Theme 1: Nature of Economics

Question 1

What is ceteris paribus?

Answer 1

All other things held constant (in Latin)

Question 2

What type of science is economics?

Answer 2

A social science

Question 3

How do economists make models/theories?

Answer 3

They assume ceteris paribus (meaning that they focus on one factor)

Question 4

What is a positive statement?

Answer 4

An objective and fact-based statement which can be tested using evidence

Question 5

What is a normative statement?

Answer 5

A statement that carries value judgements which are opinions so it cannot be tested

Question 6

Why are value judgements useful?

Answer 6

It plays a huge role in policy making

Question 7

What is the economic problem?

Answer 7

When the human wants are infinite but we are faced with scarce resources

Question 8

What is opportunity cost?

Answer 8

The benefit given up of the next best alternative

Question 9

What is an economy?

Answer 9

Any system that tries to solve the economic problem

Question 10

What are the 3 questions that the government should consider when solving the economic problem?

Answer 10

1) What do we produce?
2) How do we produce it?
3) For whom are we making this stuff for?

Question 11

What does the factors of production mean?

Answer 11

Resources which can be used to produce things

Question 12

Why is money not considered factors of production?

Answer 12

Money can’t be used to produce anything. It can be used to buy factors of production

Question 13

What are the 4 main factors of production?

Answer 13

1) Land
2) Labour
3) Capital
4) Entreprise

Question 14

What are non-renewable resources?

Answer 14

Resources that will not replenish

Question 15

What are renewable resources?

Answer 15

Resources that can replenish over time

Question 16

What is Capital?

Answer 16

The technology or machinery we use to make goods

Question 17

What is Enterprise?

Answer 17

When an entrepreneur combines and organizes land, labour and capital to produce a good

Question 18

What is Land?

Answer 18

All the earth’s natural resources

Question 19

What is labour?

Answer 19

Human workers used to produce a good

Question 20

What does PPF stand for?

Answer 20

Production possibility frontier

Question 21

What is a PPF?

Answer 21

A graph which shows the maximum combination of 2 goods that are fully and efficiently employed

Question 22

What are capital goods?

Answer 22

Goods we use to produce consumer goods

Question 23

What is division of labour?

Answer 23

When a firm splits up its production process into smaller separate tasks, and assigns different workers to each of these tasks

Question 24

What are the 4 pros of division of labour?

Answer 24

+ increase output
+ increases quality
+ reduce unit costs
+ save on training

Question 25

What are the 4 cons of division of labour?

Answer 25

- demotivation - absenteeism - employee turnover - unemployment

Question 26

What are the 4 functions of money?

Answer 26

- standard of deferred payment - unit of account - medium of exchange - store of value

Question 27

What are the 3 pros of specialization in trade?

Answer 27

+ more variety of goods + more output + more trade

Question 28

What are the 3 cons of specialization in trade?

Answer 28

- over-specialization - natural resources depletion - vulnerable

Question 29

What does deferred payment mean?

Answer 29

You can borrow money to buy goods now, and then pay the money back in the future

Question 30

What does unit of account mean?

Answer 30

Money helps us compare prices of different products

Question 31

What does medium of exchange mean?

Answer 31

We can use money to trade goods and services

Question 32

What does store of value mean?

Answer 32

You can store your money and save it for later

Question 33

What do economists mean by ‘utility’?

Answer 33

Happiness

Question 34

Economists assume that consumers:

Answer 34

Want to maximise their utility

Question 35

What’s the formula for profit?

Answer 35

Total revenue - total cost

Question 36

Formula for total revenue?

Answer 36

Price x quantity

Question 37

What is herd behavior?

Answer 37

Following the crowd

Question 38

What is habitual behavior?

Answer 38

When consumers have a certain habit

Question 39

What do economists refer to habitual behavior as?

Answer 39

Status quo bias

Question 40

What does weakness at computation mean?

Answer 40

When consumers miscalculate probabilities and eventually make bad choices

Question 41

What is a free market economy?

Answer 41

An economy in which all resources are allocated by the price mechanism

Question 42

Can you give an example of a free market economy?

Answer 42

Hong Kong in the 1960s

Question 43

What is a command economy?

Answer 43

An economy where all resources are allocated by the government

Question 44

Can you give an example of a command economy?

Answer 44

North Korea

Question 45

What is a mixed economy?

Answer 45

An economy where resources are allocated by the price mechanism and the government

Question 46

What 2 things did Adam smith came up with?

Answer 46

Specialization and Free market economics

Question 47

What was adam smith’s book called?

Answer 47

The wealth of nations

Question 48

What did adam smith talk about in his book specifically about the free market?

Answer 48

Resources are allocated through the invisible hand

Question 49

How are prices adjusted in the free market? (Give 3 ways)

Answer 49

1) rationing 2) signalling 3) incentivising

Question 50

What did adam smith talk about in terms of types of economies? (Give 3 things)

Answer 50

- supported free markets - invisible hand is efficient at allocating resources - the government should leave markets alone

Question 51

Why did Karl Marx disliked the idea of free markets?

Answer 51

It was capitalistic

Question 52

What did Karl Marx support?

Answer 52

Command economies

Question 53

What was Friedrich Hayek’s view on free markets and command economies?

Answer 53

He supported free markets but was critical with command economies

Question 54

Why was Friedrich against command economies?

Answer 54

He thought it was impossible for the government to collect all the information of the market

Question 55

What are the 3 pros of Free Market economies?

Answer 55

+ price mechanism is super efficient + lower prices + Choice

Question 56

What are the 3 cons of free markets?

Answer 56

- Inequality - Monopolies - Market Failures

Question 57

What did Friedrich Hayek say about the price mechanism?

Answer 57

That’s its like a communication network

Question 58

What are the 3 pros of command economies?

Answer 58

+ correct market failure + less inequality + stop monopoly abuse

Question 59

What are the 3 cons of command economies?

Answer 59

- Government Failure - destroy incentives - limited choice