1.1 Nature of economics

Question 1

1.1.1 Economics as a social science

What is Economics?

Answer 1

the allocation of scarce resources to provide for unlimited human wants

Question 2

1.1.1 Economics as a social science

What does Ceteris Paribus mean?

Answer 2

“All other things remaining equal”

This assumption is needed since economists cannot test models in scientifically controlled laboratoy conditions. e.g. the demand curve would be true if other factors (like consumer income) remained the same.

Question 3

1.1.2 Positive and normative economic statements

What is a positive economic statement?

Answer 3

A statement which is based on facts which can be tested as true or false & are value free.

It is where economists explain the outcome of a particular policy, but are not expected to take sides.

Question 4

1.1.2 Positive and normative economic statements

What is a normative economic statement?

Answer 4

A statement which is based on value judgements which cannot be tested as false.

Often included the words: ought, should, fair, unfair, better or worse.

Question 5

1.1.2 Positive and normative economic statements

What is the role of value judgements in economic decision making and policy?

Answer 5

Personal preferences, beliefs & subjective assessment underpin normatice economics. This can lead to different policy prioritisation (by producers) and different ways of public spending (the government).

e.g. equity vs efficiency or environment vs economic growth

Question 6

1.1.3 The economic problem

What is the basic economic problem/ scarcity?

Answer 6

There are finite resources compared to infinate human wants, so choices have to be made about how to use those resources.

Question 7

1.1.3 The economic problem

What is an opportunity cost?

Answer 7

The value of the next best alternative forgone.

Consumers, producers, & governments all face opportunity costs.

Question 8

1.1.3 The economic problem

What is marginal analysis?

Answer 8

The effects of producing or consiming on extra unit of a good or service - this mau involve both benefirs and costs.

Question 9

1.1.3 The economic problem

What is a renewable resource?

Answer 9

A resource whose stock level can be replenished naturally over a period of time.

Question 10

1.1.3 The economic problem

What is a non-renewable resource?

Answer 10

A resource whose stock level decreases over time as it is consumed.

Question 11

1.1.3 The economic problem

What is a free good?

Answer 11

A good that is not scarce & available without limit. It doesn’t have an opportunity cost.

Question 12

1.1.3 The economic problem

What is an economic good?

Answer 12

A good that is scarce & must be allocated efficiently. It has an opportunity cost.

Question 13

1.1.4 Production possibility frontiers

What does a production possibility frontier show?

Answer 13

A production possibility fronteir shows the maximum potential level of output for two goods or services that an economy can achieve when all its resources are fully & efficiently employed, given the level of technology available.

It can be used to illustrate scarity & opportunity cost.

Question 14

1.1.4 Production possibility frontiers

What is a consumer good?

Answer 14

A good, such as a chocolate bar, that directly provided utility to consumers. It is wanted for the satisfaction it gives.

Question 15

1.1.4 Production possibility frontiers

What is a capital good?

Answer 15

A good that is used to produce consumer goods or services, such as a machine that helpes make chocolate bars. It is wanted not for its own sake, but rather for the consumer goods & services it can produce.

Question 16

1.1.4 Production possibility frontiers

What happens if you increase the production of capital goods?

Answer 16

Short term: current living standards will fall.
Long term: it increases the rate of economic growth, as capital goods are crucial for increasing production. Enables future living standards to rise at a faster rate.

Question 17

1.1.4 Production possibility frontiers

How can economic growth be shown on a PPF graph?

Answer 17

By an outward shift on a PPF graph.

Question 18

1.1.4 Production possibility frontiers

What are some causes for shifts in the PPF curve?

Answer 18

• an increase in the quantity/ quality of resources
• more education & government training schemes
• more investment & development of new technology
• ^production factors

Question 19

1.1.5 Specialisation and the division of labour

What is specialisation?

Answer 19

When an individual, firm, region or a country concentrates on the production of a limited range of goods & services.

Question 20

1.1.5 Specialisation and the division of labour

What is division of labour?

Answer 20

The specialisation of workers on individual tasks in the production process to increase efficiency.

Question 21

1.1.5 Specialisation and the division of labour

Who created the division of labour?

Answer 21

Adam Smith

Question 22

1.1.5 Specialisation and the division of labour

What are the advantages of the division of labour?

Answer 22

• ^labour productivity -> higher living standards
• ^efficiency of resources -> reduced the cost per unit of output (as capital equipment can be used continuously throughout production)
• ^quality as workers are specialised
• less time spent training each worker

Question 23

1.1.5 Specialisation and the division of labour

What are the disadvantages of the division of labour?

