Nature of economics 1.1

Question 1

What does ceteris paribus mean

Answer 1

Everything else remains equal.

This is the most important assumption for an economist to create functioning models

Question 2

What is a positive statement

Answer 2

Positive statements describe the world as it is. They are objective statements that can be proved.

E.g the proposal of the new high speed rail HS2. If the exact benefits exceed the exact costs, you could say the project is worth doing. This is positive analysis. However, you may not always know costs & benefits perfectly.

Question 3

What is a normative statement

Answer 3

Normative statements describe how the world should be. They are opinions that contain value judgements.

E.g imagine an economist argued for higher unemployment benefits during a recession, because a rich country should take care of its citizens. This is normative analysis.

Question 4

What is a value judgement

Answer 4

Value judgments are often found in normative statements. They are judgements about society that cannot be quantified and tested.

E.g the homelessness problem in Oxford needs to be addressed and funds should be redistributed to do this. This judgement is within a normative statement.
Value judgements affect economic decision-making, so normative statements are important.

Question 5

What is the economic problem

Answer 5

There are not enough resources on earth to satisfy humans’ unlimited wants and needs.

The basic economic problem involves working out how to allocate limited resources as effectively as possible to satisfy people’s unlimited wants and needs.

Question 6

Define opportunity cost

Answer 6

The benefit Forgone of the next best alternative

People face a tradeoff when they make choices.
If you choose to buy a video game, you cannot spend that income on movies.
What you would use the money from the video game to buy instead.

Question 7

Issues of opportunity cost

Answer 7

-Not all factors have alternatives.

-Some alternatives are unknown.

-Agents may lack information on alternatives.

-It can be difficult to switch some factors to another use.

Question 8

What incentives do different economic agents base their decisions on

Answer 8

-For firms this might be profit maximisation.

-Producers must decide what products to make and the selling price of products.

-Consumers decide what products to purchase and how much they want to spend on products.

-Governments decide how much they should get involved in the production and consumption process.

Question 9

What are the PPF details

Answer 9

The PPF shows economy at its maximum productive potential.
Society can choose any two goods on or inside the PPF.
The opportunity cost is the slope of the PPF.
The PPF is curved because of the law of diminishing returns.
As you increase units of one resource and keep other factors constant, the marginal benefit from the extra units will eventually start to decline.

Question 10

What does it mean if an economy is operating inside and on the PPF curve

Answer 10

When an economy operates inside the PPF, it means that it is not utilizing all its resources efficiently.

When an economy operates on the PPF, it is producing at maximum efficiency. This means that all available resources are being used optimally, and the economy is producing the maximum possible output of goods and services.

Question 11

What can cause a PPF curve to shift

Answer 11

The PPF shifts outward if there is economic growth.
This is because the productive capacity of the economy has increased.
E.g. this could be caused from improvements in technology.
But this improvement isn’t necessarily equal across all products.
E.g. an improvement in the technology to produce cars isn’t necessarily going to affect the ability to produce butter.

Question 12

Allocative efficiency

Answer 12

Allocative efficiency occurs when the resources in an economy are allocated in such a way that maximizes the total benefit to society. It is achieved when the price of a good or service reflects the marginal cost of producing it, meaning that the amount produced is exactly what consumers demand at that price.

Question 13

Productive efficiency

Answer 13

Productive efficiency occurs when goods and services are produced at the lowest possible cost. This means that the production process is using the optimal combination of inputs to produce a given output, minimizing waste and maximizing output.

Question 14

4 Factors of production

Answer 14

Capital - Resources used to produce goods or services.

Entrepreneurship - Entrepreneurship refers to the ability and willingness of an individual to combine the other factors to create goods or services.

Land - Natural resources used in production. Raw materials, minerals, land

Labour - all productive human effort both physical and mental paid or unpaid

CELL

Question 15

Define specialisation

Answer 15

Specialisation is the production of a limited range of goods by a company/individual/country which means that trade is essential as it is the only way
they are able to access all that they need.

Question 16

The division of labour

Answer 16

The division of labour is when labour becomes specialised in a particular part of the production process.

