Theme 1.1 Nature of Economics

Question 1

Define: ceteris paribus

Answer 1

All things being equal; the assumption that, whilst the effects of a change in one variable are being investigated, all other variables are being kept constant

Question 2

Define what a law is in terms of economics

Answer 2

A theory or model which has been verified by empirical evidence

Question 3

Define: normative economics

Answer 3

The study and presentation of policy prescriptions involving value judgements about the way in which scarce resources are allocated

Question 4

Define: normative statement

Answer 4

A statement which cannot be supported or refuted because it is a value judgment

Question 5

Define: positive economics

Answer 5

The scientific or objective study of the allocation of resources

Question 6

Define: positive statement

Answer 6

A statement which can be supported or refuted by evidence

Question 7

Define: scientific method

Answer 7

A method which subjects theories or hypotheses to falsification by empirical evidence

Question 8

Define: social science

Answer 8

The study of societies and human behaviour using a variety of methods, including the scientific method

Question 9

Define: theory or model

Answer 9

A hypothesis which is capable of refutation by empirical evidence

Question 10

What is the basic economic problem?

Answer 10

Where there are finite resources (scarce resources) but people have infinite wants

Question 11

Why do economists make models?

Answer 11

To provide an alternative to doing it in real life as there may be unseen consequences.

Question 12

Why is ceteris paribus an important assumption for economists?

Answer 12

As it is very difficult to predict all variables that occur in real life, therefore it simplifies the analysis of theories/models

Question 13

What does scarce resources mean?

Answer 13

That decisions need to be made regarding WHAT, HOW, WHY and FOR WHOM hoods and services are produced

Question 14

What is the difference between renewable and non renewable resources?

Answer 14

Non renewable resources are things such as coal and oil- things that will eventually run out; whereas renewable resources are things such as wind and solar- things that will never run out

Question 15

What is opportunity cost?

Answer 15

Cost of a decision in terms of the next best best alternative foregone

Question 16

What does a PPF curve show?

Answer 16

It shows the maximum possible combination of goods/services that can be produced using all available resources, it also helps analyse trade-offs

Question 17

Where is the maximum productive potential of an economy on a PPF?

Answer 17

Any point along the line of the PPF

Question 18

Where is the concept of opportunity cost on a PPF?

Answer 18

The movement from one point on the curve to another point on the curve

Question 19

Where is economic growth shown on a PPF and how does it occur?

Answer 19

An outward shift of the whole PPF curve. This can be caused by an increase in the quantity or quality of the factors of production

Question 20

Where is an economic decline shown on the PPF?

Answer 20

An inward shift of the whole PPF curve, often caused by war or a natural disaster

Question 21

What are the factors of production?

Answer 21

Land
Labour
Capital
Entrepreneurship

Question 22

What is productive efficiency

Answer 22

Where all factors of production are being fully utilised

Question 23

Where is productive efficiency show on the PPF?

Answer 23

Any point on the curve any point under the curve is inefficient - some the factors of production are not being fully utilised

Question 24

What does it mean if there is a point outside the PPF curve?

Answer 24

That point is unobtainable given the current resources and it would take economic growth for that point to become obtainable

Question 25

What is specialisation?

Answer 25

Completing one task over and over again at a very good level and at high speed

Question 26

What is division of labour?

Answer 26

Breaking down a task in to component parts

Question 27

What are the advantages of specialisation?

Answer 27

Business: 
Increased revenue
Increased output
More efficient
Less waste material
Lower unit cost
High quality products

Employee:
Highly skilled at job
(Possibly) higher wages - due to monotony of their work

Question 28

What are the disadvantages of specialisation?

Answer 28

Business:
Workers may need longer breaks (decreases total output)
Only one person can do the job
Cost to train workers
Cost for machinery (short run disadvantage, long run advantage)

Employee:
Job becomes monotonous

Question 29

What are the three types of economy?

Answer 29

Free economy
Mixed economy
Planned economy

Question 30

What is a free economic system?

Answer 30

There is no government interference
Factors of production are allocated through market forces
Most efficient in terms of meeting wants/needs of consumers
Leads to unequal distribution of income and wealth
The USA are the closest example of this

Question 31

What is a planned economy?

Answer 31

The government plans all economic activity
Allocate all factors of production
Communism
The closest to this is North Korea

Question 32

What is a mixed economic system?

Answer 32

It can have both some public and some private characteristics, for example the UK