1.1 nature of economics

Question 1

What is ceteris paribus

Answer 1

‘all other things remaining equal’

Question 2

what is a positive statement

Answer 2

a statement which is objective and made without any obvious value judgements or emotions. They can be tested to be proven or disproven

Question 3

what’s a normative statement

Answer 3

based on opinion, so cannot be proven or disproven. It often says that one action is better than another.

Question 4

what is the problem of scarcity

Answer 4

People have finite needs, but infinite wants
resources are only scarce in relation to the demands placed upon them
economies tend to try and answer theses questions in order to solve scarcity:
what how and who to sell to

Question 5

what’s an opportunity cost

Answer 5

the cost of one thing in terms of the next best option which has been given up.

Question 6

how do consumers, firms and the government make decisions about where they spend their money

Answer 6

Consumers - what gives them the greatest level of satisfaction.

Producers - will be based on profit.

The government - based on what will maximise social welfare

Question 7

what are the four factors of production

Answer 7

land labour capital entrepreneurship

Question 8

how do people gain a return on the four factors of production

Answer 8

land - rent or lump sum for selling of land
labour - salary
capital - interest
entrepreneurship - earn profit from their activities

Question 9

what’s a capital good

Answer 9

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

Question 10

what are consumer goods

Answer 10

goods that are demanded and bought by households and individuals

Question 11

what is specialisation

Answer 11

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

Question 12

what is division of labour

Answer 12

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

Question 13

how did Adam smith contribute to the division of labour and specialisation

Answer 13

he stated the concept of specialisation and the division of labour and showed how it can increase labour productivity, allowing firms to increase efficiency and lower their costs of production.

Question 14

advantages of division of labour

Answer 14

productivity increases
higher quality (more skilled workers)
no time wasted (moving between jobs)
cheap training (one job to be trained on)

Question 15

disadvantages of division of labour

Answer 15

boring for workers so could mean low quality
reduction in craftmanship
if one process is delayed all other jobs are also delayed
could suffer from structural unemployment

Question 16

specialisation in trade advantages

Answer 16

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

Question 17

specialisation in trade disadvantages

Answer 17

may become over-dependant
if its non-renewable sources (oil) it could run out
high interdependence so countries rely on each other for trade

Question 18

4 functions of money

Answer 18

median of exchange (buy and sell goods)
a store of value ( keep its value and can be kept for a long time)
measure of value (compare value of 2 goods)
method of deferred payments (pay later)

Question 19

what’s a free market

Answer 19

individuals are free to make own decisions without government intervention. it relies on the invisible hand

Question 20

what’s a command economy

Answer 20

all factors of production except labour are owned by the state and labour is directed by the state

Question 21

what’s a mixed economy

Answer 21

both free market mechanism and government intervention allocate resources to country

Question 22

what’s the invisible hand

Answer 22

concept Adam smith came up with that states resources are moved out of the production of goods as people don’t have needs or there are high prices

Question 23

advantages of free market

Answer 23

automatic system (invisible hand)
consumer freedom
people work for reward
political freedom
price wars decrease prices
increased economic growth

Question 24

disadvantages to free markets

Answer 24

high inequality (rich own factors of production)
prone to monopolies taking over meaning low quality of service
if low competition then high monopolies
no control over demerit goods

Question 25

advantages of a command economy

Answer 25

minimum standard of living less waste of resources like money on ads low demerit goods government allocate resources meaning increase in general wellbeing

Question 26

disadvantages of a command economy

Answer 26

to many decisions for the state to make which could lead to waste of resources slow decisions bribery and corruption low motivation and efficiency as an increase in effort does not mean an increase in pay loss of freedom

Question 27

what are the governments roles in a mixed economy

Answer 27

set rules like consumer protection, prevention of monopolies and employee protection high merit goods low demerit goods redistribute income stabilise the economy

Question 28

what was the idea Adam smith agreed with

Answer 28

the free market economy and the laissez-faire approach by governments. He explained how there was an ‘invisible hand’ in the market which allocated resources to everyone’s advantage, allowing the greatest good for the greatest number of people. 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. Smith concluded that each individual’s self-interest managed to produce and purchase the goods and services that society needed. However, he did argue that the state needed to provide goods/services which free markets wouldn’t such as. the laws, property rights and goods such as bridges and roads.

Question 29

what was the idea that Friedrich Hayek believed in

Answer 29

argued that state control of the economy leads to the loss of freedom. He believed that the poor in free market (or freer market) countries were better off than those in command economies because at least they had personal freedom. Also, he said that central planning by governments led to what a small minority wanted being forced on the whole of society. Hayek believed that, although individuals don’t make supply and demand decisions based on perfect information, they best know what they need in their own situation i.e. a consumer knows how much bread they need and a manager knows how many raw materials they need.

Question 30

what did karl marx believe in

Answer 30

the command economy and criticised capitalism. Marx believed that capitalist’s profit came from exploiting labour as they underpaid workers for the value that they actually created. He wanted remove the difference between the incomes of owners and workers and believed that capitalism would collapse leading to communism. Marx saw businesses growing and workers getting poorer, creating a two class system with a few wealthy capitalists and many underpaid workers. He thought more firms would fail because of competition causing unemployment, lower wages and higher prices and this would lead to discontent amongst the working class. His theory stated that these workers would inevitably rise against property owners and seize control of the means of production. This would lead to a democratic society where everything would be owned by everyone i.e. the fall of capitalism to begin communism.