1.1 Nature of Economics

Question 1

What is the purpose of economic models?

Answer 1

To explain how the economy works by simplifying complex realities.

Question 2

What does “ceteris paribus” mean?

Answer 2

“All other things remaining equal” – used to isolate variables in economic analysis.

Question 3

Why is economics considered a social science?

Answer 3

It studies human behavior and cannot conduct controlled experiments like natural sciences.

Question 4

What is a positive statement?

Answer 4

An objective statement that can be tested and proven true or false.

Question 5

Give an example of a positive statement.

Answer 5

“Raising taxes will lead to an increase in tax revenue.”

Question 6

What is a normative statement?

Answer 6

A subjective statement based on opinions or value judgments.

Question 7

Give an example of a normative statement.

Answer 7

“The government should increase taxes.”

Question 8

What is the basic economic problem?

Answer 8

Scarcity – finite resources but infinite wants

Question 9

What are the three fundamental economic questions?

Answer 9

What to produce? How to produce? For whom to produce?

Question 10

What are the three economic agents?

Answer 10

• Consumers
• Producers
• Government

Question 11

Define opportunity cost.

Answer 11

The value of the next best alternative foregone.

Question 12

What defines a need?

Answer 12

• Goods/services necessary for survival.
• Limited
• E.g. Food, Water, Clothing, Shelter.

Question 13

What defines a want?

Answer 13

• Goods/services not necessary for survival but makes life more comfortable.
• Infinite
• E.g. Bigger car, New TV.

Question 14

What are the 4 factors of production?

Answer 14

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

Question 15

Graph: PPF

Answer 15

Question 16

What does a PPF curve represent?

Answer 16

The maximum possible combinations of two goods that an economy can produce.

Question 17

What does a point inside the PPF indicate?

Answer 17

Inefficient use of resources.

Question 18

What does a shift outward in the PPF indicate?

Answer 18

Economic growth due to an increase in resources or better technology.

Question 19

What is specialisation and the division of labour?

Answer 19

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

Dividing the prodction process into a number of tasks and allocating each worker a specific task is specialisation and is also know as the division of labour (explained by Adam Smith).

Question 20

What are the advantages of specialisation?

Answer 20

Increased efficiency, lower costs, and higher output.

Question 21

What are the disadvantages of specialisation?

Answer 21

Boredom for workers, over-reliance on specific industries.

Question 22

What is an advantage of specialisation in trade?

Answer 22

The theory of comparative advantage states countries should specialise in
producing those goods where they have a lower opportunity cost, and so they are
relatively best at producing. This will help them boost their economy. On the whole,
there is greater output globally.

Question 23

What are the disadvantages of specialisation in trade?

Answer 23

• Countries become over-dependant on one particular export.
• High global interdependence .
• Countries specialising in non-renewable resources will face significant loses when resources run out.

Question 24

What are the 4 functions of money?

Answer 24

1. Medium of exchange
2. Store of value
3. Measure of value
4. A means of making a deferred payment

Question 25

What is a double coincidence of wants?

Answer 25

Occurs when bartering - in order to make an exchange you would have to find someone who wants what you have and who has what you want.

Question 26

What is a free market economy?

Answer 26

An economy where resources are allocated by supply and demand, therefore using the price mechanism, with little government intervention.

Question 27

Name 2 economists who supported free markets.

Answer 27

1. Adam Smith – believed in the "invisible hand." 2. Friederich Hayek - Road to Serfdom (1944): control of the market by state limits the freedom of individuals and leads to an oppressive society or even tyranny.

Question 28

What are the advantages of a free market economy?

Answer 28

- Goods and services are produced that consumers want - the system is automatic due to the invisible hand. - Consumers have freedom of choice, called consumer sovereignty. - 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.

Question 29

What are the disadvantages of a free market economy?

Answer 29

- High levels of inequality, since the rich own more factors of production and can grow richer. - Goods such as public goods and merit goods may not be produced in sufficient quantities due to the inability to make profit. - If competition disappears then there may be monopolies, who charge high prices and offer low quality of service. - Environmental damage. - Other externalities.

Question 30

What is a command economy?

Answer 30

An economy where the government controls resource allocation.

Question 31

What are the advantages of a command economy?

Answer 31

- Minimum standard of living overcomes inequality. - Prevents abuse of monopoly power. - Essential public goods and services are provided. - Full employment.

Question 32

What are the disadvantages of a command economy?

Answer 32

- Government decisions will not be perfect - over/under production of goods/services - inefficient allocation of resources. - Increase in bribery and corruption (an increase in bureaucracy) as decision making will be slow as it has to go through various stages. - Lower efficiency as there is no incentive for workers to work hard. - Consumers lose their freedom and it is often led by dictators.

Question 33

What is a mixed economy?

Answer 33

A combination of free market and government intervention.

Question 34

Who advocated for command economies?

Answer 34

Karl Marx – argued for communism to eliminate class struggles.