1.1 - Nature of Economics

Question 1

What is the ‘basic economic problem’?

Answer 1

The basic economic problem is scarcity:
Knowing we can enjoy more by not just having basic needs, we have infinite wants yet we live in a world of scarce/finite resources.

Question 2

Define the term ‘scarce’.

Answer 2

Scarce generally means limited or finite, but in the economic problem, we may not actually have scarce resources however when we compare our infinite wants with the resources, it may seem scarce in comparison.

Question 3

What choices do economies make in response to the basic economic problem?

Answer 3

Economies make choices from 3 important questions:
What products should be made?
How can these products be produced?
For whom should these products be produced for?

Question 4

Give an example of scarcity.

Answer 4

Food shortages around the world.

Question 5

What is a renewable resource?

Answer 5

A renewable resource is a resource of economic value which can always be reused/replenished. Its rate of consumption (use) should be equal to its rate of replenishment so stock doesn’t decrease.

Question 6

What is a non-renewable resource?

Answer 6

A non-renewable resource is a resource of economic value that can’t always be replenished; its rate of consumption isn’t always equal to its rate of replenishment.

Question 7

What is the opportunity cost?

Answer 7

The opportunity cost is the value of the next best alternative forgone.

Question 8

Describe the choices a consumer would make in terms of the opportunity cost.

Answer 8

The consumer will generally put forward their limited income towards what will give them greater satisfaction.

Question 9

What choices would a producer make in terms of the opportunity cost?

Answer 9

The producer will make choices regarding what to do with their limited resources, mainly thinking about profit.

Question 10

What choices would a government make in terms of the opportunity cost?

Answer 10

A government will decide where they can put forward their limited tax revenue towards, thinking about how this will strengthen social mobility.

Question 11

Give an example of opportunity cost.

Answer 11

If the government decides to put tax revenue towards the NHS, the opportunity cost will be that they didn’t put it towards other sectors such as defense or education.

Question 12

Why should we make choices regarding the opportunity cost?

Answer 12

This is because the same limited resources can’t always be used for making different products, therefore, we must ally the limited resources with the infinite wants, so choices must be made.

Question 13

What are the four economical factors of production?

Answer 13

• Land
• Labour
• Capital
• Entrepreneurship

Question 14

Describe the economical factor of land.

Answer 14

In economics, land can be in the form of natural resources, produce of the sea and many more, where you can collect raw materials to produce your goods. Land owners will receive rent or large sums of money from their land.

Question 15

Describe the economical factor of labour.

Answer 15

Labour is typically defined as physical or mental productive human effort, whether they are paid or unpaid. If paid, human workers will receive a wage.

Question 16

Describe the economical factor of capital.

Answer 16

Capital is the man-made resources used for production of consumer goods. Owners of capital will receive interest on their land.

Question 17

Describe the economical factor of entrepreneurship.

Answer 17

Entrepreneurship is the willingness and determination to combine the other 3 factors and take calculated risks to produce a business selling goods or services. Successful entrepreneurs will receive a profit from these activities.

Question 18

Will industries make use of all the economical factors of production?

Answer 18

Generally differing industries will use the four factors in differing combinations; construction and education will focus on the labour factor, whereas manufacturing will put more focus on capital.

Question 19

Why do economists develop models?

Answer 19

Economists will develop models to describe and explain how the economy works.

Question 20

How are theories and models different?

Answer 20

Theories are generally expressed in words whereas models require greater precision and accuracy so they are expressed in more mathematical terms.

Question 21

Why are assumptions of theories and models regularly made?

Answer 21

Assumptions are made as the world is always changing, so after a model has been put forward the economy may suffer a drastic change, therefore, assumptions should be made to justify this change.

Question 22

Describe the term ‘ceteris paribus’.

Answer 22

Ceteris paribus is a phrase meaning ‘all other things remaining are equal’; e.g: If prices of t-shirts increase - ceteris paribus - there will be less demand from buyers to buy larger quantities of t-shirts.

Question 23

When can a theory or model become a law?

Answer 23

If the theory or model has gained universal acceptance then it can become a law.

