Theme 1.1

Question 1

What is Ceteris Paribus?

Answer 1

When making a economic model, you must assume all other aspects apart from what you investigate remain equal.

Question 2

What is a positive economic statement?

Answer 2

A statement which can be tested as true or false with evidence. They are value free.

Question 3

What is a normative economic statement?

Answer 3

Based on value judgements. These statements cannot be tested as true or false. Can often include words like ‘ought’ or ‘should’.

Question 4

What is the definition of economics?

Answer 4

The allocation of scarce recourses to provide for unlimited human wants.

Question 5

What is the definition of opportunity cost?

Answer 5

The benefit lost from the next best alternative.

Question 6

What is scarcity?

Answer 6

There are finite resources compared to infinite human wants, so choice must be made about how to use those resources.

Question 7

What phrase should you use instead of saying ‘opinion’?

Answer 7

Value judgement

Question 8

What type of science is economics?

Answer 8

A social science, this means it is concerned with the study of human behaviour.

Question 9

How are economic models judged?

Answer 9

Their ability to explain and predict consumer and producer behaviour, even when the assumptions of these models are unrealistic.

Question 10

Why is the ceteris paribus assumption essential in economic modelling?

Answer 10

Economics isn’t like normal science, they cannot test models in scientifically controlled lab conditions.

Question 11

What sort of factors must we assume remain equal (ceteris paribus)?

Answer 11

Wage given to workers
Wealth of the area (consumer income)
No tax increase/decrease
Time of year (certain businesses will make more revenue at different times of year)

Question 12

What are the roles of value judgements in economic decision making?

Answer 12

Value judgements have a major influence on economic decision making for consumers and producers. E.g a cautious individual would save money in their pension fund rather than increasing current spending on goods.

They also play a role in government policy making, e.g cut income tax rather than increase expenditure on healthcare provision.

Question 13

Why do we have economic problems?

Answer 13

There are infinite wants for finite supplies. The supplies which experience the scarcity can vary on a countries wealth. E.g some could have insufficient food, where as others simply want more technological devices.

Question 14

What is a free good?

Answer 14

A good which isn’t a scarce recourse.

Free goods don’t use up any factor inputs when supplied. They have zero opportunity cost (the marginal cost of supplying and extra unit is zero).

Question 15

What is a economic good?

Answer 15

This is a resource which is scarce.

Question 16

What is marginal analysis?

Answer 16

The effects of producing or consuming one extra unit of a good or service. Both may give benefits and costs.

This is often used when looking at the opportunity cost.

Question 17

What is a renewable recourse?

Answer 17

This is a resource who’s stock level can be replenished naturally over a period of time. For example: solar energy, tidal energy, winder power, timber and soil. However, their availability may decline over time if they’re consumed at a faster rate than they’re replenished.

Question 18

What is a non-renewable recourse?

Answer 18

A recourse who’s stock level decreases over time as it is consumed. These include fossil fuels such as coal, oil and gas. It is ,however, possible to reduce the rate of decline through recycling, development of new substitutes and new technology.

Question 19

What are some real life ways used to ration scarce goods?

Answer 19

Market price
Consumer income
Assessment of need
Education level (for a job)
Age (elderly got the COVID vaccine first)
Gender
Nationality

Question 20

What are the 4 factors of production?

Answer 20

Land
Labour
Capital
Enterprise

Question 21

How is Land used for production and what is the reward of the factor?

Answer 21

Natural resources available for production, the reward is rental income to the owners of the land.

Question 22

How is Labour used for production and what is the reward of the factor?

Answer 22

The human input into the production process, the reward is the wage and salaries from being employed.

Question 23

How is enterprise used in production and what is the reward of the factor?

Answer 23

Entrepreneurs organise factors of production and take risks. The reward for this is profit for the entrepreneur.

Question 24

How is capital used in production and what is the reward of the factor?

Answer 24

Goods used in the supply of other products (e.g machines). The reward is interest from savings as well as dividends from shares.

Question 25

What affects the rate of extraction of finite resources?

Answer 25

Current market price. Businesses with rights to extract these resources will do so when prices are high to make more profit.

Question 26

Why do economists use models?

Answer 26

They are theoretical concepts which look at how different variables interact. They will use qualitative info and statistical data to underpin the theoretical thought process. Models often use empirical (real-world) info.

Question 27

What is a consumer good?

Answer 27

A good, such as a bar of chocolate, that directly provides utility to consumers. It is wanted for the satisfaction it gives.

Question 28

What is a capital good?

Answer 28

This is a good that is used to produce consumer goods or services, such as a machine which helps to make chocolate bars. It is wanted not for its own sake, but rather the consumer goods and services it can produce.

