Theme 1 - Introduction to Markets and Market Failure (1.1 - The Nature of Economics) Flashcards

1
Q

Describe what is meant by the “Ceteris Paribus” theory. [1]

(Ref - 1.1.1 - Economics as a Social Science)

A

The assumption that, while effects of a change in one variable is measured, all other variables are constant. [1]

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2
Q

Define a normative statement [1]

(Ref - 1.1.1 - Economics as a Social Science)

A

A statement which is a value judgement, so cannot be supported or opposed. [1]

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3
Q

Define a positive statement [1]

(Ref - 1.1.1 - Economics as a Social Science)

A

A statement which can be supported or opposed with evidence. [1]

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4
Q

What is the main theory of the Basic Economic Problem? [2]

(Ref - 1.1.3 - The Economic Problem)

A

Wants are infinite, but resources are scarce. [1]

Therefore, resources must be allocated between competing uses. [1]

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5
Q

Define and give an example of opportunity cost [2]

(Ref - 1.1.3 - The Economic Problem)

A

Opportunity cost is the lost benefits of the next best alternative [1]

e.g. The opportunity cost of buying a house is 2 cars. [1]

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6
Q

State the 4 resources which are commonly known as the factors of production. [4]

(Ref - 1.1.3 - The Economic Problem)

A
  1. Land
  2. Labour
  3. Capital
  4. Entrepreneurship
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7
Q

Describe the 2 types of capital and their properties [4]

(Ref - 1.1.3 - The Economic Problem)

A

Working capital [1] - Stocks of raw materials and manufactured goods waiting to be sold. [1]

Fixed capital [1] - Stocks of offices, factories, machinery etc. [1]

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8
Q

Describe the role of entrepreneurs in an economy/business. [4]

(Ref - 1.1.3 - The Economic Problem)

A

Organising production [1] - Organising the production of goods/services from land, labour and capital [1]

Taking risks [1] - Buying more factors of production with the hopes of more profit. [1]

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9
Q

Describe 2 rewards to the factor of production [2]

(Ref - 1.1.3 - The Economic Problem)

A

Owners of fixed capital can earn profits from renting equipment [1]

Entrepreneurs can earn considerable profit from risking financial capital [1]

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10
Q

What does the Production Possibility Frontier (PPF) show? [1]

A

The maximum potential output of goods of an economy. [1]

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11
Q

If an economy decides to produce more capital goods at the production possibility, what would most likely occur? [1]

(Ref - 1.1.4 - Production Possibility Frontiers)

A

The amount of consumer goods produced decreases. [1]

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12
Q

Describe how the Production Possibility Frontier represents opportunity cost [2]

(Ref - 1.1.4 - Production Possibility Frontiers)

A

Generally, if an economy is working in line with the production possibility, [1] the more capital or consumer good produced [1], the less of the other good is produced [1].

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13
Q

How does the shape of the PPF affect the opportunity cost? [2]

(Ref - 1.1.4 - Production Possibility Frontiers)

A

A straight line PPF shows a constant opportunity cost [1].

A curved line PPF will cause variation in opportunity cost along the PPF. [1]

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14
Q

Define Specialisation [2]

(Ref - 1.1.5 - Specialisation and the Division of Labour)

A

Production of a limited range of goods by an individual/firm [1] in co-operation with others to produce a complete range of goods. [1]

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15
Q

Define Division of Labour [1]

(Ref - 1.1.5 - Specialisation and the Division of Labour)

A

When production is broken down into many separate tasks, as individuals undergo constant repetition. [1]

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16
Q

Explain 2 advantages of division of labour [4]

(Ref - 1.1.5 - Specialisation and the Division of Labour)

A

Increases in workers productivity [1] as workers are undergoing repetition on a specific task, which makes them more skilled in performing it. [1]

Competitive advantages by increasing sales [1] as the end product will be of higher quality, therefore there is more customer loyalty. [1]

17
Q

Explain 2 disadvantages of the division of labour [4]

(Ref - 1.1.5 - Specialisation and the Division of Labour)

A

Decreased productivity in workers [1] which means that the worker will undergo boredom, therefore experience less motivation to work. [1]

Harder to find replacements [1] as if one worker is not present, it would be harder to find a replacement, therefore the economy suffers [1]

