Micro LS(1-5)

Question 1

What is an economy?

Answer 1

All the goods and services produced in an area

Question 2

What are the factors of production?

Answer 2

• Land: The stock of natural factor resources available for production – known as natural capital.
• Labour: The quantity and quality of the human input available for the production process.
• Capital: Man-made goods used to supply other products e.g. drones, vehicles factories, hardware & software.
• Enterprise: Entrepreneurs organise inputs and take risks when seeking to exploit market opportunities.

Question 3

What is the economic problem?

Answer 3

How to use the available, scarce resources to satisfy peoples infinite needs, and infinite wants as effectively as possible

Question 4

What are the three key questions related to the economic problem?

Answer 4

What to produce : how to allocate our scarce resources
When/how to produce it : how do we efficiently employ our resources
whom to produce it for : who will best receive our scarce resources

Question 5

What is an economic agent, give three.

Answer 5

A group that participates in the economy:
- Producers, create goods and services. They are also known as firms
- Consumers by goods and services made by firms , individuals and firms can be consumers
- The government sets the rules that are the economic agents must follow, and it also produces some goods and services

Question 6

What is a green belt or brown belt area?

Answer 6

A green belt area cannot be built on, whereas a brown belt can

Question 7

How do you economists explain how the economy works?

Answer 7

• They use models which can predict the impact of economic change. Models allow economists to test theories and guide policies.
• Eval: one criticism could be that these are often oversimplified and can be unrealistic

Question 8

Why is it difficult for economics to conduct experiments?

Answer 8

There are a lot of factors that can impact economic activity to overcome this problem. Economists assume ‘ceteris paribus’ which assumes other variables remain constant. Economists also can’t isolate variables in real time.

Evaluation: this is highly unrealistic as isolation is difficult when there are many connected variables

Question 9

What is opportunity cost?

Answer 9

It is the value of the next best alternative forgone as a result of a choice made

Question 10

What are the uses of opportunity cost?

Answer 10

-Consumers, use it to decide what to spend their incomes on
- Producers, use it to decide what and how to produce goods and services
- The government uses it to decide what policies to choose

Question 11

What does a production possibility frontier show?
what causes the concave shape of the ppf?

Answer 11

The maximum potential output of a combination of two goods or services an economy can achieve when all its resources are fully and efficiently employed given the current level of technology

the concave shape of the curve is caused by the law of diminishing marginal returns (not all factor inputs are equally suited to producing different goods and this leads to lower productivity)

Question 12

Define economic growth
Define negative economic growth
How does a ppf change with each?

Answer 12

An increase in the production of goods and services in an economy
A decrease in the production of goods and services in an economy
With economic growth, the arc shifts out , with negative economic growth, the arc shifts in

Question 13

Define consumer goods and capital goods

Answer 13

Consumer good is a good which does not produce other goods and are used to satisfy wants and needs
Capital goods or goods which are used to produce other goods and services

Question 14

What does it mean if an economy is at any point on its PPF and why might an economy not be on its PPF?

Answer 14

If an economy is on its PPF, there is an efficient allocation of resources since none are being wasted or underutilised
If it is not, then there is a inefficient use of resources or underutilised/unemployed resources , they might also be a dictatorship.

Question 15

What is a positive economic statement?

Answer 15

A statement that can be proven true or false it is objective

Question 16

What is a normative economics statement?

Answer 16

A statement which expresses opinions and cannot be proven true or false. It is subjective.

Question 17

Define specialisation

Answer 17

When an individual, firm region or country is concentrates on the production of a limited range of goods and services

A relevant economist is Adam Smith who argued that specialisation leads to improve productivity and economic growth.

Question 18

Why do firms/region/country is specialise?

Answer 18

It allows individuals to become more skilled
It increases the quality or quantity of output they can produce. This is because the task is divided up and the workers can complete their task accurately = more efficient
It increases the variety of higher quality products from different markets
Expansion of global trade and allows exploitation of economies of scale

Question 19

Define division of labour

Answer 19

specialisation of workers: they focus on specific tasks in the production process

Question 20

Define productivity

Answer 20

The effectiveness of productive effort usually measured in terms of the rate of output per unit of input

Question 21

What does increased productivity lead to?

Answer 21

• Higher output and higher quality
• Higher standard of living
• More efficient use of resources

Question 22

What are the advantages of the division of labour?