Question 29

What does PPF stand for?

Answer 29

Production possibility frontier.

Question 30

What does a PPF show?

Answer 30

The maximum potential level of output for two goods or services that an economy can achieve when all its recourses are fully efficiently employed, given the level of technology available. It can be used to illustrate scarcity and opportunity cost.

Question 31

What does it mean if the economy is located on the PPF?

Answer 31

The production of resources is efficient. A firm or economy is using all of its recourses it has available to it.

Question 32

What does it mean if the economy lies below the PPF line?

Answer 32

The economy has inefficient production. It can utilise more of its recourses which currently isn’t employed in order to increase the rate of productivity.

Question 33

Why can the economy not be beyond the PPF as it currently is?

Answer 33

It isn’t possible due produce more than the maximum it can given the current availability of recourses and level of technology. To actually increase the production possibility past the PPF, the economy would have to go under economic growth.
This is infeasible productivity.

Question 34

What does the curved shape show on a PPF?

Answer 34

A typical PPF is bowed towards the origin (in a concave shape). This means that when more of one good is produced, a constantly increasing amount of the other good is lost. In other words, the opportunity cost rises. The reason for this is that not all recourses are as efficient as other recourses in the production of both goods. The concept of diminishing returns sets in.

Question 35

How is outward shift shown on a PPF?

Answer 35

The PPF will shift further outwards on the graph.

Question 36

What are some of the possible causes of economic growth?

Answer 36

An increase in the quality and/or quantity of resources.
The expansion of further and higher education and government training schemes.
An increase in investment and the development of new technology.

Question 37

What does is mean if the PPF is linear (a straight line)?

Answer 37

The opportunity cost remains the same the whole way along the PPF. This means all resources are just as efficient at creating one good as they are the other good.

Question 38

Why may the PPF in some occasions shift inwards towards the origin?

Answer 38

This is because there is a decrease in the potential output of an economy. Two reasons for this could be wars or natural disasters, where recourses may end up being destroyed.

Question 39

What are diminishing returns?

Answer 39

Thus is the idea that on a PPF the marginal (extra) output of a good diminishes (gets lower) as more factor resources are allocated to it.

Question 40

What is the difference between productive efficiency and allocative efficiency?

Answer 40

Productive efficiency simply means that an economy is working on the PPF line and they are using all the factor resources and supplies available to them. However, even if you’re productively efficient, it might not be good allocative efficiency. Allocative efficiency means being at the right point along the PPF in order to maximise production in the ratio which the economy requires.

Question 41

What are examples of capital goods?

Answer 41

Fixed plant
Machinery
Hardware
Software
New factories
Other buildings

Question 42

What are the subdivisions of consumer goods and services?

Answer 42

Consumer durables: Products that provide a steady flow of satisfaction over their working life (e.g a washing machine)
Consumer non-durables: products that are used up in the act of consumption (drinking a coffee or turning up the heating )
Consumer services: a hair cut or ticket to a show

Question 43

What are some causes of an outward shift on a PPF?

Answer 43

-Higher productivity/efficiency
-Better management of factor inputs
-Increase in the stock of capital and labour supply
-Innovation and invention of new products and recourses
-Discovery/extraction of new natural resources

Question 44

What can cause the PPF to shift inwards?

Answer 44

-Damaging effects of natural disasters such as a drought.
- Destruction/loss of factor inputs caused by civil war and other forms of conflict that may last for many years
- Trend decline in the productivity of inputs. Perhaps causes by a persistent recession which causes net investment to be negative.
- Large scale net outward labour migration. E.g due to an economic depression that leads to a brain drain of skilled workers.

Question 45

What is production?

Answer 45

Production is a measure of the value of the output of goods and services e.g. measured by national GDP or an index of production in specific industry such as car manufacturing

Question 46

What is productivity?

Answer 46

This is a measure of the efficiency of factors of production. It can be measured by either output per person employed or by output per person per hour.

Question 47

Does an increase in production always lead to an increase in productivity?

Answer 47

No, an increase in production does not always automatically mean an increase in productivity. It depends on how many factor inputs have been employed to supply the extra output.

Question 48

What is specialisation?

Answer 48

This occurs when individuals, firms, regions or countries concentrate on producing specific goods or services.

Question 49

What is division of labour?

Answer 49

Division of labour is a type of specialisation where production is split into different tasks and specific people are allocated to each task.

Question 50

What are the advantages of the division of labour?

