1.1 Nature of Economics

Question 1

What do economists develop to explain how the economy works?

Answer 1

Models and theories

Examples include theories of supply and demand and the circular flow of income.

Question 2

What is the term used by economists meaning ‘all other things remaining equal’?

Answer 2

Ceteris paribus

This term allows economists to simplify their models and theories.

Question 3

What is the difference between a positive statement and a normative statement?

Answer 3

Positive statements are objective and can be tested; normative statements are subjective and based on opinion.

Question 4

Give an example of a positive statement.

Answer 4

‘Raising taxes will lead to an increase in tax revenue.’

Question 5

True or False: Normative statements can be proven or disproven.

Answer 5

False

Normative statements are based on opinion and cannot be tested.

Question 6

What fundamental economic problem arises from finite needs and infinite wants?

Answer 6

Scarcity

Scarcity leads to the need for choices in production.

Question 7

What is the opportunity cost?

Answer 7

The cost of one thing in terms of the next best option given up.

Question 8

Define renewable resources.

Answer 8

Resources that can be replenished or replaced on a level equal to consumption.

Question 9

Provide an example of a non-renewable resource.

Answer 9

Fossil fuels such as coal, oil, and gas.

Question 10

What does the Production Possibility Frontier (PPF) show?

Answer 10

The maximum possible combinations of capital and consumer goods that the economy can produce.

Question 11

What does a movement along the PPF indicate?

Answer 11

A change in the combination of goods produced.

Question 12

What does a shift of the PPF indicate?

Answer 12

A change in the productive potential of the economy.

Question 13

What is the division of labour?

Answer 13

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

Question 14

Who introduced the concept of specialisation and the division of labour?

Answer 14

Adam Smith

Question 15

List some advantages of the division of labour.

Answer 15

• Increased labour productivity
• Higher quality of goods
• Cost-effective tool development
• Reduced time wasted
• Specific training requirements

Question 16

What are some disadvantages of the division of labour?

Answer 16

• Boredom leading to poor quality work
• Reduction of craftsmanship
• Delays in one process affect the entire production
• Limited industrial training could lead to unemployment

Question 17

What is the theory of comparative advantage?

Answer 17

Countries should specialise in producing goods where they have a lower opportunity cost.

Question 18

What are the four key functions of money?

Answer 18

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

Question 19

What is the primary function of money in an economy?

Answer 19

To serve as a medium of exchange, a measure of value, a store of value, and a method for deferred payment.

Question 20

Define ‘double coincidence of wants’ in the context of barter.

Answer 20

A situation where both parties in a trade desire what the other offers.

Question 21

What does it mean for money to be a ‘measure of value’?

Answer 21

It allows for the comparison of the value of different goods and services.

Question 22

In what way does money function as a ‘store of value’?

Answer 22

It can maintain its value over time, unlike perishable goods in barter.

Question 23

What is a ‘command economy’?

Answer 23

An economy where all factors of production are owned and allocated by the state.

Question 24

What are the main characteristics of a ‘free market economy’?

Answer 24

Individuals make choices without government interference, resources are allocated through the price mechanism, and consumer demand drives production.

Question 25

Who is associated with the concept of the ‘invisible hand’?

Answer 25

Adam Smith.

Question 26

Fill in the blank: In a free market economy, consumers make decisions based on _______.

Answer 26

satisfaction.

Question 27

What is ‘consumer sovereignty’?

Answer 27

The freedom of consumers to choose what to purchase.

Question 28

List two advantages of a free market economy.

Answer 28

• Automatic resource allocation via the invisible hand
• High motivation due to potential rewards.

Question 29

What is a major disadvantage of a free market economy?

Answer 29

High levels of inequality.

Question 30

What did Friedrich Hayek argue regarding state control of the economy?

Answer 30

It leads to a loss of freedom and can impose the desires of a minority on the majority.

Question 31

What is the primary goal of a command economy?

Answer 31

To work for the common good and eliminate private property.

Question 32

Who criticized capitalism and advocated for a command economy?

Answer 32

Karl Marx.

Question 33

What is one advantage of a command economy?

Answer 33

It provides a minimum standard of living, reducing extreme poverty.

Question 34

List two disadvantages of a command economy.

Answer 34

• Slow decision-making due to bureaucracy
• Lack of motivation among workers due to uniform wages.

Question 35

What is a ‘mixed economy’?

Answer 35

An economy that combines elements of both free market and command economies.

Question 36

What is one role of the government in a mixed economy?

Answer 36

To create a framework of rules to prevent monopoly abuse.

Question 37

Fill in the blank: The government redistributes income from the _______ to the _______.

Answer 37

rich; poor.

Question 38

What is the purpose of fiscal and monetary policy in a mixed economy?

Answer 38

To manage the level of demand and stabilize the economy.

Question 39

What does ‘merit goods’ refer to?

Answer 39

Goods considered intrinsically good and are encouraged by the government.

Question 40

True or False: In a command economy, consumers have significant freedom to choose their goods.

Answer 40

False.

Question 41

What are ‘externalities’?

Answer 41

Costs or benefits incurred by third parties not involved in a transaction.