T1.1 Introduction to Markets and Market failure - Economics

Question 1

Define assumptions

Answer 1

Assumptions are initial or prior conditions made before a micro or macroeconomic analysis is built

exam tip: try to note down at least one assumption when writing analysis in exam answers

Question 2

What is the basic economic problem?

Answer 2

The basic economic problem is when there are infinite demands on finite resources

Question 3

Define opportunity cost

Answer 3

Opportunity costs is the value of the next best alternative forgone

Question 4

What does ceteris paribus mean?

Answer 4

All other things considered equal

Question 5

What are positive statements?

Answer 5

Positive statements are objective statements that can be tested and evaluated based on empirical evidence

Question 6

What are normative statements?

Answer 6

They carry one or more value judgements about what ought to be
Involves political considerations as well as positive analysis

Question 7

Define Production Possibility Frontiers (PPFs)

Answer 7

PPFs is a line to show possible combinations of goods an economy can produce with all resources being fully employed

Question 8

Factors of production:

Answer 8

Land - natural resources
Labour - workers
Capital - man made resources
Enterprise - ideas, risk taking, management

Question 9

Define renewable resource

Answer 9

A resource is renewable because it has the ability to replenish its stock level

Question 10

Define sustainable

Answer 10

A sustainable resource is renewable resource that is managed in such a way that it does replenish its stock level

Question 11

Define productive effciency

Answer 11

Productive effciency are all resources being fully utilised (any point on the PPF)

Question 12

Define allocative efficiency

Answer 12

It is the economy producing what consumers wants

Question 13

What happens when combinations of goods are lying inside the PPF?

Answer 13

This means that there are unemployed resources or when resources are used ineffciently

Question 14

If combinations are beyond the PPF are they attainable or unattainable?

Answer 14

Unattainable

Question 15

Define resource depletion

Answer 15

This is a decline in the total stock of resources available

Question 16

Define resource depreciation

Answer 16

This is when the productivity/ effciency of resources diminishes with age and also with repeated use when producing goods and services

Question 17

What is specialisation?

Answer 17

Specialisation is when we concentrate on producing a specific task or product

Question 18

What is Division of labour?

Answer 18

Division of labour is the breaking down of a production process of a good/service into smaller tasks, each of which is carried out by a different person

Question 19

State one drawback of specialisation

Answer 19

Unrewarding, repetitive work that requires little skill can lower motivation and eventually cause lower productivity

Question 20

+ve of DoL

Answer 20

Higher productivity levels
Lower unit costs (so higher profits)
Easier to train workers
-The narrower range of tasks, the less to teach

Question 21

-ve of DoL

Answer 21

Mass- produced standardised goods lack variety for consumers
Increased risk of production being shut down to a missing worker

Question 22

What is an economic system?

Answer 22

An economic system refers to the way resources are allocated

Question 23

What is a command economy?

Answer 23

Command economies are where resources are allocated by state (central planning)

Question 24

What is a free market economy?

Answer 24

Free market economy are where resources are allocated by forces of demand and supply

Question 25

Who advocated for the free economy?

Answer 25

Friedrich Hayek

Question 26

Who advocated for the command economy?

Answer 26

Karl Marx

Question 27

Who advocated for the mixed economy?

Answer 27

John Maynard Keynes & Adam Smith

Question 28

What is the role of value judgments?

Answer 28

Value judgements help us explain why economic policies vary from place to place, and time to time

Question 29

What are the main functions of money?

Answer 29

A medium of exchange - can be used to buy things
Store of value - an asset that holds its value over time
Unit of account - allows pricing
Standard deferred payment - this refers to the expressing the value of the debt

Question 30

What are the 6 key characteristics of money?

Answer 30

Durable
Portable
Divisible
Hard to counterfeit
Accepted
Valuable

Question 31

ve of Free market economies

Answer 31

Some members of society may be unable to work e.g the elderly, those with disabilities
Goods that are bad for us may be over produced e.g cigarettes & alcohol
Because of the profit motive, firms may be tempted to cut costs, and so exploit labour

Question 31

+ve of command economies

Answer 31

Low level of inequality
Low level of unemployment
Fast to get a large scale infrastructure built

Question 32

-ve of command economies

Answer 32

Bureaucratic costs of central planning of resources
Low productivity and weak incentives lead to rising losses for many state-owned businesess

Question 33

Causes of an outward shift in the PPF

Answer 33

Higher productivity
Better management of factor inputs
Increase in the stock of capital and labour supply

Question 34

What does a straight line on the PPF mean?

Answer 34

A straight line on the PPF is an indication of perfect substitutability of resources such as labour or capital

Question 35

Causes of an inward shift in the PPF

Answer 35

Human capital flight
Capital scrapping
Natural disasters
Deforestation

Question 36

What are capital goods?

Answer 36

They are used to make other goods

Question 37

What are consumer goods?

Answer 37

They are used to fulfil wants and needs