1.1 Nature of Economics

Question 1

why is economics a social science

Answer 1

it is the study of human behaviour, and there is the inability to make scientific experiments in a controlled environment

Question 2

what does ceteris paribus mean

Answer 2

all other variables remain constant

Question 3

what is a positive statement

Answer 3

one that is a statement of fact - can either be true or false

Question 4

what is a normative statement (value judgement)

Answer 4

one that is based on opinions or beliefs - they cannot be proven

Question 5

what is the basic economic problem

Answer 5

resources are scarce - humans have infinite wants and needs but only finite resources

Question 6

what is a renewable resource

Answer 6

one that can be used repeatedly and naturally replenished

Question 7

what is a non-renewable resource

Answer 7

one that cannot be naturally replenished

Question 8

what is opportunity cost

Answer 8

the loss of the next best alternative when making a decision

Question 9

what does a PPF show

Answer 9

the maximum possible output of two G/S a country can generate if it uses all of its FOPs

Question 10

what is a capital good

Answer 10

assets that help a firm or country to produce output (manufacturing)

Question 11

what is a consumer good

Answer 11

end products that have no future productive use

Question 12

what does an outwards shift of a PPF mean

Answer 12

economic growth - increase in the productive potential of an economy

Question 13

what causes an outward shift of a PPF

Answer 13

an increase in the quality or quantity of available FOPs

Question 14

what is specialisation

Answer 14

the concentration of production on a narrow range of G/S

Question 15

what are the advantages of specialisation

Answer 15

higher output (+ trade, + growth)
wider range of G/S
greater allocative efficiency
higher productivity through better use of workers
quality improvements

Question 16

what are the disadvantages of specialisation

Answer 16

finite resources
changes in fashion/taste
de-industrialisation
national interdependence

Question 17

what is the division of labour

Answer 17

breaking down the production process into separate tasks upon specialisation

Question 18

what are the advantages of the division of labour

Answer 18

workers highly productive (+ wages, time savings, - costs of production, - prices)
specialist capital for workers
lower prices, higher quality/choice and quality for consumers

Question 19

what are the disadvantages of the division of labour

Answer 19

demotivation of workers
high worker turnover
risk of long term unemployment
highly standardised G/S

Question 20

what is the preferred medium of exchange

Answer 20

money/currency - a measure and store of value and a method of deferred payment

Question 21

why is bartering problematic

Answer 21

it requires two people to want each other’s good (double coincidence of wants)

Question 22

what are the 3 main economic agents

Answer 22

consumers
producers
the government

Question 23

what are the three fundamental economic questions

Answer 23

what to produce?
how to produce it?
who to produce it for?

Question 24

what did Hayek believe

Answer 24

free markets with no government intervention are best. that there were information gaps between what the economy actually required and what the central planners in charge said it required, which created shortages or surpluses of G/S in command economies

Question 25

what did Smith believe

Answer 25

free markets with some government intervention are best (mixed economy). governments ensure efficiency in the allocation of resources, but felt economies functioned best when private individuals work in their own self-interest

Question 26

what did Marx believe

Answer 26

free markets lead to capitalism where bosses exploit their workers. which creates inequality. the State should should share means of production and ownership with all workers in society. abolition of private property, and the State becomes the central planner

Question 27

what is a free-market economy

Answer 27

an economy with no government intervention in the allocation of resources and distribution of G/S

Question 28

what is a command economy

Answer 28

an economy where all the resources are owned by the state and the government controls the distribution of G/S

Question 29

what is a mixed economy

Answer 29

a mix of a command economy and a free market, where the government owns some FOPs and distributes some G/S

Question 30

what are the advantages of a free market

Answer 30

EPIC (Efficiency, Productivity, Incentives, Competition) always at allocative efficiency encourage competition dynamic efficiency - investment job creation and economic growth freedom, liberty and choice no risk of government failure

Question 31

what are the disadvantages of a free market

Answer 31

markets can fail inequity and inequality excessive profiteering by firms creative destruction (old technology becomes obsolete) price volatility

Question 32

what are the advantages of a command economy

Answer 32

less inequality all workers receive the same wage to achieve social equality less unemployment resources can be directed to urgent priorities the government owns monopoly businesses so consumer exploitation is avoided

Question 33

what are the disadvantages of a command economy

Answer 33

receiving the same wages disincentives people from gaining difficult skills lack of competition means less innovation lack of efficiency as central planning always leads to surplus of G/S black markets exist to address shortages lower standards of living restricted personal freedoms