1.1 Nature Of Economics

Question 1

Developing models (why economist make them)

Answer 1

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

Question 2

What are theories

Answer 2

They can often be expressed in words

Question 3

What are models

Answer 3

Expressed in mathematical terms

Question 4

Why are assumptions made

Answer 4

When there are too many variables which can change within an economic model

Question 5

What is ceteris Paribus

Answer 5

All other thing remain equal

Question 6

How is econ a social science

Answer 6

It is difficult to set up experiments to test hypothesis. As economists has to gather data in the every day world other variables are always changing. However, it is still a science as it is all linked by the method of building a model or theory

Question 7

Argument for why econ isn’t a science

Answer 7

It studies human behaviour which cannot be reduced to scientific law. However, groups of people are much more predictable than individuals themselves

Question 8

What is a positive statement

Answer 8

A statement which is objective and made without any obvious value judgments or emotions. Can be proven or disproven and are expressed in the form of a hypothesis

Question 9

What is a normative statement

Answer 9

One which is subjective and based on opinion so cannot be proven or disproven. It often includes words like “ought, maybe, unwise, should etc. or says one is better than the other.

Question 10

Value judgments

Answer 10

These can influence economic decision making and policy. Different economists may make different judgments from the same statistic

Question 11

The Economic problem:

Answer 11

-problem of scarcity
-renewable and non-renewable resources
-opportunity costs

Question 12

Problem of scarcity

Answer 12

People have finite needs but infinite wants as no one would choose to live at the level of basic human living standards. Although wants are infinite, recourses are finite. It is a relative concept as recourses are not necessarily scarce themselves but are scarce in relation to the demand placed upon them.

Question 13

Renewable recourses

Answer 13

They are recourses of economic value that can be replenished or replaced on a level equal to consumption. E.g. oxygen, solar power and fish.

As long a the rare of consumption is less than or equal to the rate of replenishment, the stock will not decrease.

Question 14

Non-renewable resource

Answer 14

A resource of economic values that cannot be readily replaced by natural means on a level equal to consumption.

Question 15

What are opportunity costs

Answer 15

When the same recourse cannot be used to produce different goods at the same time so decisions have to be made on how to use them.

It is the cost of one thing in terms of the next best option which has been given up.

Question 16

Difference between consumers choice and producers and the government choice on the opportunity costs

Answer 16

Consumers make choices on what gives them greatest level of satisfaction

Produces make a choice based on profit

Government must make decisions on where they should spend limited tax tenues based on what will maximise social welfare.

Question 17

Four factors of production:

Answer 17

Land - natural resources used in production
Labour - all productive human effort (value of worker is human capital)
Capital - all man made recourses that are used to produce goods and services in the future. Owners of capital receive interest on their land.
Entrepreneurship - willingness and ability to take the risk of combining other three factors

Question 18

What do production possibility frontiers show

Answer 18

Shows the maximum possible combinations of capital and consumer goods that can be produced with its current resources and tech

Question 19

What are PPF diagrams usually drawn as a curve

Answer 19

Because the first recourses that are switched from capital to consumer good production are resources that are it adding much to capital goods but will be much more productive in the production of consumer goods and vice verse

Question 20

Maximum potential of an economy (PPF)

Answer 20

It is any point on the curve that represents the maximum productive potential of the economy, the most that the country can produce

Question 21

PPF graph representing growth of economy

Answer 21

The PPF maximum potential line will shift outwards as the economy can produce more of both goods. This can be achieved by increasing the quantity and quality of resource.

Question 22

Reasons for decline in economy’s maximum potential

Answer 22

It can produce less of capital and consumer goods due to a number of factors: natural disasters, natural recourses running out or a decrease in quality/quantity due to war, migration or fall in spending on education

Question 23

How is economic efficiency achieved

Answer 23

When recourses are used for their best fit - at all points on the PPF recourses are allocated efficiently.

Question 24

Where is production shown as inefficient on a PPF diagram

Answer 24

Below the PPF curve where production of the goods are not maximising output.

