1.1 - Nature Of Economics

Question 1

what is an economic model?

Answer 1

a simplified representation of a real world economic situation that is used to analyse and understand the underlying economic principles at work

Question 2

examples of economic agents?

Answer 2

-firms
-households
-governments

Question 3

what is an economic assumption?

Answer 3

a simplified statement about how economic agents behave in a given situation

Question 4

ceterius paribus?

Answer 4

-all other factors remain constant

Question 5

challenging ceterius paribus?

Answer 5

-many other factors can cause an impact
-eg many factors effect unemployment
-assumes no change in labour productivity
-assumes a competitive labour market

Question 6

1.1.2
what is a positive statement?

Answer 6

• can be tested with available evidence

Question 7

what is a normative statement?

Answer 7

-based on value judgements
-cannot be tested
-usually contain the word should

Question 8

what is a value judgement?

Answer 8

-a statement about what an individual or firm believes is the most important
-influences economic decisions

Question 9

what are the roles of Value Judgements in Influencing Economic Decision Making and Policy?

Answer 9

1. value judgements in economic decision making
   2.conflicts in values
   3.economists and value neutrality
   4.ethical considerations
   5.public opinion and economic policy

Question 10

value judgements in economic decision making?

Answer 10

Economic decisions often involve choices influenced by individual or societal values.

Policies such as taxation, subsidies, and regulations are shaped by value judgments.

Example: A government may implement progressive taxation to address income inequality based on a value judgment that reducing inequality is desirable.

Question 11

conflicts in values?

Answer 11

Different people and groups may hold conflicting values, leading to debates over economic policies.

Example: Environmental policies may clash with economic growth goals, as stricter regulations might slow economic