Answer 23

• repitition -> monotony/ boredom ->^turnover of staff -> ^recruitment costs
• easier to replace workers with machines -> structural unemployment
• interdependence in production

Question 24

1.1.5 Specialisation and the division of labour

What is the first function of money?

Answer 24

Medium of Exchange: enables the buying & selling of products, making exchange easier. Money eliminates the need for barter.

Question 25

# 1.1.5 Specialisation and the division of labour What is the second function of money?

Answer 25

**Measure of value:** enables a value to be placed on products so they can be brought & sold with ease while also enabling comparisons between the relative values of products.

Question 26

# 1.1.5 Specialisation and the division of labour What is the thrid function of money?

Answer 26

**Store of value:** a convenienct way of storing wealth so that it can be spent at a later date. It will tend to hold its value in the short run as long as inflation remains low.

Question 27

# 1.1.5 Specialisation and the division of labour What is the fourth function of money?

Answer 27

**Method of deffered payment:** enabled borrowing & lending. A price is usually set for this -- known as the rate of interest.

Question 28

# 1.1.6 Free market economies, mixed economy and command economy What is a free market economy?

Answer 28

Where all resources are privately owned & allocated via the price mechanism. Economic decisions are decentralised as there is minimal government intervention.

Question 29

# 1.1.6 Free market economies, mixed economy and command economy Who was Adam Smith?

Answer 29

Classical economic thinker. He was asscoiated with the free market economy. He referred to the 'invisible hand' of self-interest as guiding supply & demand in markets.

Question 30

# 1.1.6 Free market economies, mixed economy and command economy Who was Friedrich Hayek?

Answer 30

An economic thinker who believed in the free market economy & minimal government intervention.

Question 31

# 1.1.6 Free market economies, mixed economy and command economy What is the main advanatge of a free market economy?

Answer 31

**Economic efficiency & lower prices: **competition ->firms try to keep lower production costs & competitive prices (productive efficiency) competition -> more demand is met (allocative efficiency) Therefore, the price mechanism will equate consumer demand with producer supply.

Question 32

# 1.1.6 Free market economies, mixed economy and command economy What are some other advantages of a free market economy?

Answer 32

* ^quality of products to get competitive advantages * greater choice (also more employment opportunities) * financial incentives - more risks taken & people work harder

Question 33

# 1.1.6 Free market economies, mixed economy and command economy What are the disadvantages of a free market economy?

Answer 33

* competition -> monompolies may form * unequal distribution of income & lack of welfare = poverty * external cost of pollution & benefit of education are often ignored. * information gaps persist: lack of regulations to protect consumers * can cause ^inflation during a boom & ^unemployment during a slump

Question 34

# 1.1.6 Free market economies, mixed economy and command economy What is a command economy?

Answer 34

Where there is public ownership of resources & these are allocated by the government & decision making is centralised.

Question 35

# 1.1.6 Free market economies, mixed economy and command economy Who was Karl Marx?

Answer 35

A German philosopher & economist of the 19th century who believed that production should be directed on the basis of human need rather than profit. He was concerned with the exploitation of workers.

Question 36

# 1.1.6 Free market economies, mixed economy and command economy What are the advantages of a command economy?

Answer 36

* cooperation between firms -> ^levels of ouput (which replaces ^profits as an aim within businesses) * reduction in inequality as gov. controls wages * gov. may limit external costs of production (e.g. pollution) * gov. can fund public goods (law & order, education, healthcare) which ueild high external benefits to society * smaller swings in the business cycle = less unemployment & inflation as gov. has more control

Question 37

# 1.1.6 Free market economies, mixed economy and command economy What are the disadvantages of a command economy?

Answer 37

* price mechanism = unable to work so their may be excess demand & excess supply -> insufficient allocation of resources. * lack of competition -> inefficinecy -> low productivity * lack of competition -> poor quality (esp when maximising output) * less choice (also for workers) * lack of financial incentives * economic growth & living stabdards grow at a slower rate

Question 38

# 1.1.6 Free market economies, mixed economy and command economy What is a mixed economy?

Answer 38

Where some resources are owned & allocated by the private sector & some by the public sector. Most developed countries are command economies.

Question 39

# 1.1.6 Free market economies, mixed economy and command economy Which economist is associated with the command economy?

Answer 39

Karl Marx

Question 40

What is the price mechanism?

Answer 40

Where demand and supply determine the price of a good. automatic - helps balance supply with consumer demand. | the 'invisible hand'- Adam Smith