Answer 50

Increase in labour productivity, which leads to higher living standards. Each worker can become highly skilled in a task due to repetition.
Increase in efficiency of recourses, helping to reduce the cost per unit of output. Partly because capital equipment can be used continuously along a production line. In addition, no time is wasted moving workers from one task to another.
Increase in quality as each worker can specialise in a job that suits his or her skills.
Training costs reduced if workers only trained to perform limited tasks.

Question 51

What are the disadvantages in the division of labour?

Answer 51

-Repetition creates monotony and boredom. There could be a high turnover of staff, leading to increased recruitment and selection costs.
- Breaking down into different tasks makes it easier for skilled workers to be replaced with machines, causing structural unemployment.
-Specialisation creates interdependence in production, if one group of workers goes on strike, the whole production could come to a halt.

Question 52

What does specialisation allow firms/regions/countries to do?

Answer 52

-Reduce unit costs through bulk buying.
-Improve quality through better training and skills
- Use technology to increase speed and improve accuracy.
- Firms will specialise in order to benefit from specialisation, as they can trade with other economic agents that specialise in different fields.
The PPF will shift outwards.

Question 53

What are the wider gains of specialisation?

Answer 53

-Higher output (more efficient and quality can also be improved)
-Variety in products for consumers
-A bigger market, specialisation and global trade increase the size of the market
-Competition and lower prices: increased competition gives firms an incentive to lower the cost of their products, which maximises customer welfare.

Question 54

What are the issues with overspecialisation?

Answer 54

-Regional unemployment
- Breakdown in the production process can cause chaos.
- Countries become less self sufficient. This is a big issue during things like COVID and wars.

Question 55

What areas of production does the UK specialise in?

Answer 55

Medicinal drugs, aircraft manufacturers, tourism and mainly financial and business services.

Question 56

What is money?

Answer 56

Money is anything that is generally accepted in the payment of a good or a service, or of a debt.

Question 57

What did the development of money lead to?

Answer 57

It enables specialisation and and trade to grow, leading to the sophisticated economies of today.

Question 58

Why is it crucial that people have confidence in the money used?

Answer 58

If there isn’t confidence, it will lose its general acceptance when making a transaction. An example of this is in when the Venezuelan government accidentally printed off too much of its currency, leading to hyperinflation. In 2019, it’s inflation rates exceeded 2 billion %. The currency became worthless and no longer was acceptable in payment for goods and services.

Question 59

What are the 4 functions of money?

Answer 59

-Medium of exchange: enables the buying and selling of products without the need to barter.
-Measure of value: money creates a unit of measure that enables comparison between the relative values of products.
-Store of value: Convenient way of storing wealth to be spent at a later date. Generally, money holds value in the short term if inflation rates stay low.
Method of deferred payment: enables borrowing and lending. A person can borrow money to buy something rather than saving funds. A price is usually set for borrowing and lending (interest).

Question 60

What do economies do?

Answer 60

They organise their resources in different ways to produce goods and services. This ranges along a continuum from free market economy to a command economy.

In reality, the majority of economies are a mixture of the private enterprise and state intervention. In the UK, roughly 60% of recourses are managed by the private sector, and 40% by the public sector. The UK government provides healthcare, education, defence and law.

In some European countries (Sweden, Germany) the public sector is bigger, and in some counties (USA and Canada) it is smaller than in the UK.

Question 61

What is a free market economy?

Answer 61

This is where decisions on what, how and for whom to produce are left to the operation of the price mechanism. It is associated with the writings of the economists Adam Smith and Friedrich Hayek. In a free market economy, resources are owned privately and economic decision making is decentralised among many individual consumers and producers. There’s minimum government intervention.

Question 62

What is Adam Smith’s ‘invisible hand’?

Answer 62

In his book ‘The Wealth of Nations’, published in 1776, Smith refers to an ‘invisible hand’ of self interest as guiding supply and demand in markets. He believed that consumers and producers acting on their own self-interest would lead to the best outcome for all of society. This approach led to the development of the classical school of economic thought.

Question 63

Why are there no pure free market economies in the world today?

Answer 63

This is because in every economy, the government directly controls some resources and output. However, the proportion of government intervention tends to be significantly less in some developing countries, such as Malaysia and Thailand. Perhaps the best example of a developed country will a relatively small government sector is Hong Kong.

Question 64

What are the advantages of a free market economy?

Answer 64

• Economic efficiency and lower prices. Competition means that firms try to keep production costs down in order to sell goods and services at competitive prices (productive efficiency). They also try to goods and services that consumers demand (allocative efficiency).
• Quality of products. Competition means that firms will continuously try to improve the quality of their products to gain and advantage over their opponents.
• Greater choices. Consumers can often choose to buy from a wide selection of goods and services. Workers often also have a wide selection of employment opportunities.
• Financial incentives. Entrepreneurs have an incentive to invest and take risks in order to earn a profit. Labour has an incentive to work hard to gain more earnings.

