Economics as a Social Science

Question 1

Social science

Answer 1

The scientific study of societies and social interaction.

Question 2

Ceteris paribus

Answer 2

Latin for “all other things held constant”. Economists assume ceteris paribus to simplify their models.

Question 3

Positive statement

Answer 3

A statement that can be tested using evidence to see if it’s true or false.

Question 4

Normative statement

Answer 4

A statement that involves a value judgement

Question 5

Opportunity cost

Answer 5

The benefit given up of the next best alternative

Question 6

The economic problem (or problem of scarcity)

Answer 6

Humans have infinite wants but scarce resources

Question 7

Economy

Answer 7

Any system that tries to solve the economic problem

Question 8

Capital

Answer 8

The technology or machinery we use to make goods

Question 9

Enterprise/Entrepreneurship

Answer 9

An entrepreneur combines and organises land, labour and capital to produce a good

Question 10

Land

Answer 10

All the earth’s natural resources i.e. physical land but also raw materials

Question 11

Labour

Answer 11

Human workers used to produce a good

Question 12

Factors of production (CELL)

Answer 12

Capital, Enterprise, Land, Labour

Question 13

PPF

Answer 13

Shows all possible combinations of two goods that can be produced, using all resources efficiently

Question 14

Capital good

Answer 14

Goods we use to produce consumer goods e.g. an oven

Question 15

Consumer good

Answer 15

Goods we consume e.g. a pizza

Question 16

Division of labour

Answer 16

When a firm splits up its production process into smaller separate tasks, and assigns different workers to each of these tasks.

Question 17

Specialisation

Answer 17

When a worker, firm or economy concentrates on producing a limited range of goods and services.

E.g. Farmers specialise in producing fruits and veg, Domino’s specialises in producing pizzas, Saudi Arabia specialises in producing oil

Question 18

Functions of money

Answer 18

(DUMS, Donald Uses Money Shopping)

Deferred Payment

Unit of account

Medium of exchange

Store of value

Question 19

Deferred payment

Answer 19

You can borrow money to buy goods now, and then pay the money back in the future

Question 20

Unit of account

Answer 20

Money helps us compare prices of different products

Question 21

Medium of exchange

Answer 21

We can use money to trade goods and services.

E.g. Domino’s pays its workers money for their services, the workers then use the money to pay for the goods and services they want

Question 22

Store of value

Answer 22

You can store your money and save it for later.

Question 23

Pros of division of labour

Answer 23

• Can increase productivity and output by specialising and using specialist equipment
• Can increase quality because workers master their craft
• Can decrease unit costs because workers are more efficient
• Can help firms save on training costs because each worker needs to be trained in fewer skills

Question 24

cons of division of labour

Answer 24

• Demotivation can decrease productivity and output
• Demotivation can decrease quality because workers will take less pride in their work
• Can increase absenteeism, staff turnover and recruitment costs
• Specialised workers will have only one skill so may end up unemployed if they lose their jobs

Question 25

Pros of specialisation and trade

Answer 25

• Wider variety of goods and services from trade
• Can increase overall output
• Can increase trade

Question 26

cons of specialisation and trade

Answer 26

• If a region over-specialises and their specialist industry shuts down, workers will have no other work, leading to unemployment e.g. miners in the 1980s after the mines were shut down
• Countries can over-specialise and deplete their natural resources e.g. Saudi Arabia is slowly running out of its oil reserves
• We become vulnerable because if people specialised in producing a certain good or service go on strike or stop trading, we’re left without the goods and services we need

E.g. when train drivers strike the rest of us can’t get to work or school

Question 27

Rational decision making for consumers

Answer 27

Economists assume that consumers want to maximise their utility.

Question 28

Rational decision making for firms

Answer 28

Economists assume that firms want to maximise their profit

Question 29

Utility

Answer 29

In economics, utility means happiness/benefit/satisfaction

Question 30

Profit

Answer 30

Profit = Total Revenue - Total Cost

Question 31

Total revenue

Answer 31

Total revenue is how much money a business receives from its sales.

Total revenue = price x quantity

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Question 32

Herd behaviour

Answer 32

Consumers are influenced by the behaviour of others.

E.g. consumers may start smoking just because they see friends and celebrities smoking.

Question 33

Consumers are influenced by the behaviour of others.

E.g. consumers may start smoking just because they see friends and celebrities smoking.

Answer 33

When consumers are in the habit of making certain decisions.

E.g. consumers may continue to buy car insurance from their current provider out of habit, even if there are cheaper car insurance providers available.

Question 34

Weakness at computation

Answer 34

Consumers are bad at making calculations, estimating probabilities and working out future benefits/costs.

E.g. consumers may miscalculate which mobile phone contract offers the best value for money.

E.g. consumers overestimate the probability of a plane crash (it’s more likely that you will die wrestling a vending machine than in a plane crash).

E.g. consumers overestimate the future health benefits of “superfoods” and underestimate the future health costs of smoking.

Question 35

1. Market failure

Answer 35

When the price mechanism leads to a misallocation of resources.