1.1 Nature of Economics

Question 1

What is the name of UK welfare schemes?

Answer 1

Universal Credit

Question 2

What does ceteris paribus mean?

Answer 2

All other factors being equal

Question 3

Definition of positive statement

Answer 3

Objective opinions that are factually based comments and can be tested with scientific methods

Question 4

Definition of normative statement

Answer 4

A normative statement is a value judgement that relies on subjective opinion

Question 5

Definition of scarcity

Answer 5

Unlimited wants but limited resources to satisfy those wants

Question 6

Opportunity cost

Answer 6

The value of the next best alternative foregone

Question 7

Difference between renewable and non renewable resources?

Answer 7

renewable can be replenished while non-renewable cannot.

Question 8

PPF Curves

Answer 8

A curve which represents all possible combinations of goods an economy or a firm can produce when all factors of production are fully employed and used efficiently.

Question 9

(Notes on PPF’s) What does it mean if point isn’t on PPC curve?

Answer 9

point lies outside the PPC - the economy is not utilizing its resources efficiently, and it cannot currently produce that combination of goods without either increasing its resource base or improving its technology. if a point lies inside the PPC, it suggests that the economy is operating below its maximum potential, and it could produce more of both goods by utilizing its resources more efficiently.

Question 10

What is the marginal analysis on PPF’s? (why is it drawn as a curve)

Answer 10

The first resources switched from capital to
consumer good production and vice versa are resources that are not adding much to capital goods but will be much more productive in the production of consumer goods, and vice versa (highlands and sheep farming.)

Question 11

What might cause a shift in the PPF curve?

Answer 11

An increase in the productive capacity of the economy (anything that might shift LRAS right) i.e. improvements in technology, increase in supply of labour etc.

Question 12

What are consumer goods?

Answer 12

Consumer goods
are goods that are demanded and bought by households and individuals

Question 13

What are capital goods?

Answer 13

Capital goods are goods that are produced in order to aid the production of consumer goods in the future

Question 14

What is specialization?

Answer 14

Specialisation is the production of a limited range of goods by a company/individual/country

Question 15

What is division of labour?

Answer 15

The division of labour is when labour becomes specialised in a particular part of the production process

Question 16

Who invented the theory of division of labour?

Answer 16

Adam Smith (pin making process in a factory!)

Question 17

Advantages of division of labour?

Answer 17

(1) Labour productivity per hour is improved (2) Higher quality services (3) Less waste of resources (4) Time is not wasted

Question 18

Disadvantages of division of labour?

Answer 18

(1) May induce alienation - feelings of boredom, nihilism etc (MARX) (2) Could lead to structural unemployment (3) Production line may be more insecure if one part fails

Question 19

Advantages of specialisation

Answer 19

(1) 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 20

Disadvantages of specialisation

Answer 20

(1) Countries may become overdependent (2) Could lead to structural unemployment in long term (3) High interdependence between countries

Question 21

Functions of money

Answer 21

(1) Medium of exchange as acceptable everywhere (2) Measure of value - can compare the value of different two goods with standardised currency (3) A store of value - can store its value over time as not a perishable (4) Method of deferred payment - money can allow debts to be collected and paid

Question 22

Definition of free market economy

Answer 22

allocates resources through price mechanism. freedom for firms and consumers what to produce.

Question 23

Definition of command economy

Answer 23

all factors of production, except labour, is owned by the state and labour is directed by the state. No private poverty.)

Question 24

Definition of mixed economy

Answer 24

This is an economy where both the free market mechanism and the government planning
process allocate a significant amount of the total resources in the country

Question 25

Characteristics of free market economy

Answer 25

(1) individuals are free to make their own choices and own the factors of production without government interference (2) Resources are allocated through
the price mechanism (3) . Consumers make decisions based on satisfaction and
producers based on profit

Question 26

Characteristics of command economy

Answer 26

(1) exploiting labour as they underpaid workers for the value that they actually create (labour theory of value) (2) . Resource allocation is carried out by
the government, rather than the price mechanism. (3) no matter their job, tend to receive the same wage, products are standardised (4)
prices are limited causing excess demand and queueing

Question 27

Double coincidence of wants

Answer 27

The problem with barter was that people could only trade if
there was a double coincidence of wants: where both parties want the good the other
party offers.

Question 28

Invisible hand

Answer 28

where individuals pursuing their own self-interest unintentionally promote the well-being of society as a whole - this guides price mechanism which allows resources to be used efficiently.

Question 29

What did Hayek believe about free market economies?

Answer 29

although individuals don’t make supply and
demand decisions based on perfect information, they best know what they need in their own situation

Question 30

Advantages of free market economy

Answer 30

(1) The system is automatic due to invisble hand - not by a inefficient central planning government (2) high incentive to work (3) COMPETITION between firms - productive efficiency (4) higher growth

Question 31

Disadvantages of free market economy

Answer 31

(1) inequality r>g equation - richer people can accumulate capital quickly poor cannot (2) Lack of merit goods and surplus of demerit goods (3) monopolies (4) externalities

Question 32

Advantages of command economy

Answer 32

(1) less income inequality with minimum standard of living (2) less wastage of resources (3) long-term planning (5 year china plan) (4) less production of demerit goods

Question 33

Disadvantages of command economy

Answer 33

(1) not allocatively inefficient without price mechanism (2) oversupply and undersupply due to asymetric information (3) less motivation and efficiency (4) bribery and corruption due to centralised power

Question 34

What does a government do in a command economy?

Answer 34

(1) Creating a framework for rule of law (2) Supplements price mechanism with externalities (3) redistributes income (4) stabilizes the economy with