1.1 - The nature of economics

Question 1

Define factors of production and state the 4

Answer 1

The resources of a country: Land, labour, capital and enterprise.

Question 2

Define capital goods

Answer 2

Goods that are used in the manufacture of consumer goods.

Question 3

Define ceteris paribus

Answer 3

When the effect of a change in one variable is considered, it’s assumed that all other variables are held constant.

Question 4

Define command economy and state who endorsed it

Answer 4

An economy in which the government owns all FOP.

• Karl Marx

Question 5

Define consumer goods

Answer 5

Goods/services used by individuals to satisfy their wants and needs.

Question 6

Define economic decline

Answer 6

A decrease in the productive capacity, indicating a decrease in real output.

Question 7

Define economic goods

Answer 7

Resources that have an opportunity cost as they’re scarce and so constantly command a price.

Question 8

Define economic growth

Answer 8

An increase in the productive capacity of the economy, indicating an increase in real output.

Question 9

Define free goods

Answer 9

Infinite resources with no opportunity cost as the consumption by one doesn’t limit others.

Question 10

Define free market economy and state who endorsed it

Answer 10

An economy in which there’s no government intervention and price allocates resources.

• Friedrich Hayek

Question 11

Define mixed economy and state who endorsed it

Answer 11

An economy in which both the free market mechanism and the government allocate resources.

• Adam Smith

Question 12

Define non-renewable resources

Answer 12

Resources that will eventually be completely depleted.

Question 13

Define normative economic statements

Answer 13

Subjective statements based on value judgements and therefore can’t be proved or disproved.

Question 14

Define opportunity cost

Answer 14

The next best alternative foregone when an economic decision has been made. (A benefit one hasn’t received/given up)

Question 15

Define positive economic statements

Answer 15

Objective statements based on evidence/facts that can therefore be proved or disproved.

Question 16

Define PPF

Answer 16

A production possibility frontier which shows the max combo of goods/services, which can be produced, if all FOP are fully and efficiently utilised.

Question 17

Define renewable resources

Answer 17

Resources that can be replaced naturally after use.

Question 18

Define scarcity

Answer 18

Refers to infinite wants for resources that are limited.

Question 19

Define the division of labour

Answer 19

When individual workers specialise in a particular task at different stages of production of a good/service.

Question 20

Define transition economy

Answer 20

An economy which is changing from a command to a free market economy.

Question 21

Explain how efficiency is an adv of specialisation/dol
IN ORGANISING PRODUCTION

Answer 21

• Increased productivity (higher output per worker per hour), leading to lower AC.
• No time is wasted moving from one job to another; organisational slack (x-inefficiency) reduced

Question 22

State the economic problem

Answer 22

The basic economic problem is that resources are scarce. For many of these resources there are infinite wants but finite resources with which to satisfy
them. This means that decisions need to be made regarding the allocation of resources.

Question 23

Define specialisation

Answer 23

When factors of production are concentrated on the production of one good/service or one aspect of it.

Question 24

Define the ‘invisible hand’

Answer 24

The idea that the market, through the self-interest of individuals and firms, can coordinate economic activity and allocate resources efficiently.

Question 25

Explain how reduced FC of training and recruitment are advs of specialisation/dol
IN ORGANISING PRODUCTION

Answer 25

• Less time required to train workers for specific tasks.
• Workers can gain loyalty and a sense of achievement from their branch of production; labour turnover is reduced

Question 26

Explain how motivation and quality of output are advs of specialisation/dol
IN ORGANISING PRODUCTION

Answer 26

• Workers are more motivated as they’re utilising their area of expertise.
• Workers become more highly skilled in a particular task due to repetition so quality improves.

Question 27

Explain how efficiency is a disadv of specialisation/dol
IN ORGANISING PRODUCTION

Answer 27

• Monotony and boredom could lead to low labour morale. Therefore, mistakes are more likely to be made, higher risk of sabotage, more wastage.
• Dol creates interdependence in production. If one group of workers strike, the production process could be brought to a halt.

Question 28

Explain how higher FC of automation is a disadv of specialisation/dol
IN ORGANISING PRODUCTION

Answer 28

Breaking down the production process into different tasks may make it more practicable to automate it instead. However this will come at the expense of capital.

Question 29

Explain how comparative advantage is an adv of specialisation/dol
IN TRADE

Answer 29

When countries specialise in producing those goods where they have a lower opportunity cost, they’re relatively the best at doing so. This will help them boost their economy, therefore increasing output globally.

Question 30

Explain how labour productivity is an adv of specialisation/dol
IN TRADE

Answer 30

Higher labour productivity lowers cost /unit
for firms, which makes their exports more
competitive internationally.

Question 31

Explain how over-dependency is a disadv of specialisation/dol
IN TRADE

Answer 31

Countries may become over-dependent on one particular export and if this fails their economy may collapse. For example, due to the effect of weather on agriculture or war.

Question 32

State when there’s an inwards shift in the PPF

Answer 32

If there’s a decrease in the quality or quantity of the FOP.

Question 33

State what an inwards shift in the PPF shows

Answer 33

A decrease in the productive potential of an economy therefore a decrease in economic growth.

Question 34

State when there’s an outwards shift in the PPF

Answer 34

If there’s an increase in the quality or quantity of the FOP.

