Nature Of Economies (Y12 & Y13)

Question 1

social science?

Answer 1

study of how people make decisions and interact

Question 2

ceteris paribus?

Answer 2

‘all other things held at constant’

Question 3

economics as a social science?

Answer 3

It looks at the way in which other people interact and how they behave with eachother.

-difficult to test.
- because many different factors can change

Question 4

economic methodology? And the method

Answer 4

Scientific method:
1. observation
2. forming a hypothesis
3. predictions
4.test predictions

If hypothesis survives the test , supported by evidence its becomes a theory. If not we’re back to stage 2 where need to form a hypothesis

Question 5

positive statement?

Answer 5

• statement that can be tested using evidence
• objective
• fact based

Question 6

normative statement?

Answer 6

statement that is value judgement (an opinion)
cannot be tested

Question 7

role in policy making:

Answer 7

policy decisions –> value judgements
e.g David Cameron received data predictions of how increasing uni fees would save tax payers billions each year , his final decision was normative (is it better to keep it low or high) in the end he said it would be best to help the tax payer.

Question 8

moral and political judgements:

Answer 8

value judgements - these are influenced by moral and political judgement

Question 9

renewable and non-renewable energy resources:

Answer 9

renewable = can replenish (solar , wind and tidal)
non- renewable = will not replenish ( coal , gas and natural gas)

sometimes it depends on behaviour.

Question 10

the economic problem:

Answer 10

We have:
- infinite wants
- finite or scarce resources
(so we have to make choices)

Question 11

opportunity cost:

Answer 11

benefit given up of the next best alternative

Question 12

what is an economy?

Answer 12

any system that tries to solve the economic problem or the problem of scarcity

Question 13

the 3 questions:

Answer 13

what?
how?
for whom?

Question 14

factors of production:

Answer 14

• land
• labour
• capital
• enterprise

Question 15

productivity?

Answer 15

how much output is produced by a factor of production

labour productivity:
how much output is produced by labour in a given period of time.

Question 16

productive efficiency?

Answer 16

is when the economy producing along its PPFs
using all resources to full potential

Question 17

allocative efficiency?

Answer 17

is when the economy maximises welfare

(we can’t see allocative efficiency)

Question 18

shifts in PPFs

Answer 18

Economic growth caused by an
increase in factors of production
available in an economy can cause
the PPC to shift outwards and to the
right.

This will result in an increase in the
productive capacity of the economy
from PPC to PPC1 i.e. greater output
can be produced.

Question 19

consumer goods?

Answer 19

goods we consume

Question 20

capital goods?

Answer 20

used to produce consumer goods

Question 21

productivity?

Answer 21

how much output is produced by a factor of production.

Question 22

labour productivity?

Answer 22

how much output is produced by labour in a given period time

Question 23

specialisation and division of labour:

Answer 23

• split of production process
• smaller separate tasks
• assign different workers to each task

which allows specialisation.

Question 24

money:

Answer 24

medium of exchange
we can sell stuff we specialise in good or service —> sell for money—> spend on other goods.

Question 25

pros of specialisation and division of labour

Answer 25

- increases output - increases quantity - reduce unit costs - saves on training

Question 26

cons of specialisation and division of labour

Answer 26

- demotivation - absenteeism (Absence of an employee from work without a valid reasons) - employee turnover (rate at which employees leave a company and need to be replaced by new hires)

Question 27

specialisation in trade:

Answer 27

- division of labour within firms - also specialisation across countries - trade between countries

Question 28

pros on specialisation in trade:

Answer 28

-more variety - more output - more trade

Question 29

cons on specialisation in trade:

Answer 29

- over-specialisation (when an individual becomes high skilled or knowledgeable in a very specific area) - natural resource depletion (Excessive use of essential resources which can lead to environmental problems and scarcity of these resources in the future) - vulnerable

Question 30

what is PPFs?

Answer 30

production possibility frontier (PPF): - shows us all the possible combinations of two goods we can produce - use our resources efficiently outside ppf: - impossible inside ppf: - productively inefficient on the line - productively efficient

Question 31

opportunity cost?

Answer 31

the benefit given up of the next best alternative.

Question 32

productive efficiency?

Answer 32

when an economy producing along its ppf

Question 33

allocative efficiency?

