Theme 1: Nature of Economics

Question 1

Define ‘ceteris paribus’

Answer 1

All other things being equal

Question 2

Explain the difference between a ‘want’ and a ‘need’

Answer 2

Need: Things required for survival
Want: Anything that is not a need

Question 3

Define ‘opportunity cost’

Answer 3

The benefit foregone of the next best alternative

Question 4

List the 4 factors of production

Answer 4

Capital
Enterprise
Land
Labour

Question 5

Define a positive statement

Answer 5

A statement which can be proven or disproven with reference to evidence and data

Question 6

Define a normative statement

Answer 6

A value judgement which does not have evidence to certainly prove or disprove it

Question 7

Explain what a Productin Possibility Frontier (PPF) shows

Answer 7

The maximum potential output of an economy when resources are fully and efficiently employed

Question 8

Explain factors that would cause an outward shift in a PPF

Answer 8

Any increase in the quality / quantity of the factors of production (more workers, improved skills, advanced technology, etc…)

Question 8

Explain how a PPF illustrates the concept of opportunity cost

Answer 8

When efficiency is maximised, the only way to increase output of consumer goods is to forefit the output of capital goods, and vice versa

Question 9

Explain the difference between capital goods and consumer goods

Answer 9

Capital goods: used to produce consumer goods
Consumer goods: goods bought by individuals to satisfy wants / needs

Question 10

Explain specialisation

Answer 10

Where workers, firms, or regions focus on producing a limited range of goods or services in order to maximise efficiency

Question 11

Explain the advantages of specialisation and the division of labour in firms

Answer 11

Workers specialise in tasks best suited to their own skillset
Reduces training costs
Allows specialist machinery to be utilised
Less time is wasted from moving between tasks
Increases productivity
Reduces costs of production

Question 12

Explain the disadvantages of specialisation and the division of labour in firms

Answer 12

Monotony and bordeom could reduce productivity
Loss of skill and overspecialising is problematic if there are redundancies
Strikes in one worker group could halt the entire production line
Lack of variety in products

Question 13

Explain the advantages of specialisation in the production of goods and services to trade

Answer 13

Countries increase output of products they are well equipped to supply
Trading allows greater choice and lower prices for products it is not suited to output

Question 14

Explain the disadvantages of specialisation in the production of goods and services to trade

Answer 14

Country may become overdependent on imported goods
If its products are not competitive, it may lead to structural unemployment
Value of imported goods may exceed the value of exported goods

Question 15

Explain the 4 functions of money

Answer 15

1. Medium of exchange - enables proportionate exchange of the price of labour for goods and services
2. Store of value - saving for valuable goods in the future
3. Measure of value - assessment of realtive goods’ values
4. Mean of deferred payment - purchasing goods and paying with credit

Question 16

Explain a command economy structure

Answer 16

There is state ownership and allocation of resources. The state determines price, and dictates producer output targets

Question 17

Explain a free market economy structure

Answer 17

There is private ownership of resources. Market forces determine production. Consumers maximise utility, producers maximise profit. There is little to no government intervention

Question 18

Explain the advantages of a command economy

Answer 18

Greater equality of income and wealth
Macroeconomic stability
External costs / benefits considered with consumption / production
No exploitation of monopoly power
Full employment
Resources allocated to maximise social welfare

Question 19

Explain the disadvantages of a command economy

Answer 19

Inefficiency - no profit motive or competition
Lack of incentive to invest
Restrictions on freedom of choice
Shortages and surpluses
Bureaucracy
No consumer sovereignty - state dictates production
Not flexible to market trends

Question 20

Explain the advantages of a free market

Answer 20

Consumer sovreignty - spending dictates production
Flexibility in response to demand changes
Efficient due to profit motive and competition
Increased choice of goods and services
Economic and political freedom
No resources wasted on bureaucracy

Question 21

Explain the disadvantages of a free market

Answer 21

Inequality
Trade cycles = instability
Imperfect information
Monopolies
Externalities rarely considered
Goods and services that aren’t profitable aren’t produced