The Economic Problem

Question 1

What are the 2 kinds of Economic Statements?

Answer 1

Positive and Normative Statements

Question 2

What is a positive statement?

Answer 2

A statement that is objective and can be tested and proved by evidence

Question 3

What is a normative statement?

Answer 3

Subjective statements that include value judgements, people’s opinions

Question 4

What is the basic economic problem?

Answer 4

There is a scarce amount of resources available to satisfy people’s wants and needs

Question 5

What are the four factors of production?

Answer 5

Capital
Enterprise
Land
Labour

Question 6

What is labour?

Answer 6

The work done by people

Question 7

What is Capital?

Answer 7

The equipment used to produce goods and services

Question 8

What is enterprise?

Answer 8

The willingness to take a risk in order to make a profit

Question 9

What are the 3 economic agents?

Answer 9

Producers
Consumer
Governments

Question 10

What does a production possibility frontier (PPF) diagram show?

Answer 10

The options that are available when you consider the production of just two types of goods or services

Question 11

What is a trade-off?

Answer 11

When you must choose between two conflicting objectives because you cannot achieve all your objectives at the same time

Question 12

Where on the PPF curve are all factors of production being utilised?

Answer 12

Anywhere on the PPF curve

Question 13

Where on the PPF curve are all factors of production not being fully utilised?

Answer 13

Anywhere on the inside of the PPF curve

Question 14

Where on the PPF curve is it not possible to produce at that level?

Answer 14

Anywhere outside the PPF curve

Question 15

What is an opportunity cost?

Answer 15

The next best alternative that you give up in making a decision

Question 16

What causes the PPF curve to shift outwards?

Answer 16

Increased resources
Improvements to technology or labour

Question 17

What causes the PPF curve to shift inwards?

Answer 17

When fewer total resources are available, such as after a natural disaster or a war

Question 18

What causes the PPF curve to only shift in one direction?

Answer 18

When there is an improvement in resources only for a specific good or service

Question 19

What do markets do?

Answer 19

They are a method of allocating resources

Question 20

What is a free market economy?

Answer 20

An economy that allocates resources based on supply and demand and the price mechanism

Question 21

What are the 2 types of economies?

Answer 21

Free market
Command economy

Question 22

What is a command economy?

Answer 22

When a government controls how resources are allocated

Question 23

What are the pros of a free market economy?

Answer 23

Efficiency - Firms have the incentive to make goods in the most efficient way possible so they can sell at the highest price possible
Entrepreneurship - Rewards for good ideas can bring lots of money, which encourages risk - taking and innovation
Choice - There is a more wide range of choice for a product

Question 24

What are the cons of a free market economy?

Answer 24

Inequalities - Free market economies can lead to differences in income
Non Profitable goods may not be made, such as a firm may not sell a drug to treat a rare drug as it is not profitable.
Monopolies - Successful businesses can become dominant in a market, and could abuse its power

Question 25

What are the pros of a command economy?

Answer 25

Maximise welfare - Government have more control, so they can prevent inequality and redistribute income fairly
Low unemployment - Governments can try to give everyone a job.
Prevent monopolies - Market dominance of monopolies can be avoided

Question 26

What is a mixed economy?

Answer 26

An economy with a private and public sector

Question 27

What are the cons of a command economy?

Answer 27

Poor decision making - Lack of information means government cannot make the best decisions
Restricted choice - Consumers have limited choice, firms will produce what they are told to produce.
Lack of risk - taking and efficiency - Governments don’t need to take risks and be efficient because they don’t need to make a profit

Question 28

What is a margin?

Answer 28

The change in x caused by an increase of unit y

Question 29

What does traditional economic theory assume about economic agent?

Answer 29

That they are utility maximisers and they always act rationally

Question 30

What does behavioural economics look at?

Answer 30

The impact of social, psychological and emotional factors on decision making

Question 31

What causes economic agents to act irrationally?

Answer 31

Imperfect or asymmetric information
Bounded rationality

Question 32

What biases can individuals be influenced by?

Answer 32

Rules of thumb - Such as saying please or thankyou
Anchoring - Placing too much emphasis on on piece of information
Availability bias - Where judgements are made about a product based on a piece of information that can be remembered, but has a low chance of actually happening.
Social norms - Buying and smoking cigarettes just because everyone around you thinks its normal

Question 33

What is choice architecture?

Answer 33

When an individual’s choice is influenced by adapting the way the choice is presented

Question 34

What are the types of choice architecture?

Answer 34

Default choice - People can’t be bothered to change the choice so they leave it, such as opting out as an organ donor.
Framing - The way is presented, making it look more or less desirable
Nudges - Giving people some alternative to choose without removing the freedom of choice