Econ Theme 1

Question 1

Positive Statements

Answer 1

Those which can potentially be proved or disproved with reference to facts.

Question 2

Normative Statements

Answer 2

Those which cannot be proved or disproved with reference to the facts.
I.e they are a matter of opinion or ‘value judgements’

Question 3

Scarcity

Answer 3

Unlimited wants in the face of finite resources.

Scarcity means economic agents have to choose the best way to allocate resources.

Question 4

Opportunity Cost

Answer 4

The value of the next best alternative foregone.

Question 5

Factors of Production

Answer 5

Inputs used in the production of goods and services (land, labour, capital and enterprise).

Question 6

Renewable and Non-renewable resources

Answer 6

Renewable - Natural resources that can be replenished, e.g solar power.
Non-renewable - Natural resources, which once used cant be replenished, e.g. oil.

Question 7

PPFs
Consumer Good
Capital Good

Answer 7

PPF - curve showing the maximum potential output in an economy, assuming all available resources are used fully.
Consumer good - A good that directly provides satisfaction or utility to consumers, e.g. chocolate bars.
Capital good - A good used to produce consumer goods, e.g. a machine making clothing.

Question 8

Causes of outward shifts in PPFs

Answer 8

1. More resources obtained, e.g. migrant labour.
2. Higher worker productivity due to better skills/training.
3. Increased workforce size, due to lower school leaving age or higher retirement age.
4. Discovery of new technology, e.g. fracking.

Question 9

Causes of inward shifts in PPFs

Answer 9

1. Natural disasters damaging infrastructure.
2. Epidemic depleting the workforce.
3. Natural resource depletion.
4. War or conflict.

Question 10

Specialisation

Answer 10

When an individual, firm, region or country concentrates on the production of a limited range of goods and services, e.g Germany and engineering.

Question 11

Division of Labour

Answer 11

Production of a good or service is broken down into different task, and labour is allocated to each task.

Question 12

Advantages/Disadvantages of specialisation

Answer 12

Adv:

1. Overall increase in productivity.
2. Higher levels of global output.
   - Countries which specialise can trade with others to acquire goods they need.
   - Leading to global rise in living standards.
3. Competition between firms leads to higher quality goods.

Disadv:

1. If demand for specialised good falls, can be large scale unemployment, e.g. Coal & and the NE.
2. Countries specialising in raw materials face resource depletion.
3. Unfavourable rate of exchange, especially for LEDCs

Question 13

Advantages/Disadvantages of Division of Labour

Answer 13

1. Repetition means workers are more skilled and complete work faster.
2. More effective use of capital, machinery constantly in use.
3. Lower training time and costs.
4. Increases output.

Disadv:

1. Repetition leads to boredom and low productivity.
2. Mechanisation of different stages, leading to unemployment.
3. Interdependence in production, one group strikes it affects the whole industry.

Question 14

4 functions of money

Answer 14

1. Medium of Exchange.
   - Enables buying and selling of products.
   - Makes exchange easier.
   - Reduces need for barter and ‘double coincidence of wants’.
2. Measure of Value.
   - Enables value to be placed on products.
   - Facilitates comparison of goods and services.
   - Value society places on a good in monetary terms.
3. Store of Value.
   - Currency must be acceptable to buyers and sellers.
   - Sellers only accept money if it can be used for future transactions.
   - Way of storing wealth.
   - Money holds value in the SR.
4. Method of Deferred Payment.
   - Enables borrowing and lending.
   - E.g. firms employ workers with the promise of payment at the end of the month.
   - Monetary contracts are a method of deferred payment.

Question 15

Free Market Economy

Answer 15

All resources are privately owned are allocated via the price mechanism.

Advantages:

1. Competition means firms keep costs low (Productive efficiency).
2. Firms cater for consumer wants (Allocative efficiency)
3. Increase quality of goods and greater consumer choice.
4. Financial incentives.

Disadvantages:

1. Unequal income distribution.
2. Potential for monopolies to form.
3. External costs/benefits of production ignored.
4. Information gaps mean people consumer demerit goods.

Question 16

Command Economy

Answer 16

All resources are publicly owned and allocated by the state.

Advantages:

1. Less inequality, govt controls wages of workers.
2. Govt can limit external costs from production/consumption.
3. Fund production of public goods and goods with external benefits.
4. Firms co-operate leading to higher output.

Disadvantages:

1. Inefficient resource allocation.
2. Lack of competition leading to inefficiency, high prices and low quality.
3. Fewer financial incentives.
4. Slow econ growth and low living standards.

Question 17

Mixed Economy

Answer 17

Some resources are owned and allocated by the private sector, some by the state.

Government only intervenes to correct market failure and help markets work.

Question 18

Rational decision making

Answer 18

Consumers allocate expenditure on goods and services to maximise utility, and producers aim to maximise profits.

Question 19

Alternative views of consumer behaviour

Answer 19

1. Habitual behaviour
   - Consumers stick to what they know.
   - Development of consumption habits, e.g tobacco.
2. Influence of other’s behaviour
   - Following actions of others, ‘herd like mentality’.
   - E.g. buying stocks and shares in a company as everyone else is doing so.
   - Late comers to the market often see little benefit.
3. Consumer weakness at computation
   - Imperfect information means consumers don’t always buy a good at its cheapest.
   - ‘Bounded rationality’ - economic agents do the best they can given the information given.

Question 20

Demand

Answer 20

The quantity of a good or service purchased at a given price over a given time period.

Question 21

Effective demand

Answer 21

The want for a good backed up by the ability to pay for it.

Question 22

Movement along the demand curve

Answer 22

• Caused by a change in price.
• Price fall causes an extension in demand.
• Price rise causes a contraction.

Question 23

Factors which shift demand

Answer 23

PASIFIC!

Population
Advertising
Substitutes
Income
Fashion
Interest Rates
Complements

Question 24

Marginal Utility

Answer 24

The utility or satisfaction gained from consuming one extra unit of a good or service.

Question 25

Diminishing Marginal Utility

Answer 25

As successive units of a good are consumed, the utility gained from each extra unit falls.
(This explains the downward sloping demand curve).
Consumers will only buy more if the price falls, and eventually none at all.

Question 26

Snob Effect (Conspicuous)

Answer 26

Demand curve may slope upwards.

Consumers demand a good simply because the price is high.

Question 27

PED

Answer 27

The responsiveness of demand for good, due to a change in its price.

Question 28

PED > 1 (ignoring the sign - ITS)

Answer 28

Demand is relatively price elastic.

So demand is highly sensitive to change in price

Question 29

PED < 1 (ITS)

Answer 29

Demand is relatively price inelastic.

So demand is not very sensitive to a change in price

Question 30

PED = 1

Answer 30

Unit elasticity

% change in quantity demand is the same as the % change in price.

Question 31

PED = 0

Answer 31

Demand is perfectly inelastic.

change in price has no effect on the quantity demanded

Question 32

PED = infinite

Answer 32

Demand is perfectly elastic

Price rise causes demand to fall to zero