1.1 - nature of economics

Question 1

What are positive statements?

Answer 1

Objective statements based on evidence or facts that can be proved or disproved.

Question 2

What are normative statements?

Answer 2

Subjective statements based on value judgements, and cannot be proved or disproved.

Question 3

What is specialisation?

Answer 3

The concentration of production on a narrow range of goods and services.

Question 4

What are 2 advantages of specialising in the production of goods and services?

Answer 4

• Higher output (greater allocative efficiency) so economic growth
• Wider range of goods/services, lower prices

Question 5

What are 2 disadvantages of specialising in the production of goods and services?

Answer 5

• Finite resources, changes in taste, and other countries becoming more efficient can lead to uncompetitive goods/services if a country is over-specialised. This leads to unemployment.
• Countries become over-dependent on imported goods and services. If there are issues with foreign trade, the benefits of specialisation go away.

Question 6

What is the division of labour?

Answer 6

Breaking down the production process so that workers specialise on very specific, separate tasks.

Question 7

What are 2 advantages of the division of labour?

Answer 7

• Workers become highly productive (they become an expert in one task best suited to them, less time is wasted, and means lower training costs for the firm)
• Specialist capital for workers (increased use of machinery, which increases productivity, and reduces average costs of production)

Question 8

What are 2 disadvantages of the division of labour?

Answer 8

• Demotivation of workers leads to high worker turnover.
• Risk of long term unemployment for workers if the job becomes more automated, as they become over-specialised in a particular task, so have limited skills.

Question 9

What are the 4 functions of money?

Answer 9

• Medium of exchange
• Store of value
• Measure of value
• Means of deferred payment

Question 10

What is a free market economy, and give 2 main features.

Answer 10

An economic system where the economic problem is solved by market forces, with no government intervention.
- Private ownership of resources
- Price is determined by supply and demand

Question 11

What is a command economy, and give 2 main features.

Answer 11

An economic system in which resources are allocated by the state.
- State ownership of resources
- The state determines price

Question 12

What are 2 advantages of free market economies?

Answer 12

• Competition between firms leads to innovation and economic growth.
• Consumer sovereignty: consumer spending decisions determine what is produced.

Question 13

What are 2 disadvantages of free market economies?

Answer 13

• Inequality: those who own resources are likely to become richer than those who do not own resources.
• Exploitation: danger of monopolies charging higher prices than the free market equilibrium.

Question 14

What are 2 advantages of command economies?

Answer 14

• Greater equality: everyone enjoys a minimum standard of living and no one is extremely rich.
• Removal of demerit goods

Question 15

What are 2 disadvantages of command economies?

Answer 15

• Restrictions: neither consumers nor producers own resources, and people would be directed into jobs the state deems necessary.
• No consumer sovereignty: decisions on what is produced are made by the state.

Question 16

What are 4 key roles of the state in a mixed economy?

Answer 16

• Defence and internal security
• Provision of public goods
• Provision of public services (education, healthcare)
• Redistribution from the rich to the poor