1.1 The Nature of Economics

Question 1

what is meant by a model in economics?

Answer 1

a model is a simplified version of reality used to predict or describe what will happen in an economy if one of the variables changes

Question 2

what does ceteris paribus mean?

Answer 2

all other things being equal, so when we change one variable we hold all others constant in order to isolate the consequences of the variable we changed

Question 3

how does economics differ from a science such as physics?

Answer 3

it isn’t possible to conduct laboratory experiments

Question 4

define positive economics

Answer 4

a statement that can be proven or refuted by data (may contain statistics)

Question 5

define normative economics

Answer 5

a statement that contains a value judgement (may use words such as unfair, should, must)

Question 6

what is the fundamental economic problem?

Answer 6

scarcity– the fact there are finite resources and infinite wants in society

Question 7

define physical capital

Answer 7

any good used to make another good, or provide a service

Question 8

define land

Answer 8

anything from the land, water or sky

Question 9

define enterprise

Answer 9

a special form of labour– risk taker who bring all the factors of production together

Question 10

define labour

Answer 10

workers and the skills and abilities they possess

Question 11

define opportunity cost

Answer 11

the next best alternative foregone when an economic decision is made

Question 12

define renewable resources

Answer 12

have the ability to replenish themselves if they are not depleted at the current rate of use

Question 13

define non-renewable resources

Answer 13

finite and cannot be replenished in a reasonable time period

Question 14

why is a PPF concave?

Answer 14

because of the law of diminishing returns– not all factors of production are equally good at the production of both goods, so opportunity cost increases as you move around the curve

Question 15

what does a point inside a PPF indicate?

Answer 15

unemployed resources

Question 16

what does a point outside a PPF indicate?

Answer 16

not attainable with current technology

Question 17

define marginal analysis

Answer 17

the effects of consuming and/or producing one extra unit of a good or service

Question 18

why might a PPF become steeper/shallower?

Answer 18

a productivity increase/decease in one of the industries being shown

Question 19

benefits of specialisation

Answer 19

–increased productivity
–reduced cost of training
–can reduce cost of capital as it becomes more specialised to each task, not everyone needs all items of capital

Question 20

define productivity

Answer 20

measures the output per unit of input (increased by better education, training, motivation and access to capital)

Question 21

define division of labour

Answer 21

when a task is broken into sub-tasks and labour is allocated to each sub-task

Question 22

define specialisation

Answer 22

where economies or households concentrate on producing goods that they are most efficient at, and then trade the surplus

Question 23

name the 4 functions of money

Answer 23

store of value
measure of value
method of deferred payment
medium of exchange

Question 24

what is the importance of a system of exchange?

Answer 24

finding a double co-incidence of wants is inefficient

Question 25

define a free market economy

Answer 25

an economy with very little government intervention e.g. Singapore

Question 26

define a mixed market economy

Answer 26

an economy with 40-50% of output produced by the government, typically where the government intervene to correct market failure e.g. UK

Question 27

define a command/planned economy

Answer 27

a planned economy is where the decisions of what to produce, how to produce and for whom to produce are taken by the government e.g. North Korea

Question 28

advantages of a free market economy

Answer 28

–market forces can be efficient in allocating resources (Adam Smith’s invisible hand)
–output can be higher as a result
–consumers and producers get to keep their income/profit rather than paying it to the government in taxes (Hayek argued the profit motive was more effective at allocating resources than the government)

Question 29

disadvantages of a free market economy

Answer 29

–can have high inequality and poverty
–markets can fail e.g. pollution
–workers can be exploited by businesses (Marx argued that this would lead to a revolution)

Question 30

link the types of economy and economists

Answer 30

command– Karl Marx
mixed– John Maynard Keynes
free– Freiderick Hayek, Adam Smith

Question 31

outline Adam Smith’s theory

Answer 31

the wealth of nations argued that by each individual pursuing their own self-interest this would ensure that resources were allocated in the most efficient way towards producing the products and services that consumers most wanted to buy– invisible hand, and resulted in maximising welfare in society through self-interest

Question 32

outline Karl Marx’s theory

Answer 32

the owners of capital would exploit their workers, and in many cases workers would be replaced by machines. this would mean workers are payed less, and there would eventually be a revolution as workers overthrew their masters

Question 33

outline Freiderick Hayek’s theory

Answer 33

government intervention, even when markets failed was inefficient. he believed the free market was the best way to organise production and that the role of the government was to facilitate the working of the free market

Question 34

outline John Maynard Keynes’ theory

Answer 34

economies needed governments to try and correct market failures and situations where the free market was inefficient. e.g. he argued the gov. should stimulate economies during recessions as they could get trapped in high unemployment

Question 35

disadvantages of specialisation

Answer 35

–can introduce bottlenecks in a production line
–can increase labour turn-over as jobs are repetitive
–can reduce quality of the products as they are mass produced

Question 36

what does a PPF show?

Answer 36

it shows all the different combinations of two goods that an economy can produce when all factors of production are fully and efficiently used, given the current state of technology