theme 1- 1.1 the nature of economics

Question 1

what is economics concerned with?

Answer 1

the ways in which societies organise scare resources in order to satisfy people’s wants

Question 2

what are economic models based on?

Answer 2

assumptions (e.g. the consumer is rational)

Question 3

ceteris paribus

Answer 3

assumption that all other things are equal

Question 4

inability of economics to make scientific experiments

Answer 4

economics is a social science based on people- one policy may not be able to be universally applied- not generalisable

Question 5

positive statements

Answer 5

based on facts- objective

Question 6

normative statements

Answer 6

based on value judgements- subjective, used to influence policymaking e.g. to reduce a budget deficit, a left wing economist suggests taxing the rich, while a right wing may suggest cutting welfare spending

Question 7

economic problem- scarcity

Answer 7

resources are finite, but wants are infinite- must allocate resources to meet demand

Question 8

factors of production

Answer 8

the resources of a country/firm

Question 9

FoP- land

Answer 9

all natural resources , raw materials, fertility of soil, resources found in the sea

Question 10

FoP- labour

Answer 10

those involved in the production of goods and services- all human effort, physical or mental

Question 11

FoP- capital

Answer 11

any man-made aid to production e.g. factories, offices, machinery, IT equipment

Question 12

FoP- enterprise

Answer 12

performs 2 essential functions-
1. bringing together the other factors of production
2. taking the risks involved in production

Question 13

renewable resources

Answer 13

those that can be replaced naturally after use e.g. solar energy

Question 14

non-renewable resources

Answer 14

those which continued consumption will eventually result in their depletion e.g. oil

Question 15

opportunity cost

Answer 15

scarcity = choice of allocation has to be made, each choice has an opportunity cost of the next best alternative

Question 16

economic goods

Answer 16

created from resources in limited supply and so are scarce- therefore command a price

Question 17

free goods

Answer 17

unlimited in supply, consumption does not limit consumption from others, opportunity cost = 0 e.g. sunlight

Question 18

PPFs

Answer 18

shows combinations of 2 goods that could be produced by an economy if all its resources are employed fully and efficiently

Question 19

assumptions involved in PPFs

Answer 19

that the economy can either produce capital or consumer goods

Question 20

what do points on the curve indicate

Answer 20

the maximum productive potential of an economy and resources are being used efficiently

Question 21

what do points inside of the curve indicate

Answer 21

resources not being allocated efficiently

Question 22

what do points outside the curve indicate

Answer 22

unobtainable production only possible with economic growth

Question 23

PPFs and marginal analysis

Answer 23

involves consideration of the impact that small changes have on the current situation
-> a marginal increase in output of capital goods means some consumer goods must be sacrificed (opportunity cost)

Question 24

PPFs and economic growth

Answer 24

a shift to the right indicates economic growth, to left indicates economic decline

Question 25

factors causing an outward shift of the PPF

Answer 25

• discovery of more natural resources
• new methods of production that increases productivity
• improvements in education/training -> productivity of the workforce
• increase in the size of the workforce e.g. migration, high retirement age

Question 26

factors causing an inward shift of the PPF

Answer 26

• natural disasters
• depletion of natural resources
• reduction in size of the workforce
• recession -> loss of productive capacity

Question 27

what do movements along the curve indicate?

Answer 27

a reallocation of resources increase/decrease production of either good

Question 28

division of labour

Answer 28

occurs when workers specialise on very specific tasks

Question 29

adam smith

Answer 29

had the view that economic growth could be achieved by increasing the division of labour
e.g. each worker becomes an expert, increasing productivity

Question 30

advantages of specialisation

Answer 30

• had a task they become an expert in
• low training costs- only learn 1 task
• less time wasted from moving between tasks
• enables line methods to be employed increasing productivity and decreasing costs of production

Question 31

disadvantages of specialisation

Answer 31

• alienation and boredom- decreases productivity
• loss of skills as workers are limited to 1 skill
• strikes could bring production to a standstill
• lack of variety in goods

Question 32

advantages of specialisation for trade

Answer 32

• increased output
• greater choice
• lower prices

Question 33

disadvantages of specialisation for trade

Answer 33

• overdependency on imported goods and services
• consistent current account imbalance

Question 34

limits to the division of labour

Answer 34

• size of the market
• type of product (can’t be a unique product)
• transport costs (if high large scale production + division of labour may not be possible)

Question 35

functions of money

Answer 35

• medium of exchange (money in return for labour)
• store of value (save to buy goods in future)
• measure of value (assess value of a good by comparing prices)
• means of deferred payments (buy and pay on credit)

Question 36

free market economies- main characteristics

Answer 36

• private ownership of resources
• market forces e.g. supply and demand decide prices
• producers aim to maximise profits
• consumers aim to maximise utility
• resources allocated by the price mechanism

Question 37

free market economies- economists

Answer 37

adam smith and friedrich hayek

Question 38

command economy- characteristics

Answer 38

• public ownership of resources
• state determines price
• producers aim to meet the targets set by the state
• state allocates resources
• greater equality of income and wealth than a free market

Question 39

command economy- economists

Answer 39

karl marx

Question 40

mixed economy

Answer 40

mix of free market and command
some resources are allocated by price mechanism, while others are allocated by the state
the state provides public goods and services e.g. streetlamps, roads, welfare, education, defence