1.1 nature of economics

Question 1

what is cereris paribus?

Answer 1

‘all other things remaining equal’

Question 2

scientific experiments

Answer 2

-social science so it is difficult to set up experiments and test hypothesis
-other variables are always changing

Question 3

what is a positive statement?

Answer 3

a statement without judgement that can be tested to be proven or disproven

Question 4

what is a normative statement?

Answer 4

a statement which is subjective and based on opinion

Question 5

what is the role of value judgements?

Answer 5

-economists tend to use positive statements to back up normative statements
-value judgement can influence economic decision making

Question 6

what is the problem of scarcity?

Answer 6

-people have finite needs but infinite wants
-resources are scarce in relation to the demand placed upon them

Question 7

what is a renewable resource?

Answer 7

-a resource that can be replenished or replaced on a level equal to consumption
-e.g oxygen, solar power

Question 8

what is a non renewable resource?

Answer 8

-a resource that can not be readily replaced by natural means on a level equal to consumption
-e.g fossil fuels like coal, oil and gas

Question 9

what is opportunity cost?

Answer 9

the benefit lost from the next best alternative forgone

Question 10

what are the four factors of production?

Answer 10

-land
-labour
-capital
-enterprise

Question 11

what is a capital good?

Answer 11

-goods produced in order to aid the production of consumer goods in the future
-e.g machines, furniture, buildings

Question 12

what is a consumer good?

Answer 12

-goods demanded and bought by households and individuals
-e.g clothing, food products

Question 13

what is specialisation?

Answer 13

-the production of a limited range of goods by a company/individual/country
-means that trade is essential as it is the only way they are able to access all that they need

Question 14

what is the division of labour?

Answer 14

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

Question 15

advantages of division of labour

Answer 15

-labour productivity will be increased as they will be concentrating on one thing
-might lead to higher quality of goods and services
-time is not wasted moving between jobs or getting out tools
-training will be cheaper as they only need to be trained to do one thing

Question 16

disadvantages of division of labour

Answer 16

-one specific task can become boring leading to lower quality work
-reduction in craftmanship as there is a more standardised product due to mechanism

Question 17

advantages of specialisation

Answer 17

-the theory of comparative advantage states countries should specialise in producing those goods where they have a lower opportunity cost, and so they are
relatively best at producing
-this will help them boost their economy so there is greater output globally

Question 18

disadvantages of specialisation

Answer 18

-countries may become over-dependent on one particular export and if this fails their economy may collapse
-high interdependence

Question 19

the four functions of money

Answer 19

-a medium of exchange
-a measure of value
-a store of value
-a method for deferred payment

Question 20

free market economy

Answer 20

-individuals are free to make their own choices and own the factors of production without government interference
-resources are allocated through the price mechanism

Question 21

Adam Smith (1723- 1790)

Answer 21

-invisible hand which allocates resources to everyones advantage
-he believed competition in the market caused lower prices as firms wanted to be competitive and so this benefits the consumer as they can get goods
cheaply

Question 22

Friedrich Hayek (1899- 1992)

Answer 22

-state control economy leads to loss of freedom
-believed that the poor in a free market were better off then the poor in a command economy because at least they had freedom
-governments plans were only suited to a small minority of society but everyone had to obide to them

Question 23

advantages of free market economy

Answer 23

-system is automatic due to the invisible hand
-consumers have freedom of choice
-high motivation
-political freedom
-productive efficiency as high competition
-tend to have higher growth

Question 24

disadvantages of free market economy

Answer 24

-high levels of inequality
-lack of merit goods and little control of demerit goods
-resources could be wasted on unproductive expenses
-monopolies
-externalities

Question 25

command economy

Answer 25

-all factors of production, except labour, is owned by the state and labour is directed by the state
-there is no private property and everyone is assumed to be selfless, working for a common good
-resource allocation is carried out by
the government, rather than the price mechanism

Question 26

Karl Marx (1818- 1883)

Answer 26

-believed in the command economy and criticised capitalism
-his theory stated that these underpaid workers would inevitably rise against property owners and seize control of the means of production

Question 27

advantages of command economy

Answer 27

-provides a minimum standard of living, ensuring no one is extremely poor as there is less inequality
-there is less wastage of resources as there is no need for competitive services nor
advertising
-long term planning means that the industry doesn’t have to keep changing and
shifting resources
-standardised products means that they are produced cost effectively.

Question 28

disadvantages of command economy

Answer 28

-impossible for the state to make so many decisions correctly, which could lead to
over or under supply and a waste of resources
-slow decision making, could increase bribery and corruption
-less motivation and efficiency
-consumers lose their freedom

Question 29

mixed economy

Answer 29

both the free market mechanism and the government planning process allocate a significant amount of the total resources in the country

Question 30

governments roles in a mixed economy

Answer 30

-creating a framework of rules: they prevent the abuse of monopolies
-supplements and modifies the price system: they produce public and merit
goods and limit the production of demerit goods
-redistributes income from rich to poor
-stabilises the economy: the government will attempt to manage the level of demand in the economy to prevent extremes of too much or too little demand