What Is Economics?

Question 1

Define Economics

Answer 1

Economics is the study of the production, distribution and consumption of wealth in human society

Question 2

Define Scarcity

Answer 2

Scarcity is the basic economic problem, resources are finite

Question 3

What are the 4 FoPs

Answer 3

1. Labour (people)
2. Land (natural resources)
3. Capital (man-made resources)
4. Enterprise (entrepreneur brings together the above 3)

Question 4

Define Positive and Normative statements

Answer 4

Positive - statements which can be proven true or false

Normative - statements which have a value judgement - can not be proven

Question 5

Define Opportunity Cost

Answer 5

Opportunity Cost is the lost benefit of the next best foregone alternative

Question 6

Define PPF

Answer 6

Production Possibility Frontier shows the maximum potential level of output of two products with a given level of fully employed resources

Question 7

What causes shifts in a PPF

Answer 7

Increasing the quantity of resources (FoPs)

Increasing the quality of resources (FoPs)

Question 8

Why does the PPF bow outwards?

Answer 8

The PPF bows outwards with the opportunity cost. Opportunity cost on a PPF is ∆y/∆x . To begin we would use resources worst at y and best at x hence we would lose little y and gain a lot of x - the PPF would be almost horizontal

Question 9

Describe the 4 roles of money

Answer 9

1. Money is a unit of value: we can use money to measure the value of all goods in an economy. This means we can clearly show how many of product x should be given for product y.
2. Money is a medium of exchange: it makes trade easier, we don’t need to barter and exchange goods.
3. Money is a store of value: you can keep money and use it later (ie. saving)
4. Money is a standard of deferred payment ie. it can be lent or borrowed

Question 10

Define Specialisation

Answer 10

Specialisation is the production of a limited range of goods. It can happen at any level:

• between countries (comparative advantage - David Ricardo)
• as individuals (different professions)
• within firms (division of labour)

Question 11

Define and evaluate Division of Labour

Answer 11

Division of Labour - each worker is given 1 task. Adam Smith used a pin factory with 18 stages as an example. It increases productivity (output per worker) because:
- by repeating a task people become better at it/quicker
- it is quicker/easier to train people
- allows the use of specialised tools/capital
BUT:
- workers can get bored/make mistakes/avoid work
- over-reliance (all eggs in one basket)
- only worth if you produce large quantities