Answer 22

Work has become more skilled through the repetition of tasks. The productivity of workers rises so output increases and time is saved by the workers focusing on a narrow range of tasks. Workers are easier and cheaper to train.
- The overall benefit for firms is a greater quantity and higher quality of output
- The overall benefit, the workers is a higher skill level and potentially higher wage

Question 23

What are the disadvantages of division of labour

Answer 23

1. Unrewarding, repetitive work can lower motivation causing lower labour productivity.
2. Workers take less pride in work therefore quality of good/service suffers.
3. Dissatisfied workers cause absenteeism = increased costs for businesses.
4. People move to less boring jobs creating high worker turnover and increased hiring/training costs.
5. Increased risk of repetitive strain injuries at work – adding to the burdens facing the health service.

Question 24

What are the disadvantages of specialisation?

Answer 24

• overspecialisation = overreliance on a few industries which is risky/ increased interdependence reduces self-sufficiency
• increases the risk of structural unemployment as workers receive very little/specific training and are occupationally immobile
• Mass produced standardised goods can lack variety = damages consumer welfare
• they are unequal benefits and this can lead to income inequality

Question 25

What are the two methods of trading and what are the two functions of money?

Answer 25

• the two methods of trading are barter and money
• The two functions of money: medium of exchange, which is something commonly, accepted in exchange for goods/ and as unit of account

Question 26

As a measure of value, what are the other two functions of money?

Answer 26

• it can act as a store of value to maintain value and keep it for a long time
• It can act as a method of deferred payment to allow debt to be created

Question 27

What is automation?

Answer 27

Automation is a production technique that uses capital machinery & new technology to replace or enhance human labour. Replacing labour is known as capital-labour substitution.

Question 28

What are non-renewable resources?

Answer 28

Non-renewable resources are finite in supply. The rate of consumption exceeds the rate of production. The rate of extraction of finite resources depends in part on the current market price. Higher prices give
businesses an incentive to increase the rate of extraction since there is an opportunity to make higher profits.

Examples could be crude oil, coal, natural gas and other fossil fuels, as there are no mechanisms to replenish them.

Question 29

What are renewable resources?
What is an important linked issue?

Answer 29

• Renewables are replaceable if the rate of extraction is less than the natural rate at which a resource renews. Examples include solar energy, tidal power, oxygen, biomass, fish stocks and forestry.

• Renewable resources can be exhaustible if they are not managed appropriately because of the length of time it takes for them to regenerate.

• An important linked issue is the tragedy of the commons and unsustainable use of common pool resources such as forestry and fish stocks. Over-extraction threatens the long-run supply of renewable inputs.

Question 30

What can cause the ppf to move inwards?

Answer 30

1. The damaging effects of severe natural disasters such as a tsunami, floods, persistent drought and other extreme weather events.
2. The destruction caused by war and other types of conflict.
3. Large scale net migration of people out of a country e.g. when there is high unemployment or a depression.
4. A long-term fall in productivity of labour.

Question 31

describe the neoclassical economic theory associated with the ppf curve

Answer 31

Pareto efficiency:
- in neoclassical economics a pareto efficient is an outcome which helps at least one person without harming anyone
- a situation is pareto efficient when the only way to help one person is to make another person worse off
- this idea is similar to opportunity cost an economy is pareto efficient when it is operating on its production possibility frontier

Question 32

describe a pareto movement

Answer 32

a movement of the economy from a point within the ppf to a point on the ppf

Question 33

what are the key characteristics of money?

Answer 33

• durability
• portable
• divisible
• hard to counterfeit
• accepted (as a legal tender, there must be trust in money)
• valuable (it can store value for a long time and not be destroyed by the effects of hyperinflation)

Question 34

What is Pareto efficiency?

Answer 34

a state where resources are allocated in such a way that no one can be made better off without making someone else worse off

Question 35

What might cause a PPF to move outwards.

Answer 35

• An increase in the quantity of the factors of production: eg. Discovery & extraction of new natural resources
• An increase in the quality of the factors of production: eg. Increase in labour productivity due to better management, healthcare, education, training
• An advance in technology: eg. a new innovation in resource use

Question 36

What does a straight line ppf indicate?

Answer 36

The economy is equally efficient at producing both goods/services. Opportunity cost is constant.

Question 37

Describe some ideas of Adam Smith

Answer 37

His most famous work was the Wealth of Nations (1776) - a study of the progress of nations where people act according to their own self-interest. Adam Smith also wrote about the ‘invisible hand’ of resource allocation.