Nature of Economics

Question 1

What is a positive statement?

Answer 1

A statement which is objective and made with no obvious value judgement. It can be tested to be proven or disproven

(e.g. Raising Tax Rates will increase revenue) - this can be tested

Positive Statements are often used to backup Normative Statements

Question 2

What is a Normative Statement?

Answer 2

A statement which is subjectie and is based upon a value judgement - it can’t be proven/disproven

Often contains words like ‘ought’, ‘should’, ‘maybe’
(e.g. The government should raise tax rates)

Question 3

Who created the concept of specialisation and division of labour?

Answer 3

Adam Smith

Question 4

Who believed in the free market economy?

Answer 4

Friedrich Hayek

Question 5

What are the pros of the Free Market Economy?

Answer 5

1) Higher Motivation for people to work harder - which leads to better quality goods and more productive workers
2) Higher competition so more productive efficiency - cheaper products

Question 6

What are the cons of Free Market Economy?

Answer 6

1) Higher Inequality as the richer can buy the factors of production so can grow their wealth faster
2) Lack of public goods - free rider problem

Question 7

What is a Command Economy and who believed in it?

Answer 7

An economy in which all factors of production, except labour are owned by the government
Everyone earns the same wage too
Karl Marx

Question 8

What are the pros of a Command Economy?

Answer 8

1) Everyone earns the same wage - so provides a minimum standard of living,
2) Government are motivated by wellbeing of the population - more merit goods

Question 9

What are the disadvantages of a command economy?

Answer 9

1) If workers earn the same wage - there will be less incentive to work harder than othjers, as they will gain nothing from it - so low productivity and likely high prices