1.1 Nature Of Economics

Question 1

Economics

Answer 1

The study of how to best allocate scarce resources amongst alternative needs and wants

Question 2

Ceteris paribus

Answer 2

where we analyse the impact of two variables on each other assuming all other variables are equal

Question 3

Positive statement

Answer 3

Statements that can be proven right or wrong according to data

Question 4

Normative statement

Answer 4

Value judgement based on opinion

Question 5

Scarcity

Answer 5

Where there are not enough resources relative to needs and wants

Question 6

Basic Economic Problem

Answer 6

Resources are scarce but wants are infinite and therefore choices within the allocation process needs to be made.

Question 7

The Three Questions

Answer 7

What is to be produced? How is production organised? For whom is production for?

Question 8

Renewable resources

Answer 8

Renewable resources e.g fish stock and forests that can be exploited over and over because they have the potential to renew themselves. This is given that the rate of consumption remains less than the rate of renewal

Question 9

Non renewable resources

Answer 9

Resources e.g coal and oil which once exploited cannot be replaced

Question 10

Opportunity cost

Answer 10

The next best alternative forgone

Question 11

Factors of production

Answer 11

Land is the natural resources used in production.
Labour is all productive human effort.
Capital refers to all man made resources that are used to produce goods and services in the future.
Entrepreneurship is the willingness and ability to take risks of combining the other FOPs in order to make a product or service

Question 12

Production Possibility Frontiers

Answer 12

The maximum possible combinations of capital and consumer goods that the economy can produce with its current resources and technology.

Question 13

Productive capacity

Answer 13

The point at which all FOPs are fully employed.

Question 14

Consumer goods

Answer 14

Goods that are demanded and bought by households and individuals

Question 15

Capital Goods

Answer 15

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

Question 16

Specialisation

Answer 16

The production of a limited range of goods by a company/individual/country.

Question 17

Division of labour

Answer 17

When labour becomes specialised in a particular part of the production process

Question 18

Labour productivity

Answer 18

Output per worker

Question 19

Adam Smith on Specialisation and DOL

Answer 19

Specialisation and DOL can increase labour productivity allowing firms to increase efficiency and lower their COP.

Split a pin making process into 18 different operations and as a result the pin company was able to produce 5000 pins per person employed.

Question 20

Adv of Specialisation + DOL in organising production

Answer 20

Increased labour productivity - workers will be quicker and more efficient if only having to focus on one thing and develop their skills.
Higher quality of goods/services - workers more skilled at their job.
Cost effective to develop specialist tools and to train workers in only one specific job.
Time not wasted e.g moving between jobs.

Question 21

EV of Specialisation + DOL in organising production

Answer 21

Poor quality of work - works feel bored because of repetition
Reduction of craftsmanship due to mechanisation
If one process is delayed, all other processes suffer
Structural unemployment due to lack of wide industrial training

Question 22

Specialising in production of goods and services to trade

Answer 22

If countries specialise, it is essential that they trade in order to obtain all the good and services that consumers demand

Question 23

Adv of specialising to trade

Answer 23

Theory of comparative advantage which states that countries should specialise in producing goods where they have a lower opportunity cost and so they are relatively best at producing. Will help boost economy which leads to greater output globally.

Question 24

EV of specialising in trade

Answer 24

Over-dependency on a particular export.
Risky for countries who specialise in non renewable resources
High interdependence will cause problems if trade is prevented
More competition to cut costs and therefore wages may fall

Question 25

Functions of money

Answer 25

A medium of exchange - money can be used to buy and sell good/services and is acceptable everywhere.
A measure of value - money can compare the value of two goods.
A store of value - money is able to keep its value and can be kept for a long time
A method for deferred payment - money can allow for debts to be created as people can pay for things without having money in the present

Question 26

Free market economy

Answer 26

An economy where resources are allocated through market forces (S+D) and consumers/firms own the fops without gov intervention

Question 27

Adam Smith on Free market

Answer 27

Invisible hand which allocated resources to everyones advantage.

Competition in the market caused lower prices as firms wanted to be competitive and so this benefits consumer as they can get cheaper goods. State needs to provide goods /services that the free market won’t

Question 28

Friedrich Hayek

Answer 28

The poorer are better off in the free market because they have have freedom of choice. Central planning of gov leads to what a small minority wants being pushed onto the whole society. Individuals know best what they want and how much.

Question 29

Adv of free market

Answer 29

System is automatic due to invisible hands (resources are moved out of production when people stop wanting it/high costs).
Consumer sovereignty
High motivation as working hard can lead to high potential rewards
Political freedom
Productive efficiency due to lower costs
Higher growth in free market economy

Question 30

EV of free market

Answer 30

High inequality since rich own more FOPs
Lack of merit goods and little control of demerit goods
Resources wasted on unproductive expenses e.g advertising
Creation of monopolies if competition disappears
Problem of externalities

Question 31

Command economy

Answer 31

Economy where resources are allocated by the government and all FOPs are owned by the gov and labour is directed by the state.

Question 32

Advantages of command economy

Answer 32

Minimum standard of living leading to no inequality
Less wastage of resources
Long term planning so industries do not have to keep changing and shifting resources
Standardised products meaning they are produced cost effectively
Objective is social welfare maximisation so merit goods are encouraged whilst demerit goods aren’t produced

Question 33

EV of command economy

Answer 33

Impossible for state to make so many decisions correctly made lead to waste of resources
Slower decision making which could lead to an increase in bureaucracy
Same wages leads to less motivation and efficiency
Loss of freedom for consumers

Question 34

Mixed economy

Answer 34

An economy where both the free market mechanism and the government planning process allocated a significant amount of total resource in a country

Question 35

Government role in a mixed economy

Answer 35

Creating a framework of rules which can help prevent abuse of monopolies.
Supplements and modifies the price system as the provides public and merit goods
Redistributes income
Stabilises the economy as the gov will attempt to manage the level of demand in the economy to prevent extremes of too much or too little demand.