Theme 1 - Nature of economics 1.1

Question 1

What is meant by scarcity?

Answer 1

A finite amount of a resource

Question 2

What is meant by resources?

Answer 2

Resources are the scarce amount of goods that a society has to give individuals

Question 3

What is meant by opportunity cost?

Answer 3

The next best alternative foregone.

Question 4

What is meant by ceteris paribus?

Answer 4

Ceteris paribus says that ‘all other things kept equal’.

Question 5

What is a positive statement?

Answer 5

An objective statement made with value judgements. They can be tested to be proven or disproven.

Question 6

What is a normative statement?

Answer 6

Subjective statement that is made based upon opinions so it cannot be tested to be proven or disproven.

Question 7

What is a value judgement and why are they used?

Answer 7

Value judgements is when a normative statement is backed up with a positive statement. They are used to influence economic decision and judgements for making policies.

Question 8

What ensures that a renewable resource remains replenishable?

Answer 8

If the rate of consumption is lower than the rate of replenishment.

Question 9

What is the relation between opportunity cost and scarce resources?

Answer 9

Opportunity cost means when 2 products cannot be produced at the same time due to scarce amount of resources and so decisions have to be made in order to allocate these resources efficiently in order to satisfy consumer wants and needs.

Question 10

What do the 3 economic agents want to maximise.

Answer 10

Consumer - satisfaction of goods and services bought
Firms - aim to maximise profits
Govt - aim to maximise the welfare of the economy

Question 11

The 4 factors of production and the receivables gained from each of them

Answer 11

Land - Rent
Labour (human capital) - wages
Capital - interest
Entrepreneurship - dividends

Question 12

What is a PPF? What does it show?

Answer 12

It shows the maximum combinations of capital and consumer goods that an economy can produce with its scarce resources.

Question 13

How is an inefficient/ unobtainable allocation of resources shown on a PPF?

Answer 13

inefficient = Under the PPF curve
Unobtainable = Over the PPF curve.

Question 14

What influences a movement along a PPF curve?

Answer 14

A change in price levels

Question 15

What influences a shift along a PPF curve?

Answer 15

more of each good or less of each good

Question 16

What is a capital good?

Answer 16

A capital good is a good used in the production of producing consumer goods.

Question 17

What is a consumer good?

Answer 17

Consumer goods are demanded and bought by households and individuals.

Question 18

What is meant by specialisation?

Answer 18

Is the production of a limited range of goods by a company therefore trade is essential

Question 19

What is meant by the division of labour?

Answer 19

When labour becomes specialised in a particular part of production

Question 20

What was Adam Smiths theory about specialisation and the division of labour?

Answer 20

He stated that these concepts were able to increase productivity (the visiting of a pin factory)

Question 21

Advantages of specialisation and division of labour

Answer 21

Labour productivity increases, higher quality of goods and services, time is not wasted.

Question 22

One advanatge of a firm using division of labour (2 marks)

Answer 22

One advantage to a firm is that they only need to train each worker for one specific role [K] so this will result in lower costs to the firm [An]

Question 23

Disadvantages of specialisation and division of labour

Answer 23

Monotonous work (inefficient work), no wide industrial training meaning structural unemployment.
Expensive - training

Question 24

Advantages specialising in production of G + S for trade

Answer 24

Theory of comparative meaning countries should produce G + S based on where they have low opportunity cost in order to boost the global economy.

Question 25

Disadvantages of specialising in production of G + S for trade

Answer 25

If a country is over-dependant on one export then the entire economy collapses if that product fails.
High interdependence is bad if trade is prevented.
Increased specialisation if wages fall.

Question 26

what is a Free market economy?

Answer 26

A free market economy is where there is little to no government intervention and where consumers and producers interact to supply and demand goods and services through the price mechanism

Question 27

What is a command economy?

Answer 27

A command economy is when governments allocate resources to firms. Consumers and producers have no say in what is produced more of.

Question 28

What are the advantages of a free market economy?

Answer 28

• Consumer and producer satisfaction as all needs are being met
• Efficient allocation of resources so little waste
• Economic growth because consumers gaining what they demand and producers selling higher quantities

Question 29

What are the disadvantages of a free market economy?

Answer 29

• Inequality (workers are exploited for low wages)
• No control over demerit goods and negative externalities (goods that harm third parties)
• Poor quality because firms are profit maximisers so will decrease cost of production as they know their goods are demanded

Question 30

What are the advantages of a command economy?

Answer 30

• Less inequality because workers aren’t being exploited (less capitalism)
• control over demerit goods and negative externalities
• Less unemployment because govt provide jobs and set wages

Question 31

What are the disadvantages of a command economy?

Answer 31

• Consumers and producers less satisfied because needs and wants are not always being met
• less competition because firms are allocating resources so prices may remained fixed
• Inefficient allocation of resources means waste

Question 32

What is Adams smiths theory about free market economies?

Answer 32

The invisible hand states that the price mechanism is responsible for the allocation of resources in an economy. He therefore likes free market economies because he believed that this was resources are more efficiently allocated

Question 33

What was Fredrich Hayek’s theory about free market economies?

Answer 33

Hayek was an advocate for free market economies because he believed that governments didn’t have enough knowledge about consumers and producers to be able to allocate resources efficiently.

Question 34

What was Karl Marx’s theory about command economies?

Answer 34

Karl Marx didn’t like that command economies were for capitalism. This meant that he hated that firms exploited workers for low wages so they could gain high profits. This increased inequality gaps as the rich remained rich and the poor remained poor.