roles of the state in a mixed economy?

Answer 19

-Regulation
-Public goods & services
-Welfare and redistribution
-Stabilisation and economic planning

Question 20

State:

Advantages of a Command Economy

Answer 20

-Equality
-Stability
-Prioritising social goals

Question 21

State:

Disadvantages of a Command Economy

Answer 21

-Lack of Incentives
-Resource Misallocation
-Bureaucracy

e.g. The Soviet Union highlighted these challenges, leading to collapse

Question 22

State:

Advantages of a Free Market Economy

Answer 22

-Efficiency
-Consumer choice
-Economic growth

e.g. the US continuously experiences high growth.

Question 23

State:

Disadvantages of a Free Market Economy

Answer 23

-Inequality
-Lack of public goods
-Boom-bust cycle

e.g. The 2008 financial crisis exposed these disadvantages

Question 24

The principle that consumers, through their purchasing decisions, determine the demand for goods and services, and therefore have a powerful influence on what is produced and how it is produced.

Answer 24

Consumer Sovereignty

A key principle in free market economies