Nature of economics

Question 1

Definition of economics

Answer 1

The allocation of scare resources to provide for unlimited human wants.

Question 2

Why do economists create models?

Answer 2

To understand how consumers and producers behave

Question 3

What are some assumptions that economists make when making economic models for consumers and producers?

Answer 3

Consumers want to maximise satisfaction. Producers want to maximise profits.

Question 4

Ceteris paribus definition

Answer 4

All other things being equal

Question 5

What are positive economics statements?

Answer 5

Statements based on facts which can be tested as true or false and are value free.

Question 6

What are normative economic statements?

Answer 6

Statements based on value judgements which cannot be tested as true or false. Depends of the values held by individuals.

Question 7

What is the economic problem?

Answer 7

The economic problem is scarcity. There are finite resources compared to unlimited human wants so choices have to be made about how to use those resources.

Question 8

What is opportunity cost?

Answer 8

The value of the next best alternative foregone.

Question 9

What is marginal analysis?

Answer 9

The effects of producing or consuming one extra unit of a good or service.

Question 10

4 factors of production

Answer 10

Land, labour, capital and enterprise

Question 11

What are renewable resources?

Answer 11

a resource whose stock level can be replenished naturally over a period of time.

Question 12

what is a non-renewable resource

Answer 12

a resource whose stock level decreases over time as it is consumed

Question 13

What does a production possibility frontier show?

Answer 13

Maximum potential level of output for two goods or services that an economy can achieve when all its resources are fully and efficiently employed.

Question 14

What is a consumer good?

Answer 14

a consumer good is a good that directly provides utlity to consumers. it is wanted for the satisfaction it gives

Question 15

What is a capital good?

Answer 15

a good that is used to produce consumer goods or services

Question 16

If the economy is located on the production possibility frontier what can be concluded?

Answer 16

Efficient allocation of resources since none are being wasted.

Question 17

If the economy is located outside the production possibility frontier what can be concluded?

Answer 17

The output combination is unobtainable given the availability of current resources and technology.

Question 18

If the economy is located on the inside of the production possibility frontier curve what can be concluded?

Answer 18

Inefficient allocation of resources as not all are being used.

Question 19

What does an outward shift of a production possibility curve mean?

Answer 19

Country has increased its production potential.

Question 20

What can cause an outward shift of a production possibility curve?

Answer 20

Increase in quantity or quality of resources. Expansion of higher education and training schemes. Increase in investment. Development of technology.

Question 21

What can cause an inward shift of a production possibility curve?

Answer 21

War, natural disaster.

Question 22

what is specialisation

Answer 22

when an individual, firm, region or country concentrates on the production of limited range of goods and services

Question 23

what are some advantages of specialisation

Answer 23

It increase productivity and living standards across the world. It increase global output.7

Question 24

what are disadvantages of specialisation

Answer 24

If demand for a good provided by a country falls it can lead to significant structural unemployment. Depletion of resources if specialised good is in high demand. Country may lose out on trade deals for specialised goods if exchange rates don’t favour them.

Question 25

what is division of labour

Answer 25

the specialisation of workers on individual tasks in the production process to increase efficiency.

Question 26

advantages of division of labour

Answer 26

1.increase in labour productivity
2.increase in the efficiency of resources
3.increase in the quality of output

Question 27

disadvantages of division of labour

Answer 27

1. repetition creates monotony and boredom
2. easier to replace skilled workers with machines, leading to structural unemployment
3. specialisation creates interdependence in production

Question 28

what is money

Answer 28

anything that is generally acceptable in the payment of goods or services, or of a debt

Question 29

what are the 4 functions of money

Answer 29

1.medium of exchange
2.measure of value
3.store of value
4.method of deferred payment

Question 30

what does medium of exchange mean?

Answer 30

makes buying and selling easier. makes exchange easier. eliminates need for barter

Question 31

what does measure of value mean?

Answer 31

enables a value to be placed on products. allows comparison between relative values of products.

Question 32

what does store of value mean?

Answer 32

convenient way of storing wealth so that it can be spent at a later date. money tends to hold its value in the short term as long as inflation remains low.

Question 33

what is the term used to set price for borrowing and lending

Answer 33

rate of interest

Question 33

what does method of deferred payment mean

Answer 33

enables borrowing and lending.

Question 34

characteristics of a free market economy

Answer 34

all resources are allocated by the price mechanism. no government intervention.

Question 35

characteristics of a mixed economy

Answer 35

some resources are allocated by the price mechanism and some by the government.

Question 36

characteristics of a command economy

Answer 36

all resources are allocated by the government. no price mechanism.

Question 37

what sectors are usually provided by government

Answer 37

education, healthcare, defense, law and order

Question 38

advantages of a free market economy

Answer 38

economic efficiency and lower prices.
higher quality of products
greater choice of products offered
financial incentives for both workers and entrepreneurs

Question 39

how does the free market result in economic efficiency and lower prices?

Answer 39

competition results in firms keeping production costs low in order to sell goods and services at a competitive price. -productive efficiency

competition also results in firms providing goods and services that consumers demand - allocative efficiency

Question 40

how does the free market result in higher quality of products

Answer 40

firms continuously will try to improve the quality of their products to gain an advantage over their rivals.

Question 41

how does the free market economy provide financial incentives

Answer 41

entrepreneurs have an incentive to invest and take risks in order to earn a profit
workers have an incentive to work hard to gain more earnings

Question 42

disadvantages of free market economy

Answer 42

monopolies may form as rival firms can get taken over or go out of business

can cause unequal distribution of income and lack of welfare support may lead to people living in absolute poverty

external costs and benefits are sometimes ignored which for example can cause damage to the environment

production of demerit goods with a lack of regulation can negatively impact consumers

lack of merit goods. these can be healthcare and education for example. less healthcare and education investment can result in more disease and lower literacy rates

erratic swings in business cycle can cause high inflation during economic boom and high unemployment in economic slump.

Question 43

advantages of a command economy

Answer 43

cooperation between firms can potentially lead to a higher level of output
reduction in inequality since government controls wages of all workers
government can limit external costs resulting in less damage to environment or consumers
government can fund provision of merit goods such as education which yield high external benefits
government has more control of economy leading to less unemployment and inflation

Question 44

disadvantages of a command economy

Answer 44

inefficient allocation of resources as price mechanism can’t operate and so you can get excess demand or excess supply.

lack of competition leads to inefficiency and so productivity is low.

can lead to poor quality products as emphasis is put on output rather than quality

less consumer choice for goods and services

workers may be directed to specific jobs due to lack of different goods being produced

labour has little incentive to work and entrepreneurs have little incentive to take risks in order to develop new goods/services

economic growth and living standards grow slower.

Question 45

why is government intervention important

Answer 45

to provide merit goods such as education and healthcare

to provide public goods such as defense