1.1 Nature of Economics

Question 1

what are the advantages + disadvantages of a command economy?

Answer 1

ADVANTAGES
- serves people collectively; focus on equality
- distributes wealth among all of society
- can have products produced to fulfil needs

DISADVANTAGES
- often insufficient resource distribution i.e. resource shortages or surplus
- cannot determine society’s objectives + consumer preferences
- lack of incentives for innovation
- infringes on personal freedoms
- cannot easily adjust to change

Question 2

characteristics of a command economy

Answer 2

• all factors of production (except labour) are owned by the state; labour is directed by the state
• no private property; everyone works towards a common good
• income distribution + resources are determined/allocated by the gov.

Question 3

advantages and disadvantages of a free market economy

Answer 3

ADVANTAGES
- prices determined by market forces; competition brings down prices
- consumers can buy anything they like
- easily adjust to change
- little gov. intervention
- great variety of goods + services

DISADVANTAGES
- could make it hard for gov. to provide adequate social services
- people can make harmful choices to themselves + others
- does not always provide for the needs of everyone in society; leading to inc. proverty

Question 4

characteristics of a free market

Answer 4

• no gov. interference
• consumers make decisions based on satisfaction; producers decided based on profit
• consumers determine what’s produced by their willingness to spend money on a good

Question 5

who popularised free market + command economies

Answer 5

Adam Smith (free)
Karl Marx (command)

Question 6

pros and cons of specialisation

Answer 6

PROS
- higher labour producivity + business profits
- lower prices, higher real incomes and GDP growth
- creates surplus output that can then be traded internationally

CONS
- unrewarding, repetitive work that requires little skill → lowers motivation; leading to lower productivity
- rate of absenteeism inc. as workers are dissatisfied
- structural unemployment/ occupational immobility - workers may be unmarketable if they are out of work
- ass produced standardised goods lack variety for consumers

Question 7

what does it mean if a point is within or beyond the PPF

Answer 7

• within -> means that not all resources are fully utilised
• beyond -> means that the resources are not yet attainable

Question 8

what causes an outward shift in the PPF

Answer 8

• Improvement in the technology available to produce capital goods.
• Better management
• Producing more of both goods with the same resources.

Question 9

what does a linear PPF mean

Answer 9

• suggests that MC=constant
• indicates a perfect factor substitutability of resources

Question 10

what is the difference between capital + consumer goods?

Answer 10

consumer goods are used to satisfy one’s needs + wants; capital goods are used in the production of other goods e.g. factories, offices, roads, etc