Question 65

What are the disadvantages of a free market economy?

Answer 65

-Monopolies may form as a result of competition in some markets, rival firms get taken over or go out of business.
-The distribution of income is very unequal. The lack of welfare support may lead to people living in absolute poverty.
-External costs and benefits of production and consumption are ignored. E.g, price mechanism ignores external costs of pollution and external benefits of education.
-Lack of regulations and taxations to protect consumers.
-Insufficient quantity of public goods and merits. Public goods include defence and street lamps. Merit goods include healthcare and education.
Erratic swings in the business cycle may cause high inflation in economic booms and high unemployment in economic slumps.

Question 66

What is a command economy?

Answer 66

This is an economy where the government makes the decisions on what, how and who to produce for. It is associated with the writings of Karl Marx, a 19th century economist and philosopher who believed that production should be directed on the basis of human need rather than profit. The government has control of resources and economic decision making is centralised. Command economies work well during times of national crisis, e.g when the UK was ran like one in WW2. However, personal freedom and living standards can be jeopardised, such as today in North Korea.

Question 67

What are the advantages of a command economy?

Answer 67

-Cooperation between firms can lead to a high level of output. In general, the maximisation of output would replace the maximisation of profit as the key aim of firms.
-Reduction in inequality compared for free market economies. Government controls wage of workers
-Government may limit the external costs from production and consumption. E.g limit pollution emissions and put heavy taxes on alcohol and tobacco.
-government can fund education, defence and law and order. It can also increase the provision of goods which yield high external benefits to society.
- Government has more control of the economy, and so there are smaller swings in the business cycle, leading to less unemployment and inflation.

Question 68

What are some disadvantages of the command economy?

Answer 68

-The price mechanism is unable to operate so markets may suffer from shortages and surpluses, leading to inefficient allocation of resources.
-Lack of competition leads to inefficiency, so production is low
-Lack of competition leads to poor quality products
-Less choice of goods and services for customers, labour may be directed to specific jobs with no choice depending on their location.
-A lack of financial incentive. Managers have no profit incentive to take risks by developing new goods and services. Also little incentive to work hard, due to fixed salary by the government.
-Underperformance. Command economies tend to grow slower than market economies.

Question 69

What is a mixed economy?

Answer 69

This is an economy where some resources are owned and allocated by the public sector (government), and some by the private sector. It’s aim to gain all the advantages of a free market economy while avoiding the negatives by having government intervention. Government intervention is usually to avoid market failure. The idea of a mixed economy is associated with the writings of John Maynard Keynes.

Question 70

What did Friedrich Hayek argue?

Answer 70

He argued that the state control of the economy leaded to a loss of freedom. Because of this, he said that even the poorest in the free (or freer) market economies around the world had a better standard of living than those in command economies because they at least had personal freedom.

Question 71

What did Friedrich Hayek say central planning by governments led to?

Answer 71

He said that central planning by governments meant that led to what a small minority wanted being forced upon the whole population. Although Hayek knew that individuals don’t make supply and demand decisions based on perfect information, they know best what they need in their own situations, not the state.

Question 72

What did Karl Marx believe?

Answer 72

He believed in command economies and heavily criticised capitalism. Marx believed that capitalists profit came from exploiting labour as they underpaid workers for the value that they had actually created. He saw ‘two class economies’ forming in capitalist societies with a few wealthy capitalists and many more underpaid workers. He believed more firms would fail because competition would cause unemployment, low wages as well as higher prices and this would lead to an unhappy working class. Therefore he believed in an economy where social equality and maximising social welfare should be the main aim.

Question 73

What did Adam Smith believe?

Answer 73

Adam Smith believed in the free market economy and laissez-faire approach by governments. He explained how there was an ‘invisible hand’ in the market which allocated resources to everyone’s advantage, allowing the greatest good for the greatest number of people. Furthermore, he believed that the market caused lower prices as firms wanted to be competitive and so this benefits the consumer as they can get goods cheaply. He essentially says that by individuals acting on their own self-interests society would manage to produce the right goods and services that it requires.

However, he did argue the state needed to provide goods and services to the economy which the free markets wouldn’t provide. This includes laws, property rights and goods such as bridges and roads.

Question 74

What was Adam Smith’s ‘pin theory’?

Answer 74

He visited a factory and observed that the pin making process had been split into 18 different operations. As a result, the company were able to produce 5000 pins per person employed. Of the work had been carried out by workers making the whole pin from start to finish, it would’ve been less than a few dozen.