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

Entrepreneur description

Answer 6

Someone who takes risks, innovates and uses FOP.

Question 7

Labour description

Answer 7

Workforce

Question 8

Entrepreneurship reward/incentive

Answer 8

Profit

Question 9

Land reward/incentive

Answer 9

Rent

Question 10

Labour reward/incentive

Answer 10

wages

Question 11

What can PPFs show?

Answer 11

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

Question 12

The law of diminishing returns

Answer 12

The law of diminishing returns states that as more units of a variable factor (e.g. labour) are added to a fixed factor (e.g. capital or land), the marginal product of the variable factor will eventually decline, assuming all other factors remain constant.

Question 13

Capital goods

Answer 13

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

Question 14

Consumer goods

Answer 14

Goods which are demanded for by consumers for consumtption, e.g. clothes

Question 15

Who came up with the idea of specialisation?

Answer 15

Adam smith

Question 16

Who can achieve specialisation?

Answer 16

Individuals, businesses, regions of countries or countries themself

Question 17

What are 4 advantages of specialisation in labour?

Answer 17

1. Better quality goods and services
2. Better labour productivity
3. Saves time and money, training workers at 1 specific task

Question 18

What are 2 disadvantages of specialisation in labour?

Answer 18

1. Employees start to become bored of that specific task
   2.Structural employment: employees are trained at 1 job, hence if unemployed, they may not be able to find an employer looking for that specific skill

Question 19

What are the 4 functions of money?

Answer 19

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

Question 20

Who are 2 free market economists?

Answer 20

Adam Smith and Friedrich Hayek.

Question 21

What is a free market economy?

Answer 21

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

Question 22

Why is Adam smith a free market economist?

Answer 22

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

Question 23

Why is Friedrich Hayek a free market economist?

Answer 23

He believes that government intervention makes markets worse.

Question 24

4 Advantages of free markets

Answer 24

1. Consumer soverignity- consumers have the freedom of choice on what to buy.
2. productive efficiency
3. Higher growth.
4. High motivation- people know that working hard will allow them to succeed.

Question 25

Disadvantages of free markets

Answer 25

1.Ignores inequality and benefits those who have the most money. 2.Monopolies could exploit the market. 3.Over consumption of demerit goods. 4.Public goods aren't provided. 5.merit goods are underprovided.

Question 26

What is a command economy?

Answer 26

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

Question 27

What did Karl Marx believe?

Answer 27

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

Question 28

Advantages of command economy?

Answer 28

0. Long term planning. 1. Less inequality as gov provides a min standard of living so no one starves. 2. Less wastage of resources, nen need for ads and competitive services. 4. Welfare over profits

Question 29

Disadvantages of a command economy?

Answer 29

1. All decisions arent made correctly as they dont have all of the information leading to over/undersupply and a waste of resources. 2. Slow decision making. 3. Everyone recieves the same wage, less motivation and efficeincy 4. consumers lose freedom

Question 30

What is a mixed economy?

Answer 30

A balance between command and free market economies.

Question 31

What are the Advantages of specialations of production of goods and services

Answer 31

Theory of comparative advantage where a country specialises in production of a good/service they have a low opportunity for, increasing output.

Question 32

What are the disadvantages of specialisation of production of goods/services?

Answer 32

1. Overdependance in a specific good/service, e.g uk overfinancing. 2.Non renewable energy sources like oil can run out which can be devastating to the c.a balance 3. High Interdepencdance: could be a problem if trade is suddenly stopped e.g war.

Question 33

What is adam smith known for?

Answer 33

Division of labour and specialisation

Question 34

What is friedrich hayek champion of?

Answer 34

A champion of free trade and no goverment intervention.