Nature of Economics

Question 1

What is the economic problem?

Answer 1

Wants are unlimited and reasorces are finite

Question 2

What does PPF show?

Answer 2

The maximum productive potential of an economy

Question 3

How would you shift the PPF scale

Answer 3

Increase or decrease quality or quantity of resource in an economy

Question 4

What are capital goods?

Answer 4

Goods that are used to make other good e.g. Machinery

Question 5

What are consumer goods?

Answer 5

Goods that cannot be used to make other goods

Question 6

What is division of labour

Answer 6

When a worker completes a specific task in the production process (Adam Smith)

Question 7

List some advantages of division of labour

Answer 7

• Higher output and better quality
• Greater variety of goods and services
• More opportunities for economies of scale

Question 8

List some disadvantages of division of labour

Answer 8

• Work becomes repetitive which lowers motivation
• Create more structural unemployment as skills might not be transferable
• By producing one type of good through specialisation variety for consumers may decrease

Question 9

List the functions of money

Answer 9

• Medium of exchange
• A measure of value
• A store of value (Can hold its value without expiring)
• Method of deferred payment (Pay for things after transaction has been made, mortgage)

Question 10

What is a free market economy

Answer 10

Where governments leave markets to their pwn devices, so market forces of supply and demand allocate scarce resources

Question 11

List some advantages of a free market economy

Answer 11

• Firms are likely to be efficient because they have to provide goods services demanded by consumers
• The bureaucracy from government is avoided

Question 12

List some disadvantages of a free market economy

Answer 12

• The free market ignores inequality and benefits those with most wealth
• There could be monopolies, which exploits the market by increasing the price
• Public goods arent provided in a free market
• Over consumption of demerit goods (tobacco)

Question 13

What is a command economy

Answer 13

This is where the government allocates ALL scarce resources in an economy (Karl Marx)

Question 14

List some advantages of a command economy

Answer 14

• It might be easier to coordinate resources in times of crisis like wars
• The government can compensate for market failure and ensure everyone can access basic needs
• Inequality in society could be reduced
• Abuse of monopoply power could be prevented

Question 15

List some disadvantages of a command economy

Answer 15

• Governments fail as do markets and they may not be fully informed for what to produce
• They may not meet consumer preferences
• Limits democracy and personal freedom

Question 16

What is a mixed economy

Answer 16

Where the market is controlled by forces of supply and demand but government provide public goods