Nature Of Economics

Question 1

What is the PPP used for and example

Answer 1

To compare different economies
How much your money can buy in terms of a different currency

BIG MAC (homogeneous good)
How much can consumers buy (have to pay) in UK vs another country’s currency

Question 2

What is the meaning of the division of labour

Answer 2

Occurs when workers specialise on very specific tasks

Question 3

Who set out the view that economic growth could be achieved by increasing division of labour

Answer 3

Adam smith

Question 4

What are the advantages of the division of labour + specialisation

Answer 4

Each worker specialised in tasks for which that worker is best suited

Worker only has to be trained in one task - training costs for firm are low

Less time wasted because a worker no longer has to be moved from one task to another

Question 5

What are the disadvantages of the division of labour + specialisation

Answer 5

Monotony + boredom’s for workers which could result in decrease in prod

Loss of skills, workers trained in one particular task have only limited skills - could be a problem if made redundant

A strike by one group of workers could bring the entire production facility to a standstill

Lack of variety - all goods produced on a prod line are identical

Question 6

What are the 4 functions of money

Answer 6

Medium of exchange - enabling people to specialise, exchanging money earned from doing specialist jobs

Store of value - save to buy in future

Measure of value - can asses the value of diff goods by comparing prices

Means of deferred payments - can buy goods and pay for them on credit

Question 7

What is a free market economy

Answer 7

An economic system in which prices are determined by supply + demand with no gov intervention

Question 8

What are the characteristics of a free market

Answer 8

Private ownership of resources
Market forces determined by prices
Producers aim to maximise profits
Consumers aim to max utility (satisfaction)
Resources allocated by price mechanism

Question 9

What is a command economy

Answer 9

One in which resources are allocated by the state

Question 10

Characteristics of command economy

Answer 10

Public state ownership of resources
State determines price
Producers aim to meet production targets set by state
State allocates resources
Greater equality of income + wealth than in a free market economy

Question 11

Who thought capitalism was inherently unstable because workers are exploited by the owners of the factors of production

Answer 11

Karl max

Question 12

What is a mixed economy

Answer 12

Combination of a free market economy + a command economy

Question 13

Advantages of free market economies

Answer 13

Consumer sovereignty - consumer spending decisions determine what is produced

Flexibility - free market system can respond quickly to changes the consumers want

No bureaucracy - officials are not needed to allocate resources

Increased choice for consumers compared to command

Question 14

Disadvantages of free market economies

Answer 14

Inequality - those who own resources are likely to becomes richer than those who don’t own resources

Trade cycles - free market economies may suffer from instability in the form of booms + slumps

Imperfect info - consumers may be unable to make rational choices if they have inadequate info

Externalities

Monopolies

Question 15

Advantages of command economy

Answer 15

Greater equality - state can ensure that everyone can enjoy a min standard of living, no one is rlly rich

No exploitation - privately owned monopolies are unable to exploit workers + consumers

Full employment - state can ensure that all workers are employed

Question 16

What is the substitution effect

Answer 16

When there is a rise in price, the consumer (whose income has remained the same) tends to buy more more of a relatively lower priced good + less of a higher priced one

Question 17

What is the income effect

Answer 17

Where there is a rise in price, consumers will suffer a fall in their real incomes (purchasing power of their money incomes falls)

Question 18

what are renewable and non-renewable resources

Answer 18

renewable = those that can be replaced naturally after use (solar and wind energy)
- likely to be sustainable unless they are consumed more quickly than they can be replaced

non-renewable = those where continued consumption will eventually result in their depletion

Question 19

what is opportunity cost

Answer 19

the next best alternative that is foregone when a choice is made

Question 20

what are capital goods

Answer 20

those required to produce other goods - both capital and consumer goods (machinery and factory buildings)

Question 21

what are consumer goods

Answer 21

those that give satisfaction/ utility to consumers (smartphones, cars, food)

Question 22

what does any point on the PPF imply?

Answer 22

that all resources are fully and efficiently employed
- indicate the maximum productive potential of an economy and that resources are being used efficiently

Question 23

what