1.1 - nature of economics

Question 1

What are positive statements?

Answer 1

Objective statements based on evidence or facts that can be proved or disproved.

Question 2

What are normative statements?

Answer 2

Subjective statements based on value judgements, and cannot be proved or disproved.

Question 3

What are 2 advantages of the division of labour?

Answer 3

• Specialisation leads to increased output and quality.
• Firms save on training costs.

Question 4

What are 2 disadvantages of the division of labour?

Answer 4

• Demotivation from workers can lead to a decrease in productivity.
• Workers would have limited skills so could face long-term unemployment.

Question 5

What are 2 advantages of specialisation in trade?

Answer 5

• A country can benefit from increased output.
• A country can benefit from a wider variety of goods due to more trade occuring.

Question 6

What are 2 disadvantages of specialisation in trade?

Answer 6

• A country could become overdependent on imported goods.
• Overspecialisation can lead to unemployment and a current account deficit if the goods/services become uncompetitive.

Question 7

What is the division of labour?

Answer 7

Breaking down the production process so that workers specialise on very specific, separate tasks.

Question 8

What are the 4 functions of money?

Answer 8

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

Question 9

What is a free market economy, and give 2 main features.

Answer 9

An economic system where the economic problem is solved by market forces, with no government intervention.
- Private ownership of resources
- Price is determined by supply and demand

Question 10

What is a command economy, and give 2 main features.

Answer 10

An economic system in which resources are allocated by the state.
- State ownership of resources
- The state determines price

Question 11

What are 2 advantages of free market economies?

Answer 11

• Competition between firms leads to innovation and economic growth.
• Consumer sovereignty: consumer spending decisions determine what is produced.

Question 12

What are 2 disadvantages of free market economies?

Answer 12

• Inequality: those who own resources are likely to become richer than those who do not own resources.
• Exploitation: danger of monopolies charging higher prices than the free market equilibrium.

Question 13

What are 2 advantages of command economies?

Answer 13

• Greater equality: everyone enjoys a minimum standard of living and no one is extremely rich.
• The government can remove demerit goods.

Question 14

What are 2 disadvantages of command economies?

Answer 14

• Less economic growth
• No consumer sovereignty: decisions on what is produced are made by the state.

Question 15

What are 4 key roles of the state in a mixed economy?

Answer 15

• Defence and internal security
• Provision of public goods
• Provision of public services (education, healthcare)
• Redistribution from the rich to the poor