Nature of economics

Question 1

What is ceteris paribus?

Answer 1

all things being equal (one variable being investigated, all other variables remain constant)

Question 2

What is a normative statement?

Answer 2

a statement which cannot be supported or refuted because it is based on a value judgement

Question 3

What is a positive statement?

Answer 3

A statement which can be supported or refuted by evidence

Question 4

What is a production possibility frontier used for?

Answer 4

depicts:
- The maximum productive potential of an economy
- Opportunity cost
- Economic growth or decline
- Efficient or inefficient allocation of resources
- possible and unobtainable product

Question 5

What is specialisation?

Answer 5

a system of organisation where economic units such as households or nations are not self-sufficient but concentrate on producing certain goods and services and trading the surplus with others

Question 6

What is division of labour?

Answer 6

Specialisation by workers, who perform different tasks at different stages of production to make a good or service, in co-operation with other workers.

Question 7

Which economist theorist was an advocate for specialisation and division of labour?

Answer 7

Adam Smith

Question 8

What are the advantages of specialisation and division of labour?

Answer 8

• Productive individual workers
• cost-effective to provide workers with specialist tools
• Time saved as workers aren’t constantly changing tasks or moving around
• Workers specialise in tasks which they are best suited to

Question 9

What are the disadvantages of specialisation and division of labour?

Answer 9

• Monotonous work
• Workers feel alienated
• Workers avoiding work ; not productive
• over-reliance and lack of diversification
• breakdown in a part of the chain of production can cause chaos within the system

Question 10

What are the functions of money?

Answer 10

• A medium of exchange
• A measure of value
• A store of value
• A method of deferred payment

Question 11

What is the free market?

Answer 11

When the majority of resources are allocated through markets rather than through government and planning.

Question 12

What economist favoured the free market and why?

Answer 12

Adam smith in the Wealth of nations explained how the invisible hand of the market would allocate resources to everyones advantage

Question 13

What is the mixed economy?

Answer 13

When more resources are allocated through government planning then in free market. There also tends to be a greater redistribution of income through welfare benefits

Question 14

What economist favoured the mixed economy?

Answer 14

Friedrich Hayek

Question 15

What is the command economy?

Answer 15

When most resources are allocated by the state and the market mechanism only plays a small part.

Question 16

What economist favoured the command economy?

Answer 16

Karl Marx

Question 17

What are the advantages of a free market?

Answer 17

• Variety of choice
• Strong incentive for quality and innovation
• Efficiency
• Economic growth

Question 18

What are the disadvantages of a free market?

Answer 18

• Choice has limitations ; income levels
• Markets are usually dominated by a few large producers which manipulate the market through advertising and other forms of exploitation ; not a great emphasis on quality and innovation
• Free markets don’t seem to have higher rates of growth than mixed economies over time
• Distribution of income and wealth
• Exposure to risk