Question 25

When would a point be out of the curve on a PPF diagram

Answer 25

When it is unobtainable production (not enough resources/tech to produce)

Question 26

What does a movement along the curve indicate

Answer 26

A change in the combination of goods produced: more capital goods are produced and less consumers goods are produced or vice versa

Question 27

What does a shift of the curve indicate

Answer 27

A change in the productive potential of the economy: more consumer and capital goods can be produced or less can be produced. There has been a change in the number of resources and tech available to the country and so their potential output has changed.

Question 28

What is specialisation

Answer 28

The production of a limited range of goods by a company/individual/country which means that trade is essential as it is the only way they are able to access what is needed

Question 29

Division of labour

Answer 29

When labour becomes specialised in a particular part of the production process.

Question 30

How can a country maximise the amount of goods and services it can produce

Answer 30

They need to ensure that all factors of production, including workers, undertake the tasks they are best at.

Question 31

What is the concept Adam Smith stated

Answer 31

Concept of specialisation and the division of labour and showed how it can increase labour productivity (output per worker), allowing firms to increase efficiency and lower their costs of production.

Question 32

Adam Smith’s example of specialisation and division of labour

Answer 32

He visited a factory and observed that the pin making process had been split into 18 different operations. As a result the company were able to produce 5,000 pin per person employed. If there wasn’t division of labour workers would of made less than a few dozen

Question 33

Advantages of divisions of labour

Answer 33

-enables labour productivity to be increased (workers will be quicker, better and more efficient as they can develop skills quicker)
-may lead to higher quality of goods and services
-more cost effective to develop specialist tools, improving speed or quality.
-time is. Jot wasted between moves and getting tools out
-workers may be trained to only do one specific task which saves money and time

Question 34

Disadvantages of division of labour

Answer 34

-one specific task is boring which will lead to poor quality of work and people quitting (firms take actions like playing music to reduce this)
-there is a reduction of craftsmanship and much more standardised product because of mechanisation.
-if production in one process is delayed every other task is stopped
-the workforce do not have wide industrial training and could therefore suffer form structural unemployment

Question 35

What will the degree to which specialisation or division of Labour being possible depend on

Answer 35

Nature of the task and the size of the firm.

Question 36

What is it essential to do when countries specialise

Answer 36

It is essential they they trade in order to obtain all the goods and services that consumers demand. Trade has some advantages and disadvantages

Question 37

Advantages of specialisation of production for countries

Answer 37

The theory of a comparative advantage stares countries should specialise in producing goods consumers demand when they have a lower opportunity cost, and so they were relatively best at producing.
This will help them boost their economy (greater output globally)

Question 38

disadvantages of specialisation of production for countries

Answer 38

Countries may become over-dependent on one particular exports
Other counties specialise in non-renewable recourses and these could run out
There will be high interdependence and this will cause problems if trade is prevented (e.g. because of war).
Some say that increased specialisation means there will be more competition to cut costs and therefore wages will fall, but this is not necessary true.

Question 39

Functions of money:

Answer 39

Medium of exchange
A measure of value
A store of value
A method for deferred payment

Question 40

What is a medium of exchange

Answer 40

It can be used to buy and sell goods and services and is acceptable everywhere. Prevents the problem with barter

Question 41

A measure of value

Answer 41

It can compare the value of two goods such as a table and a skirt. It is also able to put a value on labour

Question 42

A store of value

Answer 42

It is above to keep its value and can be kept for a long time. With barter, goods such as fruits often went out of date and could not keep their value

Question 43

A method of deferred payment

Answer 43

Money can be allowed for debts to be created. People can therefore pay for things without having money in the present, and can pay for it later. It relays on moment storing its value.

Question 44

What is a free market economy

Answer 44

Where individuals are free to make their own choices and own the factors of production without government interference.

Question 45

How are recourses allocated in a free market

Answer 45

Recourses are allocated through the price mechanism. The consumer determines what is produced by their money. Consumer decisions are based on satisfaction and producers based on profit.

