1.1 Nature of economics

Question 1

Define ‘ceteris paribus’

Answer 1

“all other things being equal” (or constant)

Question 2

What are normative statements?

Answer 2

Value based judgements that are not based on facts.

Question 3

What are positive statements

Answer 3

Statements based on facts

Question 4

Define opportunity cost

Answer 4

The cost of the next best alternative foregone.

Question 5

Define Production Possibility Frontier (PPF)

Answer 5

Shows the maximum potential output of an economy considering the combination of 2 goods, that uses all factor resources are being sed effectively.

Question 6

What is the basic economic problem?

Answer 6

Infinite needs and wants and limited resources.

Question 7

What is a non-renewable resource?

Answer 7

Resources finite in supply.

Question 8

What is a renewable resource?

Answer 8

Resources infinite in supply.

Question 9

What are the factors of production and there rewards?

Answer 9

Land - Rent
labour - Wages (from
employment)
Enterprise - Profits
Capital - Interest

Question 10

Define capital goods

Answer 10

Goods that can be used to produce other goods e.g. machinary

Question 11

Define consumer goods

Answer 11

Goods that cannot be used to produce other goods e.g. clothing

Question 12

What does a straight line PPF (linear) mean?

Answer 12

Opportunity cost is constant because factor resources are equally substitutable for each other.

Question 13

Define specialisation

Answer 13

Individuals, businesses and countries that focus on one particular activity leading to improved productivity. - Adam Smith

Question 14

Define division of labour

Answer 14

Where a task is broken down into smaller components which labour specialise in.

Question 15

Advantages of specialisation in organising production

Answer 15

Increase labour productivity leading to increased efficiency and lower production costs (cost per unit),
Higher quality goods and services as workers are skilled,
Trained to do one speicifc task saving money and time

Question 16

Disadvantages of specialisation in organising production

Answer 16

Lack of flexibility of workforce - may not be able to do specific tasks,
Repetitive-decrease motivation-slack of-reducing quality output

Question 17

Advantages of specialising in the production of goods and services to trade

Question 18

Disadvantages of specialising in the production of goods and services to trade

Question 19

What are the functions of money and explain them.

Answer 19

A medium of exchange - used to buy and sell goods,
A measure of value - can compare the value of 2 goods,
A store of value - It is able to keep its value,
A method of deferred payment - can allow for debts to be created.

Question 20

What is a command economy?

Answer 20

An economy where the allocation of resources is decided by the goverment

Question 21

What is a free market economy

Answer 21

When the price of goods and services are set by supply and demand or without intervention by the government.

Question 22

What is a mixed economy

Answer 22

Allocation of resources is set by a mixture of firms and the goverment.

Question 23

Advantages of a free market economy

Answer 23

Profit motive incentivises people to work and innovation, Efficent allocation of resources, Competition encourages innovation and competitive prices, more choice

Question 24

Disadvantages of a free market economy

Answer 24

Income and wealth inequality, Monopolies may form leading to higher prices as consumers have no other option,

Question 25

Advantages of a command economy

Answer 25

Reduce income inequality, No monopolies

Question 26

Disadvantages of command economies

Answer 26

Receiving same wage leads to lack of incentives, lack of competition means less innovation, inefficient allocation of resources can lead to shortages or surpluses of goods/services

Question 27

What is the role of the state in a mixed economy?

Answer 27

Sets regulation; Provides public goods and servies not provided by public sector e.g. infrasturcture, education, healthcare; Income is redistributed e.g. income tax is given back through welfare benefits, healthcare to the poor