Nature of Economics

Question 1

what does Ceteris Paribus mean?

Answer 1

all things being equal; the assumption that, whilst the effects of a change in one variable are being investigated, all other variables are kept constant.

Question 2

why can we not make scientific experiments in economics?

Answer 2

It is difficult to set up experiments to test hypothesis. Economics measures behavior which is unpredictable.

Question 3

what is a positive statement?

Answer 3

It is a statement which is objective and made without any obvious value judgements or emotions. They can be tested to be proven or disproven and they are often expressed in the form of a hypothesis that can be analyzed and evaluated.

Question 4

what is a normative statement?

Answer 4

Normative statements are subjective statements; they carry value judgements about what ought to be (an opinion). they cannot be proven or disproven.

Question 5

explain the role of value judgements in influencing economic decision making.

Answer 5

this is where economists use positive statements to back up normative statements. Different
economists may make different judgements from the same statistic, for example rising inflation could mean different things.

Question 6

what is the problem of scarcity?

Answer 6

People have finite needs, but infinite wants. Although wants are infinite, resources are finite and limited.

Question 7

how are economies trying to solve these problems?

Answer 7

Economies try to solve the basic economy problem by working out what to produce, how to produce it and for whom production should take place.

Question 8

what is the distinction between renewable and non-renewable resources?

Answer 8

Nonrenewable energy resources, like coal, nuclear, oil, and natural gas, are available in limited supplies whereas renewable resources are replenished naturally and over relatively short periods of time. The five major renewable energy resources are solar, wind, water (hydro), biomass, and geothermal.

Question 9

define opportunity costs.

Answer 9

opportunity cost measures the cost of any choice in terms of the next best alternative foregone.

Question 10

evaluate the importance of opportunity costs to consumers.

Answer 10

Consumers will make choices on how to use their limited income based on what
gives them the greatest level of satisfaction

Question 11

evaluate the importance of opportunity costs to producers.

Answer 11

Producers must choose what to do with

their limited resources and their decisions will be based on profit.

Question 12

evaluate the importance of opportunity costs to the government.

Answer 12

The government
must make decisions on where they should spend their limited tax revenues based
on what will maximise social welfare

Question 13

what are the 4 factors of production?

Answer 13

LAND is all the natural resources used in production.
LABOUR is all the productive human effort, physical, mental, paid or unpaid.
CAPITAL refers to all man-made resources used to produce goods and services in future.
ENTREPENURSHIP is the willingness and ability to the risk of combining the other FOP to make goods/services.

Question 14

what is the Production Possibility Frontier (PPF)?

Answer 14

the PPF shows the maximum potential output of a combination of goods and services an economy can achieve at a given time when all its resources are being used efficiently.

Question 15

what can shift the PPF curve outwards?

Answer 15

increased immigration (raising number of available workers), increase in uni graduates (provides a greater skilled labour force), increase investment in capital machinery, more factories built.

Question 16

what is Specialisation?

Answer 16

Specialisation is the production of a limited range of goods by a company/individual/country which means that trade is essential as it is the only way they are able to access all that they need.

Question 17

Adam Smith and specialistaion and division of labour?

Answer 17

Adam Smith stated the concept of specialisation and the division of labour and showed how it can increase labour productivity (output per worker), allowing firms
to increase efficiency and lower their costs of production.

Question 18

what is the division of labour?

Answer 18

The division of labour is when labour becomes specialised in a particular part of the production process.

Question 19

what are the advantages of specialisation and the division of labour?

Answer 19

division of labour enables labour productivity to be increased . Workers will be quicker, better and more efficient as they are concentrating on one thing and so can quickly develop their skills.

may also lead to a higher quality of goods and services, since workers are more skilled at their jobs

more cost effective to develop specialist tools, improving speed or quality

Workers only need to be trained to do one specific task , rather than many, saving
time and money.

Question 20

what are the disadvantages of specialistaion and the division of labour?

Answer 20

Countries may become over-dependent on one particular export and if this fails their
economy may collapse.

it can make work very boring which will
lead to poor quality of work and people leaving the business.

