Chapter 1.1 - The Nature of Economics

Question 0

Define ‘resources’. Identify and explain the factors of production.

Answer 0

The resources of a country are referred to as factors of production:

1. Land includes the Earth’s surface and the sea, plus everything else that occurs naturally.
2. Labour is all physical and mental work done by humans in the production of goods and services.
3. Capital refers to all man-made aids in production.
4. Enterprise refers to the functions of an entrepreneur - to bring together the other factors of production and bear its risks.

Question 1

What is the (central) economic problem?

Answer 1

The (central) economic problem is a situation where resources are limited (scarcity) but wants are unlimited, therefore not everyone can get everything they want.

Question 2

Define ‘renewable resources’.

Answer 2

Renewable resources are those resources whose stock levels can be maintained at a certain level.

Question 3

Define ‘non-renewable resources’.

Answer 3

Non-renewable resources are those resources which will eventually be completely depleted.

Question 4

Define ‘specialisation’.

Answer 4

Specialisation is the concentration by a worker or workers, firm, region, or whole economy on a narrow range of goods and services.

Question 5

Define ‘scarcity’.

Answer 5

Scarcity exists because resources are finite whereas wants are infinite, therefore choices have to be made.

Question 6

Define ‘consumer goods/services’.

Answer 6

Consumer goods/services are those which give satisfaction or utility to consumers e.g. iPhones and car repairs.

Question 7

Define ‘capital goods/services’.

Answer 7

Capital goods/services are those required to produce other goods e.g. machinery, factories, machinery repair companies and finance companies offering loans to businesses.

Question 8

Identify the difference between labour intensive and capital intensive production.

Answer 8

Labour intensive is where are a high proportion of labour is used relative to capital while capital intensive is where a high proportion of capital is used relative to labour.

Question 9

What is the division of labour?

Answer 9

The division of labour is the assignment of different parts of the production process to different workers to improve efficiency.

Question 10

Name 4 advantages of the division of labour.

Answer 10

1. Each worker specialises in tasks for which they are best suited.
2. Therefore, they only need to be trained in one task.
3. Less time is wasted as workers don’t need to switch between tasks.
4. Parts of production can be mechanised which helps to increase productivity and reduce costs.

Question 11

Name 5 disadvantages of the division of labour.

Answer 11

1. Monotonous and boredom for workers could lead to a fall in productivity.
2. Loss of skills because of specialisation which could be a problem if workers are made redundant.
3. A strike by one group of workers could bring the entire production facility to a standstill.
4. Lack of variety as all goods produced on a production line are identical.
5. Quality supervisors may need to be employed which could raise costs.

Question 12

Name 3 limits of the division of labour.

Answer 12

1. The size of the market - if there is only a small market then it will be more difficult to specialise.
2. The type of the product - some products are likely to be unique and unsuitable for the division of labour e.g. designer fashion products.
3. Transport costs - if these are very high then large-scale production and the division of labour may not be possible.

Question 13

Define ‘opportunity cost’.

Answer 13

Opportunity cost is the cost of the next best alternative foregone.

Question 14

Define ‘economic goods’.

Answer 14

Economic goods are created from resources which are limited in supply and so are scarce. Consequently, they command a price.

Question 15

Define ‘free goods’.

Answer 15

Free goods are unlimited in supply e.g. sunlight, air or sand on a beach. Consumption by one person does not limit the consumption by others so the opportunity cost of consuming a free good is 0.

Question 16

Define ‘positive statements’.

Answer 16

Positive statements are factual and can be tested.

Question 17

Define ‘normative statements’.

Answer 17

Normative statements are value judgements, based on opinion, that cannot be disproved.

Question 18

What does the Production Possibility Frontier (PPF) illustrate?

Answer 18

A PPF illustrates the maximum potential output of an economy when all resources are employed fully and efficiently.
It also indicates the principle of increasing opportunity costs - as the output of one good is increased, more and more other goods must be sacrificed.

Question 19

Define ‘economic growth’.

Answer 19

Economic growth refers to an increase in the productive capacity of the economy which indicates that real incomes have increased.

Question 20

List 5 factors causing an outward shift in the PPF.

Answer 20

1. Discovery of new natural resources.
2. Development of new methods of production which increase productivity.
3. Advances in technology.
4. Improvements in education/training which increase the workforce’s productivity.
5. Factors which lead to an increase in the size of the workforce e.g. immigration; an increase in the retirement age, better childcare enabling more women to work.

Question 21

List 4 factors causing an inward shift in the PPF.

Answer 21

1. Natural disasters e.g. earthquakes, floods which cause a destruction of productive capacity.
2. Depletion of natural resources.
3. Factors causing a reduction in the size of the workforce e.g. emigration, increase in the number of years spent in compulsory education, a decrease in the retirement age.
4. A deep recession which results in a loss of productive capacity, with factories closing down permanently.