Question 24

Why is economics classed as a social science?

Answer 24

Because it examines human behaviour in groups.

Question 25

Why is economics different from natural sciences like biology or physics?

Answer 25

Economics examines human behaviour in groups but doesn’t consist of experiments and hypothesis as it focuses on everyday life and the many variables of everyday life are always changing so for a particular set of data, there will be different sets of conclusions.

Question 26

Define a positive statement.

Answer 26

A positive statement is a statement which appears objective with no opinion or emotion, and it can be proven or disproven, and analysed in a hypothesis.

Question 27

Define a normative statement.

Answer 27

A normative statement is a statement that appears subjective and has strong opinion or emotion which prevents it from being disproven. Words such as ought, should, best, unwise, maybe… are commonly used here.

Question 28

State an example of a positive statement.

Answer 28

‘A national recession will cause a decrease in employment rates and economic activity.’

Question 29

State an example of a normative statement.

Answer 29

‘The government should put forward revenue towards the NHS.’

Question 30

What is a value judgement?

Answer 30

A value judgement is a combination of a normative statement and positive statement to assess/judge the right and wrong.

Question 31

Give an example of a value judgement.

Answer 31

The government should build more technical skills colleges in south London (normative statement)
Employment rate has fallen by 10% in many boroughs (a positive statement to back up the normative statement)

Question 32

How are value judgements useful in economics?

Answer 32

In the real world, value judgements are important in many important economical decisions and policies as there may be a variety of judgements to justify a singular statistic.

Question 33

What are economic agents?

Answer 33

Economic agents are participants in an economy.

Question 34

Give 3 examples of economic agents.

Answer 34

• Consumers
• Producers
• Government

Question 35

What is the Production Possibility Frontier (PPF)?

Answer 35

The PPF is a measure of the maximum combinations of capital and consumer goods produced, taking into account the current technology.

Question 36

Why is the PPF drawn as a curve?

Answer 36

The first resources produced from the switch of capital to consumer goods production don’t really add much to the capital goods, yet they are useful for production of consumer goods. Later on, as productivity rises there will be more combinations of products produced.

Question 37

Why does the PPF not indicate the specific combinations of products?

Answer 37

The specific products in the combination are to be decided by the people who run the economy; economics is based on why these certain products are chosen.

Question 38

Define the term ‘investment’.

Answer 38

Investment is simply expenditure (spending of funding) for capital.

Question 39

What is economic growth?

Answer 39

Economic growth is simply strengthening of an economy’s productive capacity due to more availability of inputs.

Question 40

Why is GDP measured as the total output of an economy?

Answer 40

The PPC/PPF is a precise model yet there are many millions of goods produced which aren’t included and they all can’t be illustrated via graphs, therefore, the total output of an economy is generally calculated via its GDP.

Question 41

What is division of labour?

Answer 41

Division of labour is defined as splitting a workplace into several sections, and assigning workers to specific work stations.

Question 42

Why is division of labour effective in the workplace?

Answer 42

By assigning workers to specific work stations, the workers can become very skilled over time and this is perfect for maximizing production of goods as workers won’t need to constantly go to different stations and learn from scratch.

Question 43

Give another advantage of division of labour.

Answer 43

The business may introduce capital (man made resources to help with production) to help simplify the work that the employees have, and assuming the capital will help produce good quality products, the product yield will rise and this can cause profits to increase.

Question 44

Describe a disadvantage of division of labour.

Answer 44

If the workers do the same task for long periods of time, this can cause severe boredom which leads to lack of motivation or energy which overall contributes to lesser quality products, weaker profits and business and a weaker economy.

Question 45

List another disadvantage of division of labour.

Answer 45

Many large international businesses such as Nike, Adidas, Microsoft, H&M and many more have been heavily criticized for causing people to work in poor and dangerous conditions and paying them very low.

Question 46

Define specialization.

Answer 46

Specialisation is the concentration of workers, firms or regions used to produce a specific range of products or services.

Question 47

Explain what is required for successful specialization to occur.