Answer 33

when an economy maximises welfare

Question 34

economic growth?

Answer 34

an expansion in the productive capacity of an economy.

Question 35

2 main reasons economic growth tends to happen:

Answer 35

- increasing the quantity of factors of production (e.g more farming = more land) - increase in quality of factors of production ( farming = better technology)

Question 36

marginal utility?

Answer 36

the additional utility /satisfaction / benefit from consuming one extra unit. as more utility is consumed , marginal utility decreases and total utility increases

Question 37

total utility?

Answer 37

the overall satisfaction obtained from consuming a certain quantity of a good or service.

Question 38

diminishing marginal utility?

Answer 38

as you consume more of a good the extra satisfaction/utility/benefit from an additional until will decrease.

Question 39

behavioural economics?

Answer 39

a field that blends psychology and economics to understand how people actually make decisions and behave in economic contexts to explain why humans don't act rationally. -provides more accurate model on how humans behave

Question 40

reasons for irrational behaviour:

Answer 40

- bounded rationality - bounded self control - altruism - social norms = cognitive biases - anchoring bias = cognitive biases - availability bias = cognitive biases - rules of thumb = cognitive biases

Question 41

bounded rationality?

Answer 41

Bounded rationality refers to our limited mental processing - our limited brain power when it comes to decision making. we cant make the choice to maximise utility which then leads to wrong decisions / irrational decisions.

Question 42

bounded self control?

Answer 42

our limited ability to control ourselves Bounded self-control refers to our limited ability to control ourselves which can explain why we make irrational decisions (decisions which don’t maximise our utility.)

Question 43

altruism?

Answer 43

Altruism is when we care about the utility of other people. motivated by fairness Altruistic behaviour involves doing something nice for somebody else, such as buying them a gift. This tends to increase the other person’s utility but it decreases the consumer’s own utility. This is an irrational decision because it involves increasing someone else’s utility and rather than maximising your own utility.

Question 44

irrational behaviour?

Answer 44

occurs when consumers make decisions which do not maximise their utility.

Question 45

social norms - cognitive bias?

Answer 45

the behaviour of the people around us

Question 46

anchoring bias - cognitive bias?

Answer 46

that consumers are very influenced by the first piece of information that they see.

Question 47

availability bias - cognitive bias?

Answer 47

a cognitive bias when consumers are influenced too much by the most recent piece of information they see (smoking kills on a cigarette packet)

Question 48

rules of thumb - cognitive bias?

Answer 48

mental shortcuts which consumers use to make decisions quickly.

Question 49

choice architecture?

Answer 49

describes the layout of our available choices i.e. the way that a choice is presented to you. The idea of choice architecture is the process of designing or laying out the available choices, usually to persuade people to make a certain choice.

Question 50

nudge?

Answer 50

a change in choice architecture (the layout of choices), which does not restrict choices but does try to influence people’s behaviour.

Question 51

choice architect?

Answer 51

s someone who designs the choice architecture.

Question 52

framing?

Answer 52

the way a choice is presented to you. The way that the choice is presented can have an important impact on the way that people respond to that choice.

Question 53

default choice?

Answer 53

when someone is automatically enrolled into a certain choice.

Question 54

restricted choice?

Answer 54

when consumers are still able to choose between options, but the difficulty of choosing some options is much higher than others.

Question 55

mandated choice?

Answer 55

when people are legally required to make a choice.

Question 56

e.g behavioural economics evaluation Use a theory from behavioural economics to evaluate the argument that the sugar tax will lead to a reduction in the consumption of unhealthy foods.

Answer 56

However, this may not be the case because humans have bounded self-control. This means that we have a limited ability to control ourselves. For instance, the sugar tax attempts to reduce consumption of unhealthy foods by increasing its price. However, despite the rise in price, bounded self-control will mean that people still won’t be able to resist the temptation to consume lots of sugary treats. As a consequence, even though the price may rise, people may act irrationally by continuing to consume unhealthy food in similar amounts. As a result, bounded self-control would suggest that a sugar tax may not reduce the consumption of unhealthy food.

Question 57

behavioural economics policies:

Answer 57

- choice architectures and nudges - framing - restricted choices (e.g in 2007 smoking was illegal inside) - reduce consumption of demerit good - increase consumption of merit goods

Question 58

opt out policy