The workforce do not have wide industrial training and could therefore suffer from
structural unemployment.

Question 21

what are the 4 functions of money?

Answer 21

a medium of exchange
a measure of value
a store of value
a method for deferred payment

Question 22

what is a free market?

Answer 22

In a free market economy, individuals are free to make their own choices and own the
factors of production without government interference.

Question 23

how are resources allocated in the free market?

Answer 23

through the price mechanism

Question 24

why are there no completely free markets in the world today?

Answer 24

the government has to intervene at least to an extent, for example by issuing money, protecting property rights and breaking up monopolies. Without this, the market mechanism could not work

Question 25

what are advantages of the free market economy?

Answer 25

● The system is automatic due to the invisible hand; resources are moved out of
production of a good when people stop wanting it or costs are too high.
● Consumers have freedom of choice, called consumer sovereignty.
● There is high motivation as people know working hard could lead to high potential
rewards, creating conditions where initiative and enterprise flourish.
● There is political freedom.
● Because firms are in competition, they will produce goods at the lowest cost they
can, ensuring productive efficiency.
● In general, freer market economies tend to have higher growth.

Question 26

what are disadvantages of the free market economy?

Answer 26

● There tends to be high levels of inequality, since the rich own more factors of
production and so can grow richer.
● There may be a lack of merit goods (goods considered as intrinsically good) and
little control of demerit goods (intrinsically bad).
● Resources could be wasted on unproductive expenses such as advertising,
switching the factors of production and providing competitive services.
● If competition disappears then there may be monopolies, who charge high prices
and offer low quality of service.
● There is the problem of externalities.

Question 27

what is a command economy?

Answer 27

all factors of production, except labour, is owned by
the state and labour is directed by the state. There is no private property and everyone is
assumed to be selfless, working for a common good.

Question 28

how are resources allocated in a command economy?

Answer 28

carried out by the government, rather than the price mechanism. The government’s allocation may represent the wishes of the consumer and often focuses on the need to expand certain areas of the economy, such as weapon building.

Question 29

what are advantages of a command economy?

Answer 29

● The state provides a minimum standard of living , ensuring no one is extremely
poor as there is less inequality.
● There is less wastage of resources as there is no need for competitive services nor
advertising, which is very expensive.
● Long term planning means that the industry doesn’t have to keep changing and
shifting resources. This is important as some industries may take a number of years
to get established and would fail if planning was short term.
● Standardised products means that they are produced cost effectively.
● As the government, who are generally motivated by the wellbeing of the country,
rather than the companies, who are motivated by profit, decide resource allocation,
objectives other than profit can be followed: merit goods are encouraged and
increased whilst demerit goods aren’t produced.

Question 30

what are disadvantages of a command economy?

Answer 30

● It is impossible for the state to make so many decisions correctly, which could lead to
over or under supply and a waste of resources.
● Decision making will be slow as it has to go through various stages and there could
be an increase in bribery and corruption (an increase in bureaucracy).
● As everyone receives the same wage, there is less motivation and efficiency
because people know that working harder will not increase their standard of living.
● Consumers lose their freedom and it is often led by dictators.

Question 31

what is a mixed economy?

Answer 31

both the free market mechanism and the government planning process allocate a significant amount of the total resources in the country.

Question 32

what are the 3 questions each society must decide?

Answer 32

1) what goods/services to produce?
2) how best to produce?
3) who is to receive goods/services?

Question 33

when might the PPF shift inwards?

Answer 33

1) damaging effect of severe natural disaster like tsunami, flood, persistent drought
2) war or other conflict
3) large scale net migration of people out of a country where there may be high unemployment
4) long term fall in productivity of labour

Question 34

what is resource depreciation?

Answer 34

when factor inputs are used in supplying goods and services and over time deteriorate and become harder to maintain

Question 35

what is resource depletion?

Answer 35

when stock of available resources declines e.g. amount of forestry can be permanently damaged by excessive deforestation.