18
Q

State the 4 functions which money must fulfill [4]

(Ref - 1.1.5 - Specialisation and the Division of Labour)

A
  1. It must be a medium of exchange [1]
  2. It must be a measure of value [1]
  3. It must be a store of value [1]
  4. It must be a method of payment [1]
19
Q

Describe how a medium of exchange and a measure of value relates to money [2]

(Ref - 1.1.5 - Specialisation and the Division of Labour)

A

(Medium of exchange) - It can be used to buy or sell goods. [1]
(Measure of value) - The amount of money a product costs determines it’s value. [1]

20
Q

Describe how a store of value and a method of payment relates to money [2]

(Ref - 1.1.5 - Specialisation and the Division of Labour)

A

(Store of value) - Money that can hold a fixed worth over time. [1]
(Method of payment) - Wide accepted as a reward for goods/services. [1]

21
Q

Define a Free Market Economy [1]

(Ref - 1.1.6 - Free Market, Mixed, and Command Economies)

A

Scarce resources are allocated entirely by the price mechanism [1]

22
Q

Define a Mixed Market Economy [1]

(Ref - 1.1.6 - Free Market, Mixed, and Command Economies)

A

Scarce resources are allocated partly by price mechanisms and partly by governments [1]

23
Q

Define a Command Economy [1]

(Ref - 1.1.6 - Free Market, Mixed, and Command Economies)

A

Scarce resources are allocated entirely by governments [1]

24
Q

Explain 2 advantages of free markets [4]

(Ref - 1.1.6 - Free Market, Mixed, and Command Economies)

A

Competition/efficiency [1] - Free markets compete for profits. Therefore there is more motive to be more efficient. [1]

Consumer Choice [1] - There will be many businesses competing in an economy, which provides a variety of goods/services for consumers [1]

25
Q

Explain a disadvantage of a Free Market [2]

(Ref - 1.1.6 - Free Market, Mixed, and Command Economies)

A

Inequality [1] - There is no government to provide state benefits. Those on low incomes will remain in poverty. [1]

26
Q

State and explain 2 advantages of Command economies [4]

(Ref - 1.1.6 - Free Market, Mixed, and Command Economies)

A

Guaranteed standard of living [1] - A command economy provides a base standard of living for all consumers. [1]

Solving market failure [1] - Government intervention (e.g. public services) can solve market failures [1]

27
Q

State and explain 2 disadvantages of Command Economies [4]

(Ref - 1.1.6 - Free Market, Mixed, and Command Economies)

A

Low economic growth [1] - Large command economies have little competition, therefore less incentive for productivity causes low economic growth [1]

Low consumer choice. [1] Low number of competing firms produce a small variety of goods. [1]

28
Q

Describe the role of the state in a mixed economy [2]

Give an example of this role in the economy [1]

(Ref - 1.1.6 - Free Market, Mixed, and Command Economies)

A

Intervention in order to solve market failure [1] and provide a minimum standard of living for it’s citizen’s. [1]

E.g. Governments progressively taxing the rich, to redistribute income to people with lower incomes. [1]

29
Q

State 3 key people who had key views on how the economy works and runs [3]

(Ref - 1.1.6 - Free Market, Mixed, and Command Economies)

A

Adam Smith [1]
Karl Marx [1]
Frederick Hayek [1]

30
Q

Describe Adam’s view of the types of economies [2]

(Ref - 1.1.6 - Free Market, Mixed, and Command Economies)

A

He believed that competition between firms was essential [1]
He believed that the price mechanism should be used to maximise business profits and consumer utility [1]

31
Q

Describe Friedrich Hayek’s view of the types of economy [2]

(Ref - 1.1.6 - Free Market, Mixed, and Command Economies)

A

Hayek believed that governments should not intervene in resource allocation (Communism) [1]
Hayek believed that free market economies provided a communication network, leading to efficient resource allocation [1]

32
Q

Describe Karl Marx’s view of the economy [2]

(Ref - 1.1.6 - Free Market, Mixed, and Command Economies)

A

Karl believed that there was large amounts of income inequality in a capitalist system. [1]
Karl believed that capitalism would eventually be replaced by communism [1]