Nature Of Economics 1.1

Question 1

What is Production Possibility Frontier

Answer 1

The maximum output combinations produced by a economy using all given resources

Question 2

What are the 4 F.O.Ps

Answer 2

Land - Rent
Labour - Wages
Capital - Taxes
Entrepreneurship - Income

Question 3

Summarise the key ideas of Adam Smith in 2-3 sentences:

Answer 3

-Developed market economy
-Ideas of division of labour and importance of specialisation
-Invisible hand ensure people got what they need based on their needs

Question 4

What is the definition of opportunity cost?

Answer 4

Opp. Cost (y) = gain in x/loss in y

Question 5

Explain opportunity cost

Answer 5

Benefit gained when one good is given up

Question 6

A positive statement can be…

Answer 6

Verified by data/real life (True or False)

Question 7

Normative statements are based on…

Answer 7

Value judgement

Question 8

Summarise Karl Marx’s key ideas:

Answer 8

• disagreed with Adam smiths ideas and believed in one central power to assign the distribution of resources.
• though the bourgeoisie exploited the proletariat and gave unfair wages. - planned economy

Question 9

What is the basic economic question?

Answer 9

How can available scarce resources be used to satisfy peoples infinite needs and wants as effectively as possible

-what should we make/do
-how should we make/do
-who should benefit

Question 10

What are diminishing marginal returns

Answer 10

-shown by concave graph

-increase opp cost
-normally seen on larger scale

Question 11

What are the key ideas of Hayek?

Answer 11

-Favoured market economy but believed there is a bottom line that should not be crossed
-some public goods should be distributed as Marx outlines
-believed mix economy is the best option
-believed Marxism would leave to dictatorship

Question 12

What are renewable resources?

Answer 12

-Resources that are replenished at as rate that is equal than or greater than the rate that they are depleted at

Question 13

What is division of labour?

Answer 13

-observed by Adam smith

-splitting work into small tasks and allocating them to the individuals who specialise in them
-reduces transition time
-increases productivity as people are more skilled
-specialisation allows tools to be created

Question 14

What is ceteris paribus

Answer 14

How one economic variable affected another assuming all variables remain the same

Question 15

3 ways which division of labour helps reduce unit costs

Answer 15

-produce far more output
-reduces time taken to produce as transition time reduces (more goods produced in smaller time frame)
-smaller set of skills required
-development of specialised tools
-lowers supply cost per unit

Question 16

What are three disadvantadges of specialisation

Answer 16

-leave people jobless once their skill set is replaced by machinery
-boring - more prone to mistakes

Question 17

How are resources allocated in the market economy?

Answer 17

Due to interactions between buyers and sellers via the price mechanism

Question 18

How is money useful in transactions?

Answer 18

-medium of exchange
-unit of account
-store of value
-method of deferred payment

Question 19

What are the behaviours of rational agents?

Answer 19

-know their preferences
-maximise own personal welfare

Question 20

What are the behaviours of real economic agents?

Answer 20

-less cognitive ability to know/rank preferences
-use techniques to make decisions
-rules of thumbs used to help
-copycat

Question 21

What does Ceteris paribus mean?

Answer 21

• assuming other variables remain constant

Question 22

What is the basic economic problem?

Answer 22

• that resources are scarce
• infinite wants but finite resources

Question 23

What are production possibility frontiers?

Answer 23

• PPFs help economists to analyse trade-offs.
• They show the maximum possible combination of goods/services that can be produced using all available resources

Question 24

What is an opportunity cost?

Answer 24

• the production of two more consumer goods incurs an opportunity cost of one capital good

Question 25

How is economic growth modelled on the PPF graph?

Answer 25

• outward shift in the PPF

Question 26

What is a free market?

Answer 26

• an economic system in which prices are determined by unrestricted competition between privately owned businesses

Question 27

Describe a command economy

Answer 27

• a centralised government controls the means of production and determines output levels