1.1 Nature of economics

Question 1

Define a Positive Statement

Answer 1

• A positive statement is a statement which is objective and made without any obvious value judgements or emotions.
• They can be tested to be proven or disproven
• They are often expressed in the form of a hypothesis that can be analysed and evaluated.
• Statements about the future can be positive if they can be proven or disproven in the future.

Question 2

What are the 4 Factors of Production?

Answer 2

• Land
• Labour
• Capital
• Enterprise

Question 3

How is economic efficiency achieved?

Answer 3

Economic efficiency is achieved when resources are used for their best use. At all points on the PPF, resources are allocated efficiently.

Question 4

What are consumer goods?

Answer 4

Goods that are demanded and bought by households and individuals.

Question 5

What are capital goods?

Answer 5

Goods that are produced in order to aid the production of consumer goods in the future. Some goods can be both consumer and capital goods, for example computers.

Question 6

Specialisation and the division of labour in organising production: (Advantages)

Answer 6

• The division of labour enables labour productivity to be increased Workers will be quicker, better and more efficient as they are concentrating on one thing and so can quickly develop their skills. It also is likely they will have natural abilities or talents in their task.
• This may also lead to a higher quality of goods and services, since workers are more skilled at their jobs.
• It is more cost effective to develop specialist tools, improving speed or quality.
• Time is not wasted moving between jobs and getting out tools etc.
• Workers only need to be trained to do one specific task , rather than many, saving time and money.

Question 7

Specialisation and the division of labour in organising production: (Disadvantages)

Answer 7

• If someone is only doing one specific task, it can make work very boring which will lead to poor quality of work and people leaving the business.
• Firms can take some action to reduce this, for example by playing music.
• There is a reduction of craftsmanship and a much more standardised product because of mechanisation.
• If for some reason production in one process is delayed, every other task has to stop until that problem is solved.
• The workforce do not have wide industrial training and could therefore suffer from structural unemployment.

Question 8

What are the 4 Functions of Money?

Answer 8

• A medium of exchange : It can be used to buy and sell goods and services and is acceptable everywhere.
• A measure of value : It can compare the value of two goods, such as a table and a skirt. It is also able to put a value on labour.
• A store of value: It is able to keep its value and can be kept for a long time.
• A method for deferred payment: A method for deferred payment:

Question 9

Advantages of a Free Market Economy

Answer 9

• The system is automatic due to the invisible hand; resources are moved out of production of a good when people stop wanting it or costs are too high.
• Consumers have freedom of choice, called consumer sovereignty.
• There is high motivation as people know working hard could lead to high potential rewards, creating conditions where initiative and enterprise flourish.
• There is political freedom.
• Because firms are in competition, they will produce goods at the lowest cost they can, ensuring productive efficiency.
• In general, freer market economies tend to have higher growth.

Question 10

Disadvantages of a Free Market Economy

Answer 10

• There tends to be high levels of inequality, since the rich own more factors of production and so can grow richer.
• There may be a lack of merit goods (goods considered as intrinsically good) and little control of demerit goods (intrinsically bad).
• Resources could be* wasted on unproductive expenses* such as advertising, switching the factors of production and providing competitive services.
• If competition disappears then there may be monopolies, who charge high prices and offer low quality of service.
• There is the problem of externalities.

A monopoly is a market structure with a single seller or producer that assumes a dominant position in an industry or a sector.

Question 11

Advantages of a Command Economy

Answer 11

• The state 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, which is very expensive.
• Long term planning means that the industry doesn’t have to keep changing and shifting resources. This is important as some industries may take a number of years to get established and would fail if planning was short term.
• Standardised products means that they are produced cost effectively.
  As the government, who are generally motivated by the wellbeing of the country, rather than the companies, who are motivated by profit, decide resource allocation, objectives other than profit can be followed: merit goods are encouraged and increased whilst demerit goods aren’t produced.

Merit goods are those goods and services that the government feels that people will under-consume
demerit goods are products or services that are over-consumed or consumed to a greater extent than is considered socially desirable from the perspective of society as a whole (eg tobacco/alcohol

Question 12

Disadvantages of a Command Economy

Answer 12

• It is impossible for the state to make so many decisions correctly, which could lead to over or under supply and a waste of resources.
• Decision making will be slow as it has to go through various stages and there could be an increase in bribery and corruption (an increase in bureaucracy).
• As everyone receives the same wage, there is less motivation and efficiency because people know that working harder will not increase their standard of living.
• Consumers lose their freedom and it is often led by dictators.

Question 13

The government’s role in a mixed economy:

Answer 13

• Creating a framework of rules ; Preventing the abuse of monopolies, consumer protection laws, protecting property rights, also, they ensure safety standards, protecting employers and employees.
• Supplements and modifies the price system (+Merit goods; -Demerit goods)
• Redistributes income - They move income from one group of people to another, from the rich to the poor.
• Stabilises the economy (manage the level of demand in the economy to prevent extremes of too much or too little demand)
• Government intervention occurs mainly through taxation (to raise revenue) and then spending that revenue to redistribute income and provide essential goods/services

• There are many different type of tax intervention including personal income tax, corporation tax, value added tax, tariff on imports, inheritance tax etc.
• Income is redistributed through the creation of a welfare system which often includes unemployment benefits, healthcare, and pension provision
• Government spending is often focused on infrastructure, merit goods (e.g. schools) and public goods (e.g. national defense)

Question 14

The Distinction Between Free Markets, Mixed and Command Economies

Answer 14

Question 15

Advantages and Disadvantages of Free Market Economies

Answer 15

Question 16

Advantages and Disadvantages of Command Economies

Answer 16

Question 17

What are Capital Goods?

