1.1 Nature of economics

Question 1

Define positive statement and give an example

Answer 1

A statement which is objective and made without any obvious value judgements or emotions
They can be tested to be proven or disproven
Example: Rising taxes will lead to an increase in tax revenue

Question 2

Define normative statement and give an example

Answer 2

One which is subjective and based on opinion, so cannot be proven or disproven
Often includes the words such as ought, should, maybe etc
example: The government should provide education for all up to the age of 18

Question 3

Define PPF

Answer 3

shows the maximum possible output of 2 goods or services
an economy can achieve when all resources are fully and efficiently employed at the lowest possible cost

Question 4

Define specialisation

Answer 4

Economic units conentrate on producing one G/S

Question 5

State advantages of specialisation

Answer 5

• Higher output so potentially higher quality since production focuses on what people and business are best at
• There are more opportunities of economies of scales, so size of the market increases
• There is more competition and this given them an incentive for firms to lower their costs, which helps keeps prices down
  -There could be a greater variety of G/S produced

Question 6

State disadvantages of specialisation

Answer 6

• Work becomes repetitive and monotonous, which could lower the motivation of workers. potentially affecting quality and productivity. Workers could become dissatisfied
• By producing a lot of one type of a G/S through specialisation, variety could in fact decrease for consumers
• There could be higher worker turnover for firms, which means employees become dissatisfied with their jobs and leave regularly

Question 7

What do producers decide in a free market economy

Answer 7

1. How much they produce
2. For whom
3. And at what price

Question 8

Free market economy

What did Hayek believe

Answer 8

• No government intervention
• Free markets are efficient in matching S and D via market mechanism of Signalling, Incentives, Rationing, Allocation (SIRA)
• This leads to shortages (excess demand) and surpluses (excess supply) eradicated

Question 9

Free market economy

View on consumers

Answer 9

• Rational economic agents
• Make decision to maximise utility and welfare
• Compute their best outcomes

Question 10

Free market economy

View on firms

Answer 10

• Aim to maximise consumers utility
• Partake in actions to benefit consumers via invisible hand of free market self interest

Adam Smith= invisible hand

Question 11

Free market economy

Example of invisible hand

Answer 11

Firms interest for a healthy population so
* People live longer
* Spend more of their income on their goods and services

Question 12

3 marks

Explain how Bitcoin fulfils one function of money, apart from as a medium of exchange.

Answer 12

A measure of value (1) e.g. prices can be measured in
satoshis (1) people can compare prices of goods and
services (1)
OR
A store of value (1) when an individual saves bitcoin (1)
they are confident they will receive the equivalent value
back (1)
OR
A standard of deferred payment (1) when an individual
loans another person bitcoin (1) they are confident they will
receive the equivalent value back (1)

Question 13

Free market economy

How is allocative effiency achieved by firms

Answer 13

Firms will decrease infomation gaps and utilise market reseach to understand fully the needs and preferences of consumers and in competitive markets use this to meet customer needs via lower prices

Question 14

Adam Smith

What is the Invisible hand

Answer 14

The self regulating behaviour of the market place
Individuals seeking to maximise their personal gains will lead to an efficient allocation of resources
This self interest benefits society as a whole

Question 15

Free market economy

Benefits of allocative efficiency achieved my firms

Answer 15

• Leads to innovation and invention of new G+S
• Cheaper provision to satisfy consumers
• Firms reap the benefits via higher profit

Question 16

Says Law

Answer 16

Expansion of proft maximising firms will itself increase demand for resources and labour allowing workers to earn more wages to spend.
This model requires no govt intervention

Question 17

Free market economy

Schumpeter theory on why free market economy is better

Answer 17

• Monopolies dont need to be regulated
• If they are not able to keep up with changing consumer preference, and new technology= creative destruction
• They will lose their market power
• Considering unintended consequences, regulatory capture and govt failure= each graph shows deadweight loss

Question 18

Disadvantage of free market approach

Answer 18

Without government intervention, there would be missing markets.
The free rider problem would mean most economic agents would rely on others to provide public goods like education, defence, and street lighting.
These goods would be under consumed and have positive externalities, and self-interest would prevent a free market alone to provide adequate public good provision.
This would inevitably affect the lowest income earners the most and increase inequality.
It’s the poorest that have the most income elastic demand and so are important for the success of a free market.

Question 19

Disadvantages of free market approach in terms of consumers irrational behaviour

Answer 19

Firms take advantage of consumers irrational behaviour (habitual infomation, inertia and weakness at computation) via advertising and cookies to get consumers to buy things they dont need , adding to waste, fast fashion industries and choice overload.

Question 20

Disadvantages of a free market approach providing healthcare

Answer 20

• Healthcare is a positive consumption externality and has a potential welfare gain
• Healthcare is underprovided in the free market
• On externality graph, it shows a sub-optimal allocation of resources in healthcare which requires government inervention to correct market failure
• Inequality of access to healthcare developing from unequal distribution of income in free market economies. Govt would be required to mitigate the worst excesses in this healthcare sector
• Firms have profit incentive, may allocate resources ahead of patients needs
• Monopolies- firms may become the sole supplier of a product and then exploit conumers by charging higher prices, higher than free market equilibrium

Question 21

Define the term ‘mixed economy’

Answer 21

A mixed economy means that part of the economy is left to the free
market and part of it is managed by the government OR
Public and private sectors existing within the economy

Question 22

3 marks

Explain one advantage of a free market economy.

Answer 22

• More choice (1) because of consumer sovereignty (1) and profit motive / greater incentive
• More efficient allocation of resources (1) because of allocative efficiency / productive efficiency / dynamic efficiency / lack of X-inefficiency (1) because of profit motive / greater incentive (1)
• Lower prices (1) because of more competition (1) and greater incentive (1)
• Better quality products (1) because of competition (1) and profit motive (1)
• More innovation (1) because of competition (1) and profit motive (1)