Nature of Economics

Question 1

Ceteris Paribus

Answer 1

All other things remaining equal

Question 2

Why is economics different to natural science

Answer 2

Other variables in the world that economic data relies on are always changing so setting up experiments or certain conclusions are difficult

Question 3

Positive Statement

Answer 3

Statement that is objective and factual can be proven and disproven, doesn’t contain opinion

Question 4

Normative Statements

Answer 4

Subjective and based on opinion

Question 5

Basic economic problem

Answer 5

scarcity, resources are finite and limited but consumer want are infinite, allocation of these resources

Question 6

value judgments

Answer 6

Evaluative statement of how good or bad something is

Question 7

Opportunity costs

Answer 7

cost of choosing one thing over the next best option that was given up

Question 8

Consumer opportunity cost

Answer 8

choosing how to spend income

Question 9

Producer opportunity cost

Answer 9

choose what to do with limited resources in order to earn the most profit

Question 10

Government opportunity cost

Answer 10

Government chooses to spend limited funds and tax revenue to maximise social welfare

Question 11

PPF what does it show

Answer 11

maximum possible combination of capital and consumer goods an economy can produce with its current resources and tech

Question 12

what is the x and y of the ppf

Answer 12

y = capital goods
x = consumer goods

Question 13

What is PPF good for being able to work out

Answer 13

opportunity cost

Question 14

When is the PPF curve shifted

Answer 14

When capacity in the economy grows, LRAS shifts right, when when quantity or quality of CELL increases

Question 15

When is an economy on the the ppf curve

Answer 15

When it is producing at its most efficient possible at that time

Question 16

What does movement along the PPF indicate

Answer 16

Change in combination of goods produced, capital or consumer

Question 17

consumer goods

Answer 17

Goods created for and demanded by households

Question 18

capital goods

Answer 18

goods produced in order to aid production of consumer goods

Question 19

division of labour

Answer 19

When labour becomes specialised to a specific part of the production process

Question 20

How can an economy maximise production

Answer 20

ensure CELL is being used as efficiently as possible

Question 21

Advantages of division of labour

Answer 21

• Increases labour producitivy as workers are better and quicker at their role
• Higher quality goods
• Reduces time wastage by switching between roles
• reduces time and money spent on training for multiple roles

Question 22

Disadvantages of division of labour

Answer 22

• Makes the job very boring resulting in poor quality and productivity
• reduction in craftsmanship with standardised products
• One bad process affects all others badly
• ## lack of occupational mobility as workers are trained at one thing causing structural unemployment

Question 23

Advantages of specialising in production of goods and services for trade

Answer 23

• comparative advantage theory leads to greater global output as countries produce the product they have the smallest opportunity cost to produce
• greater productivity
• lower costs
• increased global trade
• more variety

Question 24

Disadvantages of specialising in production of goods and services for trade

Answer 24

• Overdependence on one product and industry increasing susceptibility to supply and demand changes
• countries that specialise in non renewable resources aren’t sustainable
• ## Over interdependence will cause problems when trade is interrupted

Question 25

What are the four functions of money

Answer 25

Medium of exchange - used to but and sell goods
Measure of value - Compare value of two goods, put value on labour
Store of value - Can be kept for a long time and keep its value
Method for deferred payment - Can allow for debts and credit to be created

Question 26

Free market economy

Answer 26

consumer and producers make decisions on what is produced with motives of satisfaction and profit by allowing the price mechanism to work without government interference

Question 27

Who believed in the free market, laissez faire, invisible hand, competitive market approach

Answer 27

Adam smith

Question 28

Who else supported free markets arguing that consumers know best what they need, and that state controlled economies act in the interests of very few disregarding personal freedom

Answer 28

Friedrech Hayek

Question 29

Advantages of free market

Answer 29

• Automatic due to the invisible hand
• consumer sovereignty
• High motivation to work hard and earn more
• political freedom
• Entrepreneurial prospects
• firms are in competition so efficient
• Higher growth

Question 30

Disadvantages of free market

Answer 30

• High levels of inequality
• Lack of merit goods and little control of demerit goods
• problem of externalities isnt accounted for
• higher prices as uncontrolled monopolies are present

Question 31

Who owns all factors of production in free market

Answer 31

The individuals

Question 32

Who owns all factors of production in command economy

Answer 32

The state own all bar labour

Question 33

Command economy

Answer 33

State controlled price mechanism and services and companies are state controlled, no private property, products and wages standardised

Question 34

Who was the main believer in command economies as they didn’t exploit workers and promote huge class inequalities

Answer 34

Karl Marx

Question 35

Advantages of command economies

Answer 35

• minimum standard of living
• Less resource wastage as no need for advertisement
• Allows long term planning
• standardised products produced cost effectively
• merit goods are produced maximising social welfare

Question 36

Disadvantages of command economies

Answer 36

• State can’t make every decision correctly so will under over supply some things
• increase in bribery and corruption
• consumers lose freedom as usually dictorial
• less motivation to work hard as all wage is the same
• less efficient production

Question 37

Mixed economy

Answer 37

Compromise between the two extremes

Question 38

Governments role in a mixed economy

Answer 38

• Creating frameworks and rules - preventing monopolies protect customers and property rights
• Produce and provide merit goods whilst outlawing demerit ones
• redistribute income with tax promoting equality
• stabilise economy by managing demand with fiscal and monetary policy