The Nature Of Economics- Theme 1

Question 1

What is economics?

Answer 1

The allocation of scarce resources to provide for unlimited human wants and needs

Question 2

Define ceteris paribus

Answer 2

All other things being equal

Question 3

What are positive economic statements?

Answer 3

Statements based on facts which can be tested as true or false and are value-free

Question 4

What are normative Economic statements ?

Answer 4

Statements based on value judgement which cannot be tested as true or false

Question 5

What should you do when explaining why statement is normative

Answer 5

Explain that normative statements are normally characterised by value-laden words such as unfair, fair, better, worse, should and ought

Question 6

What is the economic problem

Answer 6

Scarcity. That there are finite resources compared to infinite human wants, so choices have to be made about how to use those resources.

Question 7

What is an opportunity cost?

Answer 7

The value of the next best alternative forgone

Question 8

What is a renewable resource?

Answer 8

A resource whose stock level can be replenished naturally over a period of time

Question 9

Why could there be a decline renewable resources ?

Answer 9

If the resources are consumed at a faster rate than the environment can replenish them

Question 10

What is a non-renewable resource

Answer 10

A resource whose stock level decreases over time as it’s consumed

Question 11

How can you reduce the rate of the decline of non-renewable resources?

Answer 11

Through recycling and the development of substitutes

Question 12

What does a production possibility frontier (PPF) show

Answer 12

The maximum potential output of a combination of goods an economy can achieve when all its resources are fully and efficiently employed, given the current level of technology

Question 13

Define consumer good

Answer 13

A good that directly provides utility to consumers. It’s wanted for the satisfaction it gives.

Question 14

Define capital good

Answer 14

A good that’s used to produce consumer goods or services.

Question 15

How can economic growth be shown on the PPF ?

Answer 15

By an outward shift

Question 16

How is efficiency of resources shown on the PPF?

Answer 16

if the economy is located at any point on the PPF, there is an efficient allocation of resources, since none are being wasted. If the economy is located within its PPF, there is an inefficient allocation of resources as not all are being used.

Question 17

What might cause the PPF to shift inwards

Answer 17

A decrease in the potential output of an economy which may be caused by war or a natural disaster where many resources are destroyed.

Question 18

Define specialisation

Answer 18

When an individual, firm, region or country concentrates on the production of a limited range of goods and services

Question 19

What are the advantages of specialisation?

Answer 19

Increases productivity and living standards across the world

Question 20

Define division of labour

Answer 20

The specialisation of workers on specific tasks in the production process

Question 21

Advantages of the division of labour

Answer 21

• a worker becoming highly skilled in a task due to repetition
• no time is wasted in moving from one job to another
• capital equipment can be used continuously in production
• less time required to train workers for specific tasks

Question 22

Disadvantage of the division of labour

Answer 22

• repetition creates monotony and boredom. There could be a high turnover of staff, leading to increased recruitment and selection costs
• breaking down production into different tasks makes it easier to replace skilled workers with machines, leading to structural unemployment
• specialisation creates interdependence in production. If one group of workers goes on strike, it could halt production across the whole industry

Question 23

Define money

Answer 23

Anything that is generally acceptable in the payment of a good or service, or of a debt.

Question 24

What are the four functions of money

Answer 24

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

Question 25

Describe medium of exchange as a function of money

Answer 25

It enables the buying and selling of products, making exchange easier. Money eliminates the need for barter.

Question 26

Describe measure of value as a function of money

Answer 26

It enables a value to be placed on products so they can be bought and sold with ease. Money creates a unit of measure that enables comparisons between the relative values of products.

Question 27

Describe store of value as a function of money

Answer 27

It’s a convenient way of storing wealth so that it can be spent at a later date. Money will tend to hold its value in the short term as long as inflation remains low

Question 28

Describe method of deferred payment as a function of money

Answer 28

It enables borrowing and lending. This means someone can borrow money in order to buy a product rather than waiting until enough funds have been saved. A price is usually set for borrowing and lending- this is known as the rate of interest

Question 29

Define free market economy

Answer 29

Where all resources are privately owned and allocated via the price mechanism. There is minimal government intervention

Question 30

What are the advantages of a free market economy?

Answer 30

• Because firms are in competition, they will produce goods at the lowest cost they can, ensuring ​productive efficiency​. Competition also means firms try to produce goods and services that consumers demand. This means price mechanism will equate consumer demand with producer supply.
• better quality products as a result of competition
• greater choice of goods and services as well as employment opportunities

Question 31

What are the disadvantages of a free market economy?

Answer 31

• monopolies may form as a result of competition in some markets; rival firms get taken over or go out of business.
• distribution of wealth and income is very unequal and lack of welfare support may lead to people living in absolute poverty
• erratic swings in the business cycle may cause high inflation during an economic boom and high unemployment during an economic slump

Question 32

Define command economy

Answer 32

An economy where there is public ownership of resources and these are allocated by the government.

Question 33

What are the advantages of a command economy?

Answer 33

• cooperation between firms can lead to high level of output.
• there is a reduction in inequality compared to free market economies, since the government controls the wages of all workers
• the government has more control of the economy and so there are smaller swings in the business cycle, leading to less unemployment and inflation

Question 34

What are the disadvantages of a command economy?

Answer 34

• price mechanism is unable to operate and so markets may suffer from shortages (excess demand) and surpluses (excess supply), leading to an inefficient allocation of resources
• lack of competition between firms leads to inefficiency, and so productivity is low
• there is less choice of goods and services for consumers to select from; labour may also be directed into specific jobs with no choice depending on their location

Question 35

Define mixed economy

Answer 35

An economy where some resources are owned and allocated by the private sector and some by the public sector.