Answer 47

For successful specialization to happen, there must be an appropriate trade link established because what is the point if the economy specialized in production of services yet there are no actual manufactured products or those products have no medium to get to you?

Question 48

How should trade occur?

Answer 48

For specialization to occur, trade is crucial and for trade to occur, monetary payments will be required as an appropriate method of transaction.

Question 49

What problem does specialization reduce?

Answer 49

Specialization significantly reduces the problem of scarcity, of finite resources. During specialization you are having products imported and exporting manufactured products worldwide via monetary payment, giving certain countries more of that important resource they were previously deprived of. This can largely reduce the economic problem too.

Question 50

Describe an advantage of specialization.

Answer 50

One major advantage of specialization is how it can lead to a larger output of products and services, and how it can lead to better quality of these products and services.

Question 51

Give another advantage of specialization.

Answer 51

Another advantage of specialization is how it can significantly grow a country; through trading, exporting goods and importing goods, a country can substantially grow in terms of economy, leading to a much better quality of life for its citizens.

Question 52

Give a disadvantage of specialization.

Answer 52

A major disadvantage of specialization is over-reliance: if you depend on a certain country or if a country depends on your nation to give it a valuable resource, but due to political factors, diplomatic relations break down, then this can cause many problems.

Question 53

List another disadvantage of specialization.

Answer 53

Although specialization decreases the issue of scarcity, we cannot get away with the fact that non-renewable resources like fossil fuels will run out one day. Most notably, many Middle Eastern and North African countries heavily rely on oil as a source for their economy, oil being a fossil fuel that will run out one day.

Question 54

Define the term ‘market’.

Answer 54

A market is defined as a set of arrangements for a transaction to take place.

Question 55

Describe the importance of resource allocation in markets.

Answer 55

Resource allocation in markets is very important as they focus on how prices can be used as a bridge between the buyer and seller. If the seller fails to sell many products, one of the factors contributing to this could be how customers perceive the price of the product.

Question 56

Explain why a barter economy can’t work on a large scale and why money is used as a ‘medium of exchange’.

Answer 56

A barter economy consists of very specific trading; if you want to trade with someone, you must have the desired product the person wants, and the person must have the product you want. Because this form of economy is very specific, it would be very hard to trade so life would be very different. This shows how important money is as a ‘medium of exchange’.

Question 57

Describe and explain the role of money as a ‘store of value’.

Answer 57

The money used must be acceptable to both buyers and sellers because if this wasn’t the case then we wouldn’t trust money as a form of payment, and this would make it hard to be used for further transactions.

Question 58

Describe and explain the role of money as a ‘unit of account’ and ‘measure of value’.

Answer 58

Money can be used to compare the value of several products, assets or services, giving the role of a ‘unit of account’. Furthermore, assuming the monetary price placed on these products, assets or services reflects the societal value, money is also given the role as a ‘measure of value’.

Question 59

Describe and explain the role of money as a ‘standard of deferred payment’.

Answer 59

Money as a ‘standard of deferred payment’ simply means that contracts will be agreed in terms of a monetary payment.

Question 60

What is a free market/market economy?

Answer 60

A free market (also known as a market economy), is a market where the government doesn’t intervene in the economic actions of businesses but instead the market forces guide the economy through allocation of resources. Private individuals own everything and the society is capitalist.

Question 61

What is the market mechanism?

Answer 61

The market mechanism is a cycle where the market forces of supply and demand work together, so the prices and quantity for goods and services can be supplied.

Question 62

How does the market mechanism work?

Answer 62

The market mechanism works by the businesses supplying their products or services, demanding them at a price which will secure them a profit, while the customers/consumers will demand the supply to be at an affordable price.

Question 63

In a free market, what will the consumers and producers aim to maximize?

Answer 63

In a free market, the consumers will aim to maximize their personal welfare while producers will aim to maximize profit through demanding supply at a specific price range.

Question 64

In a free market, what will the government aim to maximize?

Answer 64

The government will aim to strengthen social mobility and benefits to society.

Question 65

In a free market, what will the owners of factor inputs aim to maximize?

Answer 65

Owners of factor inputs will aim to maximize their personal gain (this may be money).

Question 66

Give an advantage of a free market.

Answer 66

A free market is useful as it encourages a competitive market where businesses compete for market share.

Question 67

Describe another advantage of a free market.

Answer 67

In a free market, allocative efficiency and productivity is used here, where production of products and services is concerned with the satisfaction of consumers, so there is much more consumer choice.

Question 68

Give a disadvantage of a free market.

Answer 68

Within a free market, the capitalist society can cause many inequalities in wealth and income, due to the majority of wealthy individuals owning a vast amount of resources.

Question 69

List another disadvantage of a free market.

Answer 69

Due to no government intervention, there is little to no regulation or law on the market, so large and strong businesses can easily dominate the free market by exploiting or cheating their way to the top.

Question 70

Who was Adam Smith?

Answer 70

Adam Smith was an economist and author who was widely considered the ‘father of modern economics’, believing in a free market economy and laissez-faire government (a government which wouldn’t intervene in the economic actions of businesses).

Question 71

What is Adam Smith’s ‘Invisible Hand’ theory?

Answer 71

This was a theory put forward by Adam Smith, describing and explaining the benefits and beliefs of a free market economy and allocative productivity.

Question 72

Describe the ‘Invisible Hand’ theory.

Answer 72

The ‘Invisible Hand’ theory discussed the beliefs of a free market economy such as how government intervention would weaken economic growth or how individuals who wished to maximize their personal gain could lead to an efficient and effective allocation of resources.

Question 73

What is a command economy?

Answer 73

As suggested by its name, a command economy is an economy where the government intervenes in all economical actions, such as deciding what, how and for whom to produce, allocating resources to its citizens and causing rationing of scarce goods.

Question 74

Give an advantage of a command economy.

Answer 74

A major advantage of a command economy is how unlike a free market economy where inequality of wealth is common, a command economy encourages a communist/socialist society where everyone is treated equally, so greater equality is implemented here.

Question 75

Describe a disadvantage of a command economy.

Answer 75

Although greater equality is used here, the government does not actually use allocative efficiency or productivity, instead it uses its own opinion of people’s wants and this may not always be right, causing poor decision making.

Question 76

List another advantage of a command economy.

Answer 76

In a command economy, the government will control all of the finite resources, so this means the government can ensure jobs to everyone and there will be lower risk of unemployment.

Question 77

Describe another disadvantage of a command economy.

Answer 77

Because there is no competition for market share or want for profit as there is in a free market economy, there will be significantly weaker innovation for products or services.

Question 78

Define a mixed economy.

Answer 78

A mixed economy is an economy where both the government and free market assume control of the economy, so resources are allocated by both the government (public sector) and market mechanism (private sector; this is free market).

Question 79

What is a public good?

Answer 79

A public good is a good which is not limited to only one person using it. Its consumption doesn’t reduce the consumption available for others using it; defence, infrastructure, NHS…

Question 80

Give some roles of the government.

Answer 80

The government:

• Controls macroeconomic variables
• Provides public goods such as defence
• Provides legal framework such as property rights
• Encourage free trade
• Reduce negative externalities

Question 81

Give an advantage of electronic money.

Answer 81

Electronic money is very convenient compared to physically going to a bank, as the process is much quicker (no long queues for transaction) and you can do it at any part of the day, in any part of the world.

Question 82

Give another advantage of electronic money.

Answer 82

Increased sales: In the modern day, technology use is colossal among many people internationally and this includes internet banking too, so electronic banks online will undoubtedly gain large quantities of sales.

Question 83

Give a disadvantage of using electronic money.

Answer 83

Security concerns: Although banks have placed many measures to protect users, such as symmetric encryption, electronic money is still vulnerable to hacking via phishing attacks to gain unsuspecting users bank account details.

Question 84

Describe another disadvantage of using electronic money.

Answer 84

Over reliance on technology: Businesses that are completely reliant on technology to run can suffer long-term issues; internet connection problems or technical issues or cyber attacks can easily damage an online bank’s reputation, decreasing trust in e-payments.