Question 17

Advantages of division of labour

Answer 17

Workers will be quicker, better and more efficient as they are concentrating on one thing and so can quickly develop their skills.

-This may also lead to a higher quality of goods and services, since workers are
more skilled at their jobs.

• It is more cost effective to develop specialist tools, improving speed or quality.
• Time is not wasted moving between jobs and getting out tools etc.
• Workers only need to be trained to do one specific task , rather than many, saving
  time and money.

Question 18

Disadvantages of division of labour

Answer 18

If someone is only doing one specific task, it can make work very boring which will
lead to poor quality of work and people leaving the business.

-There is a reduction of craftsmanship and a much more standardised product
because of mechanisation.

• If for some reason production in one process is delayed, every other task has to stop
  until that problem is solved.
• The workforce do not have wide industrial training and could therefore suffer from
  structural unemployment.

Question 19

Advantages in specialisation

Answer 19

The theory of comparative advantage states countries should specialise in
producing those goods where they have a lower opportunity cost, and so they are
relatively best at producing. This will help them boost their economy. On the whole,
there is greater output globally.

Question 20

Disadvantages in specialisation

Answer 20

Countries may become over-dependent on one particular export and if this fails their
economy may collapse.

● Other countries specialise in non-renewable resources and these could run out, which will result in a huge loss of income for that country. It will also mean the loss of these resources.

● There will be high interdependence and this will cause problems if trade is
prevented, for example because of war.

● Some say that increased specialisation means there will be more competition to cut costs and therefore wages will fall, but this is not necessarily true.

Question 21

The 4 functions of money

Answer 21

-A medium of exchange: It can be used to buy and sell goods and services and is
acceptable everywhere. Removes the double coincidence of wants.

• A measure of value: It can compare the value of two goods.

-A store of value: It is able to keep its value and can be kept for a long time. With
barter, goods such as fruits often went out of date and so could not keep their value.

• A method for deferred payment: Money can allow for debts to be created. People
  can therefore pay for things without having money in the present, and can pay for it
  later.

Question 22

What is a free market economy

Answer 22

Individuals are able to make their own choices and own the factors of production without government interference
Consumers make decisions based on utility
Businesses make decisions based on profit

Question 23

Who believed in the invisible hand

Answer 23

Adam smith

Question 24

What are the advantages for a free market economy

Answer 24

• The system is automatic
• Consumers have freedom of choice (consumer sovereignty)
  -There is high motivation as hard work can lead to high potential
  -Political freedom
• Firms have competition meaning they can ensure productive efficiency
  -In general they have higher growth

Question 25

What are the Disadvantages for a free market economy

Answer 25

• Tends to be higher inequality as the rich own higher amounts of CELL
  -There may be a lack of merit goods and little control of demerit goods
• Resources could be spent on unproductive expenses such as advertising
• If competition disappears there may be monopolies who offer low quality service at a high price

Question 26

What is a command economy

Answer 26

All factors of production are owned by the state and labour is directed by the state. There is no private property and everyone is working towards a common good
-Resource allocation is controlled by the government

Question 27

What are the advantages of a command economy

Answer 27

• The state provides a minimum standard of living
• Less wastage of resources as there is no competition
  -Standardised products means they are produced cost effectively
• Merit goods are encouraged and increased while demerit goods aren’t produced

Question 28

Disadvantages of a command economy

Answer 28

• It’s impossible for the state to make decisions correctly which can mean an over or under supply
  -Decision making will be slow as it will have to go through many stages which can increase bribery and corruption
  -Everyone receives the same wage which decreases motivation and efficiency
  -Consumers lose their freedom

Question 29

What is a mixed economy

Answer 29

Some kind of compromise economy where where both the free market mechanism and the government planning process allocate a significant amount of the total resources in the country . Around 40-60 % of goverment control

Question 30

What’s the governments role in a mixed economy

Answer 30

• To create a framework of rules to prevent monopolies ( business with more than 25% market share
  -Supplements and modifies the price system - produces public and merit goods
  -Redistributes income by using tax
  -Stabilises the economy using fiscal policy