1.1 - Nature of Economics

Question 1

How is Economics a Social Science?

Answer 1

Economics can be classed as a social science because it uses scientific methods to build theories that can explain the behaviour of individuals.

Question 2

What is ‘Ceteris Paribus’?

Answer 2

Economics use the assumption ‘ ceteris paribus ‘ which means ‘ when all other things remain equal ‘ - this allows economists to develop theories and models plus make assumptions.

Question 3

What is a Positive Statement?

Answer 3

(objective) - can be tested by referring to available evidence. These are important as they can be tested to see whether or not economic ideas are correct.

Question 4

What is a Normative Statement?

Answer 4

(subjective) - statements which contain a value judgement, opinions. These are important as they influence decisions making and government policy.

Question 5

What is the problem of scarcity?

Answer 5

There is finite resources such as water, land, oil, coal, but there is also unlimited wants.

Question 6

What are renewable resources?

Answer 6

Renewable resources are ones which are infinite e.g. air, solar, wind.

Question 7

What are non-renewable resources?

Answer 7

Ones that are finite such as coal, water, land, oil.

Question 8

Why are opportunity costs important to the economic agents?

Answer 8

They show that people cannot have everything they want - scarcity - choices have to be made on the allocation of resources.

Question 9

What is the distinction between movements along and shifts in production possibility curves.

Answer 9

When the curve is affected due to the price change, we see a movement along the curve. However, when the curve is affected due to any change other than any change in the price of a given product, we see the shift of the curve itself.

Question 10

What are consumer goods?

Answer 10

Goods that are not used to produce other goods. They are used or consumed by the consumer.

Question 11

What are capital goods?

Answer 11

Goods which are used to produce consumer (other) goods, e.g., machinery, baker’s oven, builder’s hammer, chef’s knife.

Question 12

What is specialisation?

Answer 12

It is when we focus solely on a product or task. It happens within:
* A business e.g. a car manufacturer
* A region e.g. West Midlands - motor car assembly
*A country e.g. Bangladesh - producer and exporter of textiles

Question 13

What is the division of labour?

Answer 13

The division of labour is the separation of the tasks in any economic system or organisation so that participants may specialise.

Question 14

What are the advantages of specialisation and the division of labour?

Answer 14

• Enables labour productivity to be increased. Workers will be quicker, better, and more efficient as they are concentrating on one thing and so can quickly develop their skills.
• This may lead to a higher quality of goods and services, since workers are more skilled at their jobs.
• It is more cost effective to develop specialist tools, improving speed or quality.
• Time is not wasted moving between jobs and getting out tools etc.
• Workers only need to be trained to do one task rather than many, saving time and money.

Question 15

What are the disadvantages of specialisation and the division of labour?

Answer 15

• Doing one specific task can prove to be repetitive and boring which will lead to poor quality of work and people leaving the business.
• There is a reduction of craftsmanship and a much more standardised product because of mechanisation.
• If production in one process is delayed, every other task has to stop.
• The workforce do not have wide industrial training and could therefore suffer from structural unemployment.

Question 16

What are the advantages of specialising in the production of goods and services to trade?

Answer 16

• The theory of comparative advantage states countries should specialise in producing those goods where they have a lower opportunity cost, and so they are relatively best at producing. This will help them boost their economy. On the whole, there is greater output globally.

Question 17

What are the disadvantages of specialising in the production of goods and services to trade?

Answer 17

• Countries may become over-dependent on one particular export and if this fails their economy might collapse.
• Other countries specialise in non-renewable resources and these could run out, which result in a huge loss of income for that country. It will also mean the loss of these resources.
• There will be high interdependence and this will cause problems if trade is prevented.
• Some say that increased specialisation means there will be more competition to cut costs and so wages will fall, this is not necessarily true.

Question 18

What are the four functions of money?

Answer 18

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

Question 19

What is a medium of exchange?

Answer 19

This means it can be used to buy and sell goods and services and is acceptable everywhere.

Question 20

What is a measure of value?

Answer 20

This means it can compare the value of two goods, such as a table and a skirt. It is also able to put a value on labour.