Answer 17

Capital goods are assets that help a firm or nation to produce output (manufacturing). For example, a robotic arm in a car manufacturing company is a capital good

Question 18

What are Consumer Goods?

Answer 18

Consumer goods are end products and have no future productive use. For example, a watch

Question 19

What causes an outward shift in the PPF diagram?

Answer 19

• Economic growth occurs when there is an increase in the productive potential of an economy
• This is demonstrated by an outward shift of the entire curve. More consumer goods and more capital goods can now be produced using all of the available resources
• This shift is caused by an increase in the quality or quantity of the available factors of production

Question 20

How can the how the quality of a factor of production be improved?

Answer 20

• Training and education on labour

• An educated workforce is a more productive workforce and the production possibilities increase

Question 21

How can the quantity of a factor of production be increased?

Answer 21

• A change in migration policies

• If an economy allows more foreign workers to work productively in the economy, then the production possibilities increase

Question 22

What can cause an inward shift in the PPF?

Answer 22

Economic decline - when there is any impact on an economy that reduces the quantity or quality of the available factors of production

One example of how this may happen is to consider how the Japanese tsunami of 2011 devastated the production possibilities of Japan for many years. It shifted their PPF inwards and resulted in economic decline

Question 23

How did Adam Smith develop the he developed the idea of specialisation and the division of labour?

Answer 23

• Based on observations made during a visit to a pin factory
• He noted that a single worker could not make more than 20 pins a day as it involved around 18 different processes, such as cutting the wire, sharpening the end, stamping the head etc.
• However, if the labour was divided up into different tasks and workers specialised in just that one task, Adam Smith estimated that just 10 workers could produce 48,000 pins per day

Question 24

Pros & Cons of the Division of Labour & Specialisation in Production

Answer 24

Structural unemployment - Unemployment caused by a mismatch between workers skills and the available jobs in the economy

Question 25

Pros & Cons of the Division of Labour & Specialisation in Trade

Answer 25

Question 26

State and explain the 4 Functions of Money:

Answer 26

Question 27

What is the difference between a ‘perfectly price inelastic’ and a ‘perfectly price elastic’ supply? (2)

Answer 27

• Perfectly price elastic demand is when the demand for the product is entirelt dependant on the price of the product
• Where the quantity demanded can change indefintely when the price hits or is below a certain price (no examples)

Question 28

Why would specialisation of labour cause an increase in productivity?

Answer 28

• Practice - Workers keep getting better at their specialised jobs
• Different skills - Match jobs to people’s aptitudes and abilities
• Training costs - If people only need one skill - cheaper
• Movement between machines - Less movement means less time wasted and more productivity

Question 29

What are Diminishing Marginal Returns?

Answer 29

• This occurs in the short run where one factor is fixed (eg capital)
• If the variable factor of production is increased (eg labour) there comes to a point in which it will become less productive and therefore there will eventually be a decreasing marginal and then everage product

Question 30

Why do Diminishing Marginal Returns occur?

Answer 30

• This is because when one of the factors of production are fixed (eg capital)
• extra workers will eventually get in each other’s way as they attempt to increase production
• If more workers are employed, production could increase but more and more slowly but will eventually fall

• This law only applies in the short run because in the long run all factors are variable

Question 31

Diminishing Marginal Returns (Evaluation)

Answer 31

• The law of DMR can help managements maximise other factors of production to an optimum level in order to optimise productive efficiency
• This theory also helps in increasing the efficiency of production by minimising production costs
• The law of DMR assumes that all units of a single factor of production must be homogenous
• This is not true especially in the case of labour
• As people have different skills and aptitudes and can learn and be trained

• homogenous -of the same or a similar kind or nature

Question 32

Why do economists develop economic models?

Simplified representations of the real world

Answer 32

• Models help economists to understand, explain and predict real-world economic phenomena
• Empirical evidence used to test theories
• Simplifications - Ceteris Paribus

• Models are evaluated on their ability to predict and not on the realism of assumptions
• Models relate to behaviour not thought processes

Question 33

What is the Rationality Assumption?

Answer 33

• Economists maintain that the unit of analysis is the individual
• Members of a group are asumed to pursue their own goals rather than the group’s objective
• Economists assume that individuals are motivated by self-interest and respond predictably to opportunities for gain - usuallt material well being
• This allows economists to generate testable theories concerning human behaviour

Question 34

Rationality Assumption? (Evaluation)

Answer 34

• Bounded rationality
• Behavioural economics argues that psychological limitations and complications inhibit rational decision making

Question 35

What is a consumer surplus?

Answer 35

Question 36

What is a producer surplus?

Answer 36

Question 37

Economic Surplus (Benefit to society)

Answer 37

Question 38

4 Factors of production (Summary)

Answer 38

Question 39

PPF and opportunity cost

Answer 39