1.1 - Nature of Economics

Question 1

What is ceteris paribus

Answer 1

Assuming everything else remains the same, when one economic factor effects something

Question 2

What’s a positive statement

Answer 2

An objective statement. A “fact” which can be tested
e.g. grass is green

Question 3

What is a normative statement

Answer 3

A subjective statement based on opinions
e.g milk tastes better than water

Question 4

What is the basic economic problem

Answer 4

Wants are unlimited and resources are finite

Question 5

What is opportunity cost

Answer 5

The value of the next best alternative. The next best thing

Question 6

The factors of production (CELL)

Answer 6

Capital, Entrepreneurship, Land, Labour

Question 7

What is capital (CELL)

Answer 7

goods which can be used in the production process

Question 8

What is entrepreneurship (CELL)

Answer 8

Managerial ability. The entrepreneur is someone who takes risks and uses the factors of production.

Question 9

What is land (CELL)

Answer 9

Natural resources such as oil, coal, wheat, water. It can also be the physical space for fixed capital.

Question 10

What is labour (CELL)

Answer 10

Human capital, which is the workforce of the economy

Question 11

What are renewable resources

Answer 11

Resources which can be replenished, assuming the rate of consumption is less than the rate of replenishment

Question 12

What are non-renewable resources

Answer 12

Resources which cannot be replenished

Question 13

What does Production Possibility Frontiers (PPF) do

Answer 13

Shows the maximum productive potential of an economy, using a combination of two goods or services, when resources are efficiently used

Question 14

What can the PPF curve show

Answer 14

the opportunity cost of using the scarce resources

Question 15

What does it mean when the production point lays on the PPF curve

Answer 15

It is when both goods/services are being used as efficiently and effectively as possible

Question 16

What is the law of diminishing returns

Answer 16

Increases in one factor of production mean lower additional returns

Question 17

What does it mean when the production point lays inside the PPF curve

Answer 17

It’s inefficient and resources are not used to their full productive potential

Question 18

What does it mean when the production point lays outside the PPF curve

Answer 18

It’s not yet attainable with the current resources

Question 19

How can economic growth be shown on the PPF curve

Answer 19

An outward shift. Oppositely, there is an inward shift for a decline in the economy

Question 20

What can shift the PPF curve outward

Answer 20

An increase in the quantity or quality of resources, meaning economic growth

Question 21

What can shift the PPF curve inward

Answer 21

A decrease in the quality or quantity of resources in an economy, meaning a decline in the economy

Question 22

What are capital goods

Answer 22

Goods which can be used to produce other goods, such as machinery

Question 23

What are consumer goods

Answer 23

Goods which cannot be used to produce other goods, such as clothing

Question 24

What is specialisation

Answer 24

when each worker completes a specific task in a production process

Question 25

Advantages of specialisation

Answer 25

Higher output and potentially higher quality
There could be a greater variety of goods and services produced

Question 26

Disadvantages of specialisation

Answer 26

Work becomes repetitive
There could be more structural unemployment, since skills might not be transferable
Employees become dissatisfied with their jobs and leave regularly

Question 27

What are the functions of money

Answer 27

A medium of exchange ( you don’t need to trade goods or services)
A measure of value
A store of value
A method of deferred payment (allows for debt to be created)

Question 28

What are free market economies

Answer 28

Economic decisions are taken by private individuals and firms, and private individuals own everything.

Question 29

Advantage of free market economies

Answer 29

Firms are likely to be efficient because they have to provide goods and
services demanded by consumers. Overall output increases.

Question 30

Disadvantage of free market economies

Answer 30

Ignores inequality, and tends to benefit those who hold most of the wealth.
There could be monopolies, which could exploit the market by charging higher prices.
There could be the overconsumption of demerit goods, which have large negative externalities, such as tobacco.

Question 31

What is command economy

Answer 31

Where the government allocates all of the scarce resources in an economy to where they think there is a greater need

Question 32

Advantages of command economy

Answer 32

Might be easier to coordinate resources in times of crises, such as wars
The government can compensate for market failure, by reallocating resources
Inequality in society could be reduced

Question 33

Disadvantages of command economy

Answer 33

Governments fail, and they may not be fully informed for what to produce
May not meet consumer preferences
Limits personal freedom

Question 34

What is a mixed economy

Answer 34

The market is controlled by both the government and the forces of supply and demand.

Question 35

What does the government do in a mixed economy

Answer 35

Creating rules
Adjusts the price system
Redistributes income