Question 21

What is a store of value?

Answer 21

This means it is able to keep its value and can be kept for a long time. With barter, goods such as fruits often went out of date and so could not keep their value.

Question 22

What is a method for deferred payment?

Answer 22

Money can allow for debts to be created. People can therefore pay for things without having money in the present, and can pay for it later. This replies on money storing its value.

Question 23

What is the Free Market Economy?

Answer 23

In this economy, individuals are free to make their own choices and own the factors of production without government interference. Resources are allocated through the price mechanism. The consumer determines what is produced by their willingness to spend their money on a good. Consumers make decisions based on satisfaction and producers based on profit. There are no free markets in the world today.

Question 24

Who is Adam Smith?

Answer 24

Adam Smith believed in the free market economy and the laissez-faire approach by governments. He explained the ‘invisible hand’ which allocated resources to everyone’s advantage, allowing the greatest good for the greatest number of people. He believed competition caused lower prices, benefitting consumers. Each individual’s self-interest managed to produce and purchase the goods and services that society needed.

Question 25

Who is Friedrich Hayek?

Answer 25

Friedrich Hayek argued that state control of the economy leads to the loss of freedom. He believed that the poor in the free market countries were better off than those in command economies because at least they had personal freedom.

Question 26

What are the advantages of the free market economy?

Answer 26

• The system is automatic due to the invisible hand; resources are moved out of production of a good when people stop wanting it or costs are too high.
• Consumers have freedom of choice.
• There is high motivation as people know working hard could lead to high potential rewards, creating conditions where initiative and enterprise flourish.
• There is political freedom.
• Due to competition, firms will produce goods at the lowest cost they can - efficiency.
• In general, these economies tend to have higher growth.

Question 27

What are the disadvantages of the free market economy?

Answer 27

• High levels of inequality since the rich own more factors of production and so can grow richer
• There may be a lack of merit goods and little control of demerit goods
• Resources could be wasted on unproductive expenses such as advertising, switching the factors of production and providing competitive services.
• If competition disappears then there may be monopolies who charge high prices and offer low quality of service.
• There is the problem of externalities.

Question 28

What is the Command Economy?

Answer 28

All factors of production, except labour, is owned by the state and labour is directed by the state. There is no private property and everyone is assumed to be selfless, working for a common good. Resource allocation is carried out by the government, rather than the price mechanism. The government’s allocation may represent the wishes of the consumer and often focuses on the need to expand certain areas of the economy. All workers tend to receive the same wage, products are standardised, and prices are limited.

Question 29

Who is Karl Marx?

Answer 29

Karl Marx believed in the command economy and criticised capitalism. Marx believed that capitalist’s profit came from exploiting labour as they underpaid workers for the value that they actually created. He wanted to remove the difference between the incomes and owners and workers.

Question 30

What are the advantages of the Command Economy?

Answer 30

• The state provides a minimum standard of living - less inequality.
• Less wastage of resources - no need for competitive services nor advertising.
• Long term planning means that the industry doesn’t have to keep changing and shifting resources. This is important as some industries may take a number of years to get established and would fail if planning was short term.
• Standardised products means that they are produced cost effectively.

Question 31

What are the disadvantages of the Command Economy?

Answer 31

• It is impossible for the state to make decisions correctly, which could lead to over or under supply and a waste of resources.
• Decision making will be slow as it has to go through various stages and there could be an increase in bribery and corruption.
• As everyone has the same wage, there is less motivation and efficiency.
• Consumers lose their freedom and it is often led by dictators.

Question 32

What is the Mixed Economy?

Answer 32

Where both the free market mechanism and the government planning process allocate a significant amount of the total resources in the country. Each country will have a different amount of control by the government, but it is usually between 40%-60%.

Question 33

What is the government’s role in a mixed economy?

Answer 33

• Creating a framework of rules - prevent the abuse of monopolies
• Supplements and modifies the price system - produce public and merit goods, limit production of demerit goods
• Redistributes income - move income from one group of people to another (e.g. income tax)
• Stabilises the economy - manage demand to prevent extremes of too much or too little demand (through fiscal and monetary policy)