Theme 1 - The Nature Of Economics (Autumn term 1 - yr 12)

Question 1

What is economics?

Answer 1

Economic studies the choices people take under the conditions of scarcity and uncertainty.

Question 2

Why is economics a social science?

Answer 2

Economists can never be sure of the way in which people and businesses will respond to the changing circumstances around them.

Question 3

What is the tradition economic theory?

Answer 3

It argues that all parties are out for themselves.

Question 4

What is the behavioural economic theory? + examples

Answer 4

It challenges the assumption of the rationality in our choices.

Examples: ethics - buying products that have not been tested on animals or are vegan. Or buying because you are used to it.

Question 5

What is microeconomics?

Answer 5

The study if economies at the level of an individual firm, industry or consume/household.

Data is collected by studying how prices and wages are determined in markets; how consumers decide what to buy; how businesses determine what is produced and how it is supplied.

It also involves analysing the effects of government regulations, subsidies, taxes and maximum and minimum prices and quantities of goods and supplies.

Question 6

Define ceteris paribus.

Answer 6

It is a Latin phrase meaning ‘all other things being equal’. It is used in economics when we focus on changes in one variable while holding other influences constant.

Question 7

What is a positive statement?

Answer 7

They are objective statements that can be tested, amended or rejected by referring to available evidence.

False statements can still be positive.

Example: the falling price of crude oil on world market will lead to a fall in demand for fuel efficient cars.

Question 8

What is a normative statement?

Answer 8

They are subjective statements, i.e. they carry value judgement about what ought to be.
Most economic decisions are influence by value judgments, which vary from person to person, resulting in fierce debate between political parties.

Example: an increase in house prices is good for the economy.

Question 9

What is the fundamental economic problem?

Answer 9

Scarcity and that there are only finite resources so business need to make decisions on what to spend their money on, leading to opportunities costs.

Question 10

What are opportunity costs? + example

Answer 10

They measure the value of an option/ choice you make when you forgo the other option (next-best alternative). In other words they measure the cost of a choice that you could have made, especially when the original choice you made wasn’t the best.

Example: the opportunity cost of the government spending £10 billion on the NHS, when that £10 billion could have been spent on other parts of the economy like education.

Question 11

What are economics agents, who are they and what are their rationale?

Answer 11

Economic agents: are the decision makers on how much to spend that effects the economies of households, firms and the government.
Households/consumers: want to buy the best product for the cheapest price.
Firms/producers: want to maximise profits by producing at lowest costs and selling at high prices
Governments: they wish to improve the economics and social welfare of citizens. Therefore, all are run as efficiently as possible.

Question 12

What are the factors of production?

Answer 12

Land: natural resources available for production
Labour: the human input - workforce and their skills that can be used in the production process
Enterprise: the ideas from entrepreneurs. They organise the factors of production and take risks
Capital: the money invested into the production.

Question 13

Explain the differences between renewable and non-renewable resource.

Answer 13

Renewable: materials that come from a reliable, sustainable source that can be reproduced or never run out like timber or sunlight
Non-renewable: materials that come from finite resources that cannot be replenished. Also if there is a higher demand than supply, like fuel.

Question 14

What does a PPF (Production Possibility frontier) show?

Answer 14

A PPF shows the alternative combinations of two goods or services attainable when all resources are fully and efficiently employed.
It should be able to show the opportunity costs.
Normally it is between consumer and capital goods.

Question 15

Why would the PPF curve shift inwards?

Answer 15

Unemployment - recession
Finite resources
War/civil war
Damaging effects of a natural disaster like a tsunami

Question 16

Why would a PPF curve move outwards?

Answer 16

Skills uplift
Higher productivity through increased output or input
Increase in stock capital and labour
Innovation and invention of new products - improved production = boost in efficiency.
Discovery/extraction of natural resources.

Question 17

What causes the PPF curve to shift both ways?

Answer 17

International trade (e.g. one country is better at making cars bonnets than another)
Migration (brain drain)

Question 18

What is a market?

Answer 18

A set of arrangements that allows transactions to take place, it does not have to be a physical place, as long as it brings potential buyers and sellers together.

Question 19

What is a coordination problem?

Answer 19

Because if the different organisations (economic agents) are all taking decisions, the way it fits together it hard.

Question 20

What are capital goods?

Answer 20

Goods that are used to make consumer goods + services.

Capital inputs include fixed plant and machinery, hardware, software, new factories and other buildings.

Question 21

What are consumer goods + services?

Answer 21

Good and services that satisfy our needs and wants directly.

There are sub-divisions.

Question 22

What are consumer durables?

Answer 22

Products that provide a steady flow of satisfaction/utility over their working life or over 1 year, e.g phones.

Question 23

What are consumer non-durables?

Answer 23

Products that are used up in the act of consumption e.g. deink8ng coffee or using electricity.

Question 24

What are consumer services?

Answer 24

Using a service e.g. going to the dry cleaners or having a hair cut.

Question 25

What are the sectors of production?

Answer 25

Primary: extraction if raw materials and food is grown - agriculture or oil extraction
Secondary: manufacturing, where raw materials are transformed into goods - motor industry
Tertiary sectors: produces services such as transport and leisure.

Question 26

What is a market economy? + adv and disadv

Answer 26

An economy in which market forces are allowed to guide the allocation of resources.
Adv: goods that are in demand will be produced and those that are not, will not be produced
Disadv: certain parts of societies will be unable to work, e.g. the elderly, as firms will not want their skills and there is no government support so they will be left to poverty.

Question 27

What is a command economy? + adv and disadv

Answer 27

An economy in which decisions on resource allocation are guided by the state.
Adv: prevents monopolies from being established
Disadv: there are restrictions on freedom. People cannot specialise in certain jobs and are told what to do by the government. Black markets are increased.

Question 28

What is a mixed economy? + adv and disadv

Answer 28

An economy in which resources are allocated partly through price signals and partly on the basis of intervention by the state.
Adv: both the government and individual van make economic decisions that guide the economy
Disadv: the government still has more control than the individual and can choose where to intervene like in quality of life.