Theme 1: Nature of Economics

Question 1

Positive statement

Answer 1

Statements that are objective and can be tested with factual evidence.

Question 2

Normative statements

Answer 2

Based on value judgements that are subjective and based on opinion rather than factual evidence.

Question 3

Basic economic problem

Answer 3

Wants are unlimited and resources are finite, so choices have to be made.

Question 4

opportunity cost

Answer 4

The opportunity cost of a choice is the value of the next best alternative forgone.

Question 5

Capital description

Answer 5

goods, machines and buildings

Question 6

Capital reward/incentive

Answer 6

Interest from the investment

Question 7

Entrepreneur description

Answer 7

Someone who takes risks, innovates and uses FOP.

Question 8

Land description

Answer 8

all that is available free of cost from ‘nature’

Question 9

Labour description

Answer 9

Workforce

Question 10

Entrepreneurship reward/incentive

Answer 10

Profit

Question 11

Land reward/incentive

Answer 11

Rent

Question 12

Labour reward/incentive

Answer 12

wages

Question 13

What can PPFs show?

Answer 13

The maximum potential of an economy and the opportunity cost of using scarce resources.

Question 14

The law of diminishing returns

Answer 14

When additional units of a variable input are added to fixed inputs after a certain point, the marginal product of the variable input declines.

Question 15

Capital goods

Answer 15

Goods which can be used to produce other goods eg machinery.

Question 16

Consumer goods

Answer 16

Goods which cannot be used to produce other goods, eg clothing

Question 17

Who came up with the idea of specialisation?

Answer 17

Adam smith

Question 18

Who can achieve specialisation?

Answer 18

Individuals, businesses, regions of countries or countries themself

Question 19

What are 3 advantages of specialisation?

Answer 19

(1) Higher productivity and efficiency – e.g. rising output per person hour
(2) Lower unit costs leading to higher profits
(3) Encourages investment in specific capital – economies of scale

Question 20

What are 3 disadvantages of specialisation?

Answer 20

(1) Risk of worker alienation
(2) Risk of disruptions to production process
(3) Risk of structural unemployment due to occupational immobility

Question 21

What are the 4 functions of money?

Answer 21

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

Question 22

Who are 2 free market economists?

Answer 22

Adam Smith and Friedrich Hayek.

Question 23

What is a free market economy?

Answer 23

Where governments leave markets to their own devices, so the market forces of supply and demand allocate scarce resources. No government intervention.

Question 24

Why is Adam smith a free market economist?

Answer 24

He believes in the invisible hand theory. That prices are determined by the spending votes of consumers and businesses.

Question 25

Why is Friedrich Hayek a free market economist?

Answer 25

He believes that government intervention makes markets worse.

Question 26

Advantages of free markets

Answer 26

increased efficiency, production, and innovation.

Question 27

Disadvantages of free markets

Answer 27

-Ignores inequality and benefits those who have the most money. -Monopolies could exploit the market. -Over consumption of demerit goods. -Public goods aren’t provided and merit goods are underprovided.

Question 28

What is a command economy?

Answer 28

Where governments allocates all of the scarce resources in an economy to where they think there is a greater need.

Question 29

What did Karl Marx believe?

Answer 29

The free market is unstable. Profits created come from the exploitation of labour.

Question 30

Advantages of command economy?

Answer 30

(1) Less inequality

(2) Low unemployment levels

Question 31

Disadvantages of a command economy?

Answer 31

(1) Lack of Competition hinders Innovation

(2) Inefficient - due to gov feeling lack of outside pressure

Question 32

What is a mixed economy?

Answer 32

A balance between command and free market economies.