1.1 - Nature of Economics

Question 1

Ceteris paribus

Answer 1

Assumption that other things are being held equal or constant, so nothing else changes

Question 2

Positive statement

Answer 2

Statement which is objective and can be tested with factual evidence to be proven or disproven

Question 3

Normative statement

Answer 3

Statement which is subjective and based on value judgement

Question 4

Basic problem of economics

Answer 4

Wants are infinite but resources are finite, so choices have to be made

Question 5

Opportunity cost

Answer 5

The value of the next best alternative forgone

Question 6

Four factors of production

Answer 6

1. Capital
2. Enterprise
3. Land
4. Labour

Question 7

Capital

Answer 7

Refers to all man-made resources that are used to produce goods or services in the future

Question 8

Enterprise

Answer 8

Willingness and ability to take the risks of combining the other three factors of production in order to make a product or service

Question 9

Land

Answer 9

All natural resources used in production

Question 10

Labour

Answer 10

All productive human effort, both physical and mental, paid or unpaid

Question 11

Production possibility frontiers

Answer 11

Depicts the maximum productive potential of an economy, using a combination of two goods or services, when resources are fully and efficiently employed

Question 12

Law of diminishing returns

Answer 12

As more units of a variable input are added to a fixed input, the additional output (marginal product) gained from each extra unit of input will eventually decrease, assuming all other factors remain constant

Question 13

Capital goods

Answer 13

Goods which can be used to produce other goods, such as
machinery

Question 14

Consumer goods

Answer 14

Goods which cannot be used to produce other goods, such as
clothing

Question 15

Specialisation

Answer 15

Process where individuals, firms or economies focus on producing a narrow range of goods or services

Question 16

Division of labour

Answer 16

Process of breaking down production into separate tasks, with different workers specialising in specific tasks

Question 17

Advantages of specialisation

Answer 17

1. Higher output and potentially higher quality
2. More opportunities for economies of scale, so the size of the market increases
3. More competition which gives an incentive for firms to lower their costs, which helps to keep prices down

Question 18

Disadvantages of specialisation

Answer 18

1. Work becomes repetitive, which could lower the motivation of workers, potentially affecting quality and productivity
2. Could be more structural unemployment, since skills might not be transferable
3. Producing a lot of one type of good through specialisation, could decrease variety for consumers

Question 19

Functions of money

Answer 19

1. Medium of exchange
2. Measure of value (unit of account)
3. Store of value
4. Method of deferred payment

Question 20

Medium of exchange

Answer 20

It can be used to buy and sell goods and services and is
acceptable everywhere

Question 21

Measure of value (unit of account)

Answer 21

It provides a means to measure the relative values of different goods and services, and also puts a value on labour

Question 22

Store of value

Answer 22

It is able to keep its value and can be kept for a long time

Question 23

Method of deferred payment

Answer 23

Money can allow for debts to be created, people can therefore pay for things without having money in the present, and can pay for it
later, which relies on money storing its value

Question 24

Free market economy

Answer 24

When the government leaves markets to their own devices, so the market forces of supply and demand allocate scarce resources

Question 25

Advantages of a free market economy

Answer 25

1. Firms are likely to be efficient because they have to provide goods and services demanded by consumers, they are also likely to lower their average costs and make better use of scarce resources
2. The bureaucracy from government intervention is avoided
3. Some economists might argue the freedom gained from having a free economy leads to more personal freedom

Question 26

Disadvantages of a free market economy

Answer 26

1. The free market ignores inequality and tends to benefit those who hold most of the wealth
2. Monopolies could exploit the market by charging higher prices
3. There could be the overconsumption of demerit goods, which have large negative externalities, such as tobacco
4. Public goods are not provided in a free market, such as national defence and merit goods, such as education, are underprovided

Question 27

Command economy

Answer 27

When the government allocates all of the scarce resources in an
economy to where they think there is a greater need

Question 28

Advantage of a command economy

Answer 28

1. It might be easier to coordinate resources in times of crises, such as wars
2. The government can compensate for market failure, by reallocating resources
3. Inequality in society could be reduced, and society might maximise welfare rather than profit
4. The abuse of monopoly power could be prevented

Question 29

Disadvantages of a command economy

Answer 29

1. Governments fail, as do markets, and they may not be fully informed for what to produce
2. They may not necessarily meet consumer preferences
3. It limits democracy and personal freedom

Question 30

Mixed economy

Answer 30

An economy where both the free market mechanism and the government planning process allocate a significant amount of the total resources in the country