Question 46

Examples of how governments are required to intervene to an extant preventing a market form being completely free

Answer 46

Issuing Monet, protecting property rights and breaking up monopolies

Question 47

Adam smith believe of free market …

Answer 47

He believed in free market economy and the laissez-faire approach by governments. He explained how there was an invisible hand

Question 48

Adam smith’s invisible hand explained

Answer 48

There is an invisible hand in the market which allocated resources to everyone’s advantage, allowing the greater good for the greater number of people. Adam smith believed competing in the market causes lower prices as firms warned to be competitive and so this benefits the consumer as they can get foods cheaply.

Question 49

What did Adam Smith argue about free market economy

Answer 49

The state needed to provide goods/services which free markers wouldn’t such as the laws, property rights and goods such as bridges and roads

Question 50

Friedrich Hayek

Answer 50

He argued that state control of the economy leads to the loss of freedom. He believes that the poor in free market countries were better off than those in command economies as at least they had personal freedom.

He said the central plan Ning by governments led to what a small minority wanted being forced into a whole society.

He believes although individuals don’t make supply and demand decisions based on perfect information, they know beer what they need in their own situation.

Question 51

Free market economy advantages:

Answer 51

• system is automatic due to the invisible hand; recourses are moved out of production of a good when people stop wanting it or costs are too high.
  -consumers have freedom of choice (consumer sovereignty)
  -There is high motivation as hard work can leas or high potential rewards
• there is political freedom
• in general, freer market economies tend to have higher growth

Question 52

Free market economy disadvantages:

Answer 52

-there there to be high levels of inequality since the rich own more factors of production and so can grow richer
- there must be a lack of merit goods and little control of demerit goods
-recourses could be wasted on unproductive expenses like advertising
-if competition disappears then there may be monopolies who charge high prices and offer low quality of service
-there is the problem of externalities

Question 53

Command economy

Answer 53

In a command economy all factors of production (except labour) is owned by the state and labour is directed by the state. There is no private property and everyone is working for a common food. Some goods are allocated such as housing. All workers no matter their job tend to receive the same wage, products are standardised and prices are limited causing excess demand and queuing

Question 54

Karl Marx

Answer 54

He believed in command economy and critiqued capitalism and capitalism would collapse leading to communism. He believes capitalist’s profit came from exploiting labour as they underpaid workers for the value that they created. His theory stated that these workers would inevitably rise against property owner and seize control of the means of production leading to a democratic society

Question 55

Advantages of command economy:

Answer 55

• state provides a minimum standard of living, ensuring no one is extremely poor as there is less inequality.
  -there is less wastage of resources as there is no need for competitive services nor advertising which is very expensive.
  -long term planning means that the industry doesn’t Kate to keep changing and shifting resources. This is important as some industries may take a number of years to get established and would fail if planning was short term.
  -standardised products means that they are produced costs effectively
  -the government is generally motivated by the well-being of the country rather than companies who are motivated by profit

Question 56

Disadvantages of Command economy.

Answer 56

-it is impossible for the state to make so many decisions correctly, which could lead to over or under supply and a waste of recourses
-decision making will be slow as it has to go through various stages and there could be an increase in bribery and corruption
-as everyone receives the same wage, there is less motivation and efficiency
-consumers lose their freedoms

Question 57

Mixed economy

Answer 57

Both types of economies compromise to form this economy. It is both the free market mechanism and the government planning process allocate a significant amount of the total recourses in the country.

Question 58

Governments role is a mixed economy:

Answer 58

Creating a framework of rules - prevent abuse of monopolies
Supplements and modifies the price system - producing public and merit goods and limit production of demerit goods ensuring the consideration of externalities
Redistributes income - use tax to rise money away form one group the give money to the poor.
Stabilises the economy - attempt to manage the level of demand in the economy to prevent extremes of too much or too little demand through fiscal and monetary policy.