Y1 - Nature of economics

Question 1

Define positive statement

Answer 1

Statement based on facts which can be tested as true/false

Question 2

Define normative statement

Answer 2

Statement based on value judgements which cannot be tested as true/false

Question 3

Define opportunity cost

Answer 3

The value of the next best alternative forgone

Question 4

What is the basic economic problem?

Answer 4

Wants are infinite and resources are scare = must choose what to produce, how much to produce and for whom to produce

Question 5

Define PPF

Answer 5

Graph showing the maximum output of a combination of goods/services that can be produced in an economy with all resources fully and efficiently employed
X-axis = consumer goods
Y-axis = capital goods

Question 6

Define consumer good

Answer 6

A good that directly provides utility to consumers

Question 7

Define capital good

Answer 7

A good that is used to produce consumer goods/services

Question 8

Define specialisation

Answer 8

When an individual, firm, region or country concentrates on the production of a limited range of goods/services
- However = if demand decreases = structural employment

Question 9

Define division of labour

Answer 9

The breaking down of production into a series of tasks conducted by different workers

Question 10

What are the advantages of division of labour?

Answer 10

• Increased productivity (lower cost per unit of output = increased efficiency of resources)
• Productivity increases = workers more skilled, higher total production cost but a decrease in cost per unit of output

Question 11

What are the disadvantages of division of labour?

Answer 11

• Repetition = monotony and boredom (high turnover of staff)
• Easier to replace human with capital (structural unemployment)
• Creates interdependence in production (if one group strike = all production has to stop)

Question 12

What are the functions of money?

Answer 12

• Medium of exchange
• Measure of value
• Store of value
• Method of deferred payment

Question 13

What are the different types of economies?

Answer 13

• Free market
• Mixed
• Command

Question 14

Define free market economy

Answer 14

All resources are privately owned and allocated via the price mechanism. Minimal government intervention

Question 15

What are the advantages of a free market economy?

Answer 15

• Economic efficiency and lower prices (very competitive)
• Good quality
• Consumers benefit from lower price and more choice

Question 16

What are the disadvantages of a free market economy?

Answer 16

• Monopolies
• Unequal distribution of income and wealth (lack of welfare support)
• More demerit goods (negative externalities)
• Very few public goods

Question 17

Define a mixed economy

Answer 17

An economy where some resources are owned and allocated by the private sector and some by the public sector (e.g. UK, Germany, Australia)

Question 18

Define command economy

Answer 18

An economy where there is public ownership of resources and these are allocated by the government = no role for price mechanism (e.g. North Korea)

Question 19

What are the advantages of a command economy?

Answer 19

• High levels of output
• Less inequality (government controls wages)
• Government can limit negative externalities easier
• Smaller swings in business cycle (controlled)
• More merit and public goods = better education/healthcare = LR benefits

Question 20

What are the disadvantages of a command economy?

Answer 20

• Price mechanism cannot operate = ALLOCATIVE INEFFICIENCY (demand shortage or surplus)
• Lack of competition = less efficiency = less output
• Consumers suffer from higher prices and less choice
• Underperformance = economic growth and living standards grow at slower rate
• Poor quality goods/services (no competition)