1.1 NATURE OF ECONOMICS

Question 1

i. What is a Social Science?

Answer 1

The scientific study of human society and social relationships

Question 2

ii. What is an Economic Model?

Answer 2

A simplified description of reality, designed to yield hypotheses about economic behaviour that can be tested.

Question 3

iii. Why do Economists use Models?

Answer 3

They are used to understand why things are the way they are as well as being used to decide how to act

Question 4

iv. What does ceteris paribus mean?

Answer 4

All other variables remain the same

Question 5

v. Why is it difficult for Economists conduct scientific experiments?

Answer 5

Economists have to gather data in the ordinary everyday world where variables are changing over any given time period

Question 6

i. What is the difference between a positive and a normative statement?

Answer 6

Positive statement are statements about economics which can be proven true or false; they can be refuted by evidence. Normative statements are statements about economics which cannot be supported or refuted.

Question 7

ii. Give 3 words or phrases which might suggest a normative statement

Answer 7

-Should

-Must

-Ought to

Question 8

iii. Give 3 words or phrases which might suggest a positive statement

Answer 8

-Is

-Was

-Will be

Question 9

iv. Give an example of where a value judgement may be made in Economics

Answer 9

-The government should lower taxes

Question 10

i. Which 3 questions does the study of economics seek to answer?

Answer 10

-What goods and services should be produced to meet consumer needs?

-How should they be produced, and who should produce them?

-Who should receive goods and services?

Question 11

ii. What does ‘scarcity’ mean?

Answer 11

-The state of being scarce or in short supply; shortage.

Question 12

iii. What is meant by a ‘renewable resource’?

Answer 12

-Resources, such as fish stocks or forests, that can be exploited over and over again because they have the potential to renew themselves

Question 13

iv. Give an example of a renewable resource

Answer 13

-A forest

Question 14

v. What is meant by a ‘non-renewable resource’?

Answer 14

-Resources, such as coal or oil, which once exploited in such a way that its stock is being reduced over time

Question 15

vi. Give an example of a non-renewable resource

Answer 15

-Oil

Question 16

vii. What are the 4 factors of production?

Answer 16

-Capital

-Enterprise

-Land

-Labour

Question 17

viii. What are the rewards for each factor of production?

Answer 17

-Capital: owners of capital might receive rent, lease income or a share of profits

-Enterprise: earning profit from their activities

-Land: land owners may receive a share of money raised in sales of the resource

-Labour: wage or earnings

Question 18

ix. What is an opportunity cost?

Answer 18

-The benefits forgone of the next best alternative

Question 19

x. Why do opportunity costs exist?

Answer 19

-Because of scarcity, every time we do one thing we necessarily have to forgo doing something else desirable

Question 20

xi. Give an example of an opportunity cost for a consumer

Answer 20

-an apple or a banana

Question 21

xii. Give an example of an opportunity cost for a worker

Answer 21

-working early or sleeping in

Question 22

xiii. Give an example of an opportunity cost for a firm

Answer 22

-increasing capital or increasing labour

Question 23

xiv. Give an example of an opportunity cost for a Government

Answer 23

-paying for healthcare or education

Question 24

i. What is a PPF?

Answer 24

-A curve which shows the maximum potential level of output of one good given a level of output for all other good in the economy

Question 25

ix. Explain 5 causes of an outward shift in the PPF

Answer 25

-Investment in capital i.e. plant and machinery and new technology

-Inward migration of younger, skilled workers

-Discovery of new natural resources

-Improved education, training and healthcare to lift labour productivity

-Innovations that increase output per unit and reduce to lift labour productivity

Question 26

x. Explain 2 causes of an inward shift in the PPF

Answer 26

-Lack of resources

-Failure to invest

-Erosion of infrastructure

-Natural disaster

Question 27

xii. What is the difference between capital and consumer goods?

Answer 27

Capital goods are used in the production of other goods such as factories, offices, roads, machines and equipment. Consumer goods are goods and services that are used by people to satisfy their wants and need.

Question 28

xiv. Explain why we would not want 100% of our production to be on capital goods

Answer 28

If we only produce capital goods then the consumers wants and needs will never be met as there are no consumer goods

Question 29

xiii. What is the difference between actual and potential growth?

Answer 29

Actual growth can be defined as the increase in real national income of the economy; potential growth can be defined as the increase in productive capacity of the economy

Question 30

xiv. Explain why we would not want 100% of our production to be on capital goods

Answer 30

If we only produce capital goods then the consumers wants and needs will never be met as there are no consumer goods

Question 31

xv. Explain why we would not want 100% of our production to be on consumer goods

Answer 31

If we only produce consumer goods then eventually the capital goods used to make the capital goods will break and there will be nothing o replace them

Question 32

i. Which Economist observed the division of labour in a pin factory?

Answer 32

-Adam Smith

Question 33

ii. What is specialisation?

Answer 33

-The production of a limited range of goods by an individual, firm, or country in co-operation with others so that together a complete range of goods is produced.

Question 34

iii. How does the division of labour result in higher output?

Answer 34

-specialisation enables workers to gain skills in a narrow range of tasks

-The division of labour makes it cost-effective to provide workers with specialist tools

-Time is saved because a worker is not constantly changing tasks

-Workers can specialise in those tasks to which they are best suited

-Workers become proficient after constant repetition of tasks

Question 35

iv. How might the division of labour result in higher quality?

Answer 35

-Workers who specialize in a single task have a lot of time and occasion to practice their allotted operation

Question 36

v. How might specialisation result in lower costs?

Answer 36

It costs less to make their goods or provide their services

Question 37

vi. Give 4 disadvantages of specialisation in a firm

Answer 37

-Risk of worker alienation

-Risk of disruptions to production process

-Risk of structural unemployment due to occupational immobility

Question 38

vii. Explain each of the 4 functions of money

Answer 38

-A medium of exchange

-A method of deferred payment

-A store of value

-A measure of value

Question 39

i. Which economist is associated with free market economies?

Answer 39

-Adam Smith

Question 40

ii. What is a free market economy?

Answer 40

-An economic system that resolves the basic economic problems mainly through the market mechanism

Question 41

iii. How are the 3 fundamental questions of economics answered in a free market?

Answer 41

-The majority of resources are allocated through the market rather than through the government and planning

Question 42

iv. Give 3 advantages of a free market economies

Answer 42

-Strong incentives built into the system to innovate and produce high-quality goods

-The more market orientated an economy, the higher the rate of its overall economy

-Wider variety of choice in free market economies

Question 43

v. Give 4 disadvantages of free market economies

Answer 43

-High amounts of risk

-Free market economies tend to have higher levels of inequalities

-Many markets are dominated by a few large producers

Question 44

vi. Which economist is associated with command economies?

Answer 44

-Karl Marx

Question 45

vii. What is a command economy?

Answer 45

-An economic system where government, through a planning process, allocates resources in society

Question 46

viii. How are the 3 fundamental questions of economics answered in a command economy?

Answer 46

-All the resources are allocated by the government through planning

Question 47

ix. Give 3 advantages of command economies

Answer 47

-More equal distribution of resources

-Low levels of inequality

-Not designed to meet the wants of people

Question 48

x. Give 3 disadvantages of command economies

Answer 48

-Less political freedom

-Lower levels of economic growth

-Workers have little incentive to work

Question 49

xi. Which economist is associated with mixed economies?

Answer 49

-John Maynard Keynes

Question 50

xii. What is a mixed economy?

Answer 50

-An economy where both the free market mechanism and the government planning process allocates significant proportions of total resources

Question 51

xiii. How are the 3 fundamental questions of economics answered in a mixed economy?

Answer 51

-Resources are allocated mostly through the markets whilst the government also allocates some resources

Question 52

xiv. What is the role of the state in a mixed economy?

Answer 52

-maintaining law and order, defining and protecting property rights, enforcement of contracts, providing basic health care and safe drinking water