Question 35

State what an outwards shift in the PPF shows.

Answer 35

An increase in the productive potential of an economy, therefore an increase in economic growth.

Question 36

State the factors that cause an outwards shift in the PPF

Answer 36

• Development of new methods of production which increase productivity​
• Advances in technology​
• Improvements in education and training which increase workforce productivity ​
• An increase the size of the workforce – e.g. immigration, increase in retirement age​
• Better childcare enabling more women to join workforce​.

Question 37

State the factors that cause an inwards shift in the PPF.

Answer 37

• Natural disasters.
• Depletion of natural resources.
• A reduction in the size of the workforce - e.g. emigration, an increase in no. of years spent in compulsory education
• Deep recession that results in a loss of productive capacity.​

Question 38

State what a movement along a PPF shows

Answer 38

Illustrates a change in the allocation of resources for the production of consumer or capital goods.

Question 39

Define labour

Answer 39

Those involved in the production of goods and services and includes the physical and mental efforts of humans.

Question 40

Define enterprise

Answer 40

The entrepreneur which brings together the other fop so that goods/services can be provided, and taking the risks involved in production.

Question 41

Define land

Answer 41

All natural resources/raw materials.

Question 42

Define capital

Answer 42

The man-made aid to producing consumer goods.

Question 43

Explain the 3 main advantages of free market economies

Answer 43

1) CONSUMER SOVEREIGNTY - This implies that consumers spending decisions determine what is produced. TIB, in order to survive businesses must match their production to what consumers want to buy as well as offering a range of goods/services. This increases consumer satisfaction.

2) EFFICIENCY - Competition & profit motive create a strong incentive for firms to create high quality goods and allocate resources efficiently.

3) ECONOMIC GROWTH - There’s no (or low) income or corporation tax which gives workers a greater incentive to work and firms to make profits. This helps fuel economic growth as consumers have more disposable income and firms more retained profit.

Question 44

Explain the 2 main disadvantages of free market economies

Answer 44

1) INEQUALITY - Exaggerated gaps between rich & poor. TIB, as there’s no government there’s no state provision of benefits or public services. Therefore, those on low incomes, the underprivileged & disabled will struggle to survive and could remain in poverty.

2) MARKET FAILURES
- Over-provision of de-merit goods: negative externalities created.
- Under-provision of some goods such as healthcare: disproportionate allocation of resources.
- Dominant firms may charge high prices: monopoly exploitation.

Question 45

Explain the 2 main advantages of a command economy

Answer 45

1) SOCIAL WELFARE - Purpose of this economy is to maximise social welfare. For example, as prices are set outside the market there’s no interaction between buyers & sellers to form a price. Therefore prices don’t ration goods, reflect scarcity or discourage consumption. Income inequality is minimised as a result.

2) CENTRAL RESPONSE - Command authority can easily increase production in many of its facilities that aren’t impacted by a calamity. This is essential to maintain continuous flow of goods/services on the market. As well as this, certain public goods can freely by distributed to help affected communities overcome calamities.

Question 46

Explain the disadvantages of command economies

Answer 46

1) NEEDS OF SOCIETY IGNORED - Gov may not allocate resources in the best way. TIB it’s difficult for them to obtain information about the needs of society or to implement systems to satisfy these needs. This lack of provision can give rise to the black market.

2) FREEDOM RESTRICTED - Workers aren’t given a choice on where they can work so they cannot choose career paths based on their interests and skills, but rather based on what the authority forces them to do. This can lead to social unrest.

3) INEFFICIENCY - As gov owns all industries it doesn’t encourage competition and even tires to eliminate it. Therefore, prices may be higher as there’s no incentive for firms to reduce their costs of production.

Question 47

State the functions of money

Answer 47

1) A medium of exchange
2) A measure of value
3) A store of value
4) A method of deferred payment

Question 48

Explain ‘a medium of exchange’ as a function of money

Answer 48

Money can be used to buy and sell goods/services and is acceptable everywhere, since everyone knows they can use it to buy anything they want. TMT money can easily facilitate the exchange of goods as no double coincidence of wants is necessary.

Question 49

Explain ‘a measure of value’ as a function of money

Answer 49

Money provides a means of ascribing value to different goods/service (and labour). Knowing the price of a good in terms of money allows consumers and producers to make decisions in their best interests. Without this measure, it’s difficult for buyers and sellers to arrange an agreeable exchange.

Question 50

Explain ‘a store of value’ as a function of money

Answer 50

Money is able to hold its value over time (of course inflation means that this isn’t always true). This means that it can be saved if it’s more convenient to spend the money later.

Question 51

Explain ‘a method of deferred payments’ as a function of money

Answer 51

Money can arrange terms of credit (loans) and allows for debts to be created. This allows for producers and consumers to acquire goods in the present and pay for them in the future. However, this function relies of money to store its value.

Question 52

Explain the role of the state in a mixed economy.

Answer 52

Occurs mainly through taxation to gain revenue and then spending that revenue to redistribute income and provide essential goods/services.

• REDISTRIBUTION OF INCOME: Done through a welfare system which often includes unemployment benefits, healthcare and pension provision.

-SPENDING ON GOODS/SERVICES: Often focused on infrastructure, merit and public goods.