Nature of economics

Question 1

What does ceteris paribus mean?

Answer 1

other things being equal

Question 2

What is a positive statement?

Answer 2

a statement about facts

Question 3

What is a normative statement?

Answer 3

a statement that involves an opinion or value judgement

Question 4

What is the fundamental economic problem?

Answer 4

scarcity, ie unlimited wants and limited resources

Question 5

What is a free good?

Answer 5

goods that are not normally regarded as scarce, eg earth’s atmosphere

Question 6

What is an economic good?

Answer 6

a good that is scarce

Question 7

Give two definitions of poverty.

Answer 7

• situation in which individuals lack basic necessities of life
• situation when individuals have low incomes relative to their fellow citizens

Question 8

Define opportunity cost.

Answer 8

value of the next-best alternative forgone

Question 9

Who are the three groups of economic agents?

Answer 9

• consumers
• producers
• government

Question 10

What are the four factors of production?

Answer 10

• labour
• capital
• enterprise
• land

Question 11

Give three examples of capital.

Answer 11

plant and machinery
transport equipment
factory or office buildings

Question 12

What is an entrepreneur?

Answer 12

Someone who organises production and identifies projects to be undertaken, bearing the risk of the activity

Question 13

What does *land *include?

Answer 13

• actual land
• natural resources in form of raw materials

Question 14

What is the reward for labour?

Answer 14

wages and salaries

Question 15

What is the reward for capital?

Answer 15

interest

Question 16

What is the reward for enterprise?

Answer 16

profit

Question 17

What is the reward for land?

Answer 17

rent

Question 18

What are renewable resources?

Answer 18

natural resources that can be replenished, eg forest that can be replanted or solar energy

Question 19

What are non-renewable resources?

Answer 19

natural resources that once used cannot be replenished, eg coal or oil

Question 20

What are the three key economic questions?

Answer 20

WHAT goods and services should be produced?
HOW should the productive resources be used to produce those goods and services?
FOR WHOM, ie how should they be allocated for consumption?

Question 21

What does a production possibility frontier show?

Answer 21

maximum combination of goods or services that can be produced with a given set of resources in a given period

Question 22

Why might PPF be curved?

Answer 22

Because some factors of production better suited to producing one thing than another

Question 23

What are capital goods?

Answer 23

goods used as part of the production process, eg machinery or buildings

Question 24

What are consumer goods?

Answer 24

goods produced for present use

Question 25

What is *potential economic growth*?

Answer 25

an expansion in the productive capacity of the economy

Question 26

What does *Gross Domestic Product* measure?

Answer 26

economic activity carried out in an economy over a given period

Question 27

Define *division of labour*.

Answer 27

a process whereby production procedure is broken down into a sequence of stages and workers are assigned to a particular stage

Question 28

Why can division of labour increase production?

Answer 28

* workers become skilled in performing specialised tasks, therefore become more efficient * don't lose time moving between tasks

Question 29

Give two disadvantages of division of labour.

Answer 29

* boredom leading to high staff turnover * inflexibility eg if worker is sick

Question 30

Define a *market*.

Answer 30

a set of arrangements that allows transactions to take place

Question 31

Name the four key functions of money.

Answer 31

* a medium of exchange [more flexible than barter] * a store of value [for future transactions] * a unit of account [so can compare value] * a method of deferred payment

Question 32

Define a *free market economy*.

Answer 32

an economy in which market forces are allowed to guide the allocation of resources

Question 33

Define *command economy*.

Answer 33

an economy in which decisions on resource allocation are guided by the state

Question 34

What is the main disadvantage of a free market economy?

Answer 34

outcome may not be good for society, eg inequality between groups and insufficient protection for the poor

Question 35

What is the main disadvantage of a command economy?

Answer 35

inefficiency