Theme 1: 1.1.1 - 1.1.5 (Nature of economics)

Question 1

What is ceteris paribus used to do?

Answer 1

• Isolate a specific variable
• Analyse relationship between variables without other influencing factors

Question 2

What is law of demand?

Answer 2

All other things equal when price of a good or service decreases the quantity demanded increases when price increases the demand decreases

Question 3

What is a positive statement?

Answer 3

• Statement that is verifiable by data (facts)

-Doesn’t express judgement + opinion

Question 4

What is a positive statement used for?

Answer 4

For economic analysis + predictions

Question 5

What is a normative statement?

Answer 5

• Statement that involves a value or judgement
• Personal beliefs, moral considerations or policy preferences
• Not testable through empirical analysis alone

(ought, should, fair, unfair, better, worse)

Question 6

What is a renewable resource?

Answer 6

• Commodities which can be replaceable over time. Rate of extraction is less than natural rate at which resource renews itself

eg solar, biomass

Question 7

What is a non-renewable resource?

Answer 7

• Cannot be renewed. No mechanisms exist to replenish them

eg oil, coal, natural gas

Question 8

What is a sustainable resource?

Answer 8

• Meeting needs of today, without compromising the needs of future generations

eg solar

Question 9

What is an opportunity cost?

Answer 9

• Cost of any choice measured in terms of next best alternative
• Not always consistent

Question 10

What are the 4 factors of production?

Answer 10

• Capital
• Enterprise
  -Land
  -Labour

(CELL)

Question 11

How do you calculate opportunity cost?

Answer 11

lost output of Y DIVIDED
gained output of X

Question 12

What is a PPF?

Answer 12

graphical representation showing maximum output of 2 goods or services that an economy can produce given its resources and technology

Question 13

What is a capital good?

Answer 13

Goods that are used in the production of other goods such as factories, offices, roads, machines and equipment

Question 14

What is a consumer good?

Answer 14

Goods and services that are used by people to satisfy their wants and needs

Question 15

What causes an outward shift on a PPF?

Answer 15

• Increase in natural resources (land)
• Technological advancements (capital)
• Human capital development : *better educated and more skilled workers
• Investment in capital: *increased investment in physical capital eg infrastructure, machinery, technology enhance economy’s productive capacity

Question 16

what different types of economic efficiency are illustrated by the PPF?

Answer 16

• Productive efficiency
• Allocative efficiency
• Dynamic efficiency

Question 17

What is productive efficiency?

Answer 17

Occurs when an economy is producing goods + services at lowest possible cost, given its existing technology and resources

(achieved when operating on PPF curve)

Question 18

What is allocative efficiency?

Answer 18

Occurs when an economy is producing a mix of goods + services that best aligns with consumer preferences and social needs

represents ideal distribution of resources to maximise overall satisfaction

Question 19

What is dynamic efficiency?

Answer 19

Economy’s ability to grow and expand its production possibilities. Through technological advancements, investments and innovations

Question 20

What are the drawbacks of PPF?

Answer 20

• Only suited towards primary and secondary sector and not tertiary (75% of economy)
• PPF doesn’t deal with demand
• Service output is difficult to measure
• PPF is a simplification of real world - raising questions but doesn’t answer them

Question 21

What is division of labour?

Answer 21

Process whereby the production procedure is broken down into a sequence of stages and workers are assigned to a particular stage

Question 22

What is specialisation?

Answer 22

Process by which individuals, firms or regions concentrate their efforts on producing a narrow range of goods or services in which they have a comparative advantage

Question 23

What is productivity?

Answer 23

measures how much each factor of production (Input) produces over a period of time (usually an hour)

Question 24

How do you calculate productivity?

Answer 24

Total output
DIVIDED
Number of workers

Question 25

What is the difference between division of labour and specialisation?

Answer 25

Division of labour is a general term for focusing on a particular problem

Question 26

Why is Adam Smith relevant in terms of division of labour?

Answer 26

Popularised this theory by publishing it in his wealth of nations

Question 27

What are the potential benefits from specialisation?

Answer 27

• Higher output: * means lower costs which means more wants and needs might be satisfied
• Variety: * consumers have improved access to a greater variety of higher quality products
• Bigger market: * Specialisation and international trade increase the size of the market offering opportunities for economies of scale
• Competition and lower prices: * Increased competition for domestic producers act as an incentive to minimise costs and innovate to remain competitive and keep prices low
• Division of labour: * Raises output per person and reduces costs per unit. “learning by doing” acquiring knowledge/ skills through hands on experience

Question 28

What are the limitations of division of labour?

Answer 28

May eventually reduce efficiency and increase unit costs (diseconomies = average costs increase as you output more)

• Because unrewarding, repetitive work lowers workers motivation and productivity.
  workers take less pride in work so quality suffers.
• If one machine breaks the entire factory stops
• very narrow training may not be able to find alternative jobs as high opportunity cost
• Mass produced goods tend to lack variety

Question 29

What are the 4 functions of money?

Answer 29

• Medium of exchange
• Measure of value
• Deferred payment
• Store of value

Question 30

What are the details about medium of exchange?

Answer 30

• Most important function. Money used to purchase goods and services
• No money in former barter economy which is problematic as requires double coincidence of wants

Question 31

What are the details of measure of value?

Answer 31

• Money acts as a unit of account
• bartering economy problematic as peoples opinions of value of certain items differ greatly

Question 32

What are the details of deferred payment?

Answer 32

• If banks lend money they will only do so if they think that they will be able to buy roughly same amount of goods when paid back
• Business which accepts pay later deals will only happen if its confident that money will have value in future

Question 33

What are the details of store of value?

Answer 33

• People unlikely to spend money immediately. May defer spending because its more convenient to spend later. only do this if they can buy in the future approximately equal to what they can buy today

eg earns £10 they can delay purchase of chairs knowing that their £10 can still get them in the future