1.1 nature of economics

Question 1

economic assumptions made:

Answer 1

• economic agents are rational
• consumers aim to maximise benefit/utility
• firms aim to maximize profit
• ‘ceteris paribus’ assumption that all else remains the same

Question 2

models in economics def

Answer 2

theoretical concept looking at how different variables interact

Question 3

positive statement def

Answer 3

factual, objective, evidence-based comment that is not influenced by opinion and can be verified by data checks

Question 4

normative statement def

Answer 4

subjective, opinion/prejudiced, ‘questionable’ comment requiring a value judgement

Question 5

value judgment def

Answer 5

statement put forward by individuals that can’t be formally verified

Question 6

opportunity cost def

Answer 6

benefit lost of the next best alternative when a choice is made

Question 7

what is the basic economic problem

Answer 7

unlimited wants of people with limited resources which leads to scarcity, then a choice has to be made of what to produce, how and for whom to be produced. all things produce opcost

Question 8

economics def

Answer 8

study of allocating scarce resources

Question 9

economic activity def

Answer 9

satisfying the wants and needs of society

Question 10

wants vs needs

Answer 10

needs are the G+S needed for survival while wants are the non-essentials wanted by society

Question 11

trade offs def

Answer 11

range of alternatives forgone

Question 12

what does the PPF show

Answer 12

maximum combos of G+S that can be produced when all resources are effectively employed, shows the problem of choosing how to use scarce resources when producing G+S - opcost

Question 13

productive potential def

Answer 13

max. output when all factors of production are used = PPF line

Question 14

capital good def

Answer 14

man made good used for making consumer goods that produces a stream of income

Question 14

consumer good def

Answer 14

good satisfying needs and wants of consumers with immediate benefit for consumer

Question 15

marginal analysis def

Answer 15

opportunity cost between 2 points on the PPF

Question 16

when does the PPC line shift?

Answer 16

when the size of an economy changes

Question 17

specialisation def

Answer 17

economic units focusing only on producing specific goods/services

Question 18

division of labour def

Answer 18

specialisation used in an organisation

Question 19

specialisation advantages

Answer 19

• greater understanding of requirements of production
• specialising of units at what they’re best at - do better
• efficiency - no time taken switching between jobs
• technical economies of scale - more capital lowering lrac

Question 20

specialisation disads

Answer 20

-monotony - lower quality or quantity of work
- may be limited by market size - cannot really happen in smaller size firms because it is not affordable
- threat of structural UE if industry declines
- less flexible workforce - overall lower labour occupational mobility

Question 21

DoL ads

Answer 21

• improved performance and efficiency as workers get good at the jobs they’re doing
• lower costs of prod
• competitive advantage
• production/assembly lines can increase speed and accuracy of production more

Question 22

DoL disads

Answer 22

• monotony affecting quality and quantity
• monotony causing issues like high absenteeism and higher labour turnover
• UK issue - higher wages undercut low cost overseas work
• UK issue - valuing quality over price

Question 23

adam smith view of specialisation and DoL

Answer 23

said that simplicity and repetition of tasks will lead to ‘stupidity’ and ‘ignorance’ which will lead to demotivation

Question 24

free market def

Answer 24

basic economic problem solved by market forces - supply and demand

Question 25

what is the market mechnaism?

Answer 25

supply and ddemand working together to determine prices and quantityies,, businesses privide nad consumers take

Question 26

characteristics of free market

Answer 26

private sector ownership, free enterprise, limited government intervention, firms competing for market share, resources allocated by market forces

Question 27

adam smith free market views

Answer 27

‘laissez faire economics’ and ‘the invisible hand’
minimal government intervention onlky to watch over monopolies, grant patents, provision of public goods

Question 28

friedrich hayek free market

Answer 28

even more free market than smith - government role only to maintian rule of law and be a societal safety net - otherwise would cause totalitarianism - very against collectivism

Question 29

free market advantages

Answer 29

• competitive market
• consumers have large choice
• rewards entrepreneurship and encourages innovatin
• productive efficiency
• economic growth

Question 30

free market disads

Answer 30

• wealth inequality
• little regulation
• overprovision of demerit goods
• little control over negative externalities

Question 31

difference between negative externalities and demerit goods

Answer 31

demerit goods: immediate negative effect on consumer
negative externalities: negative spillover effect on a third party

Question 32

command economy def

Answer 32

resources allocated by government only who maeks all decisions

Question 33

command economy ads

Answer 33

• greater equality
• low unemployment
• prevention of absolute monopoly power
• maximise social welfare
• focus on common good

Question 34

command economy disads

Answer 34

• lack of competition inhibits innovation
• inefficiency - inefficient firms are protected which is bad
• bureaucratic - the planning of committees
• proce controls may not be accurate leading to shortages or suprluses