1.1 Nature of Economics

Question 1

why is Economics a social science?

Answer 1

Economists develop models to explain how the economy works, for example theories of supply and demand or the circular flow of income. These are developed by putting forward a model, gathering evidence and then accepting, changing or disregarding the model.

Question 2

Ceteris Paribus

Answer 2

meaning ‘all other things remaining equal’. For example, when there is a change in income, demand will shift, ceteris paribus.

Question 3

Positive Statement

Answer 3

a statement which can be supported with evidence and fact

Question 4

Normative statement

Answer 4

Those which are value based and involve opinions

Question 5

the role of value judgements

Answer 5

Value judgements can influence economic decision making and policy. Different economists may make different judgements from the same statistic, for example rising inflation could mean different things.

Question 6

what is the problem of scarcity?

Answer 6

where there are unlimited wants and finite resources
unlimited needs –> problem of <– limited
and wants Scarcity resources

Question 7

what are the three economic questions?

Answer 7

-what to produce?
-how to produce?
-for whom to produce?

Question 8

the four economic agents

Answer 8

-government
-consumers
-suppliers
-employees

Question 9

what do the government aim to achieve?

Answer 9

aim to maximise social welfare

Question 10

what do consumers aim to achieve?

Answer 10

aim to maximise satisfaction

Question 11

what do suplliers aim to achieve?

Answer 11

aim to maximise profit

Question 12

what do employees aim to achieve?

Answer 12

aim to maximise income

Question 13

centrally planned economy

Answer 13

communism

Question 14

ceterus paribus

Answer 14

everything remains equal

Question 15

production possibility frontiers

Answer 15

shows the maximum possible output combinations of two goods or services an economy can achieve when all resources are fully and efficiently employed

Question 16

What are the 4 resources?

Answer 16

-capital
-entrepreneurs
-labour
-land

Question 17

Factors that shift the PPF

Answer 17

-increasing wages
-better benefits
-invest in better technology
-invest in to education
-invest in the green industry

Question 18

absolute advantage

Answer 18

being able to produce more of something
than another country (assuming both have the same amount of resources avaliable)

Question 19

comparative advantage

Answer 19

-being able to produce something at a much lower oppourtunity cost

Question 20

advantages of specialisation

Answer 20

-workers become better producing goods
-an increase in productivity causes the cost of production to decrease
-increased output
-higher wages for staff
-more motivation

Question 21

disadvantages of job specialisation

Answer 21

-greater costs of training workers
-quality may suffer if workers get bored
-more expensive workers
-repetitive job
-skills of workers become limited
-eventually workers will be replaced by machinery
-may become reliant on a country for imports
-might lead to over extraction of a country’s natural resources

Question 22

how to work oppourtunity cost for specilisation

Answer 22

OCA=B/A
OCB=A/B

Question 23

how do we know who should specialise

Answer 23

the country with the lower oppourtunity

Question 24

advantages in division of labour

Answer 24

-improved organisation
-increased output and better quality
-get better at one job
-increased productivity
-increased efficiency
-less training costs

Question 25

disadvantages in division of labour

Answer 25

-harder to recruit staff
-can become boring
-decreased communication
-increase in staff wages
-lack of skills for workers
-over reliant on specific staff

Question 26

Key points of Adam Smiths theroy

Answer 26

-self interest
-the wealth of nations = a book he wrote
-circular flow of income
-risk and reward
-trades leaves us all better off

Question 27

Key points of Friedrich Hayek theroy

Answer 27

-only buyers and sellers understand the market
-the government might try and help
-better off leaving the market alone

Question 28

Key points of Karl Marx

Answer 28

-capitalists control the capital
-they are motivated by profit
-they pay poor wages
-this affects spending
-long term capitalists fall
-a better idea is sharing wealth

Question 29

How was Karl Marx right?

Answer 29

-large class divide
-boom and bust economics
-globalisation
-rich get richer
-prevents exploitations
-wages can’t keep up
-with living standards

Question 30

How was Karl Marx wrong?

Answer 30

-products made cheaper
-capitalism can be reformed
-absolute poverty decreased
-lack of innovation
-failed already

Question 31

Consumer goods

Answer 31

goods that are demanded and bought by households and individuals.

Question 32

Capital goods

Answer 32

goods that are produced in order to aid the production of consumer goods in the future.

Question 33

The functions of money

Answer 33

-a medium exchange (between buyers and sellers
-a measure of value (price tags)
-a store of value (weekly wages)
-a method of settling debts

Question 34

Free market economy

Answer 34

individuals are free to make their own choices and own the factors of production without government interference. Resources are allocated through the price mechanism. The consumer determines what is produced by their willingness to spend their money on a good.

Question 35

advantages of a free market economy

Answer 35

-The system is automatic, resources are moved out of production of a good when people stop wanting it or costs are too high.
-Consumers have freedom of choice, called consumer sovereignty.
-There is high motivation as people know working hard could lead to high potential rewards, creating conditions where initiative and enterprise flourish.
-There is political freedom.
-Because firms are in competition, they will produce goods at the lowest cost they can, ensuring productive efficiency.
-free market economies tend to have higher growth

Question 36

disadvantages of free economy

Answer 36

-high levels of inequality
-lack of merit goods (goods considered as intrinsically good) and little control of demerit goods (intrinsically bad)
-Resources could be wasted on unproductive expenses such as advertising
-less competition leads to monopolies
-problem of the externalities

Question 37

advantages of command economy

Answer 37

-minimum standard of living
-less wastage of resources due to lack of competition services
-Long term planning means that the industry doesn’t have to keep changing and shifting resources
-Standardised products means that they are produced cost effectively
-who are generally motivated by the wellbeing of the country, rather than the companies, who are motivated by profit, decide resource allocation, objectives other than profit can be followed

Question 38

disadvantages of command economy

Answer 38

-It is impossible for the state to make so many decisions correctly, which could lead to over or under supply and a waste of resources
-decision making will be slowing leading to bribery and corruption
-less motivation and effiency
-consumers lose a freedom

Question 39

Mixed economies

Answer 39

This is an economy where both the free market mechanism and the government planning process allocate a significant amount of the total resources in the country. Each country will have a different amount of control by the government, but it is usually between 40-60%.

Question 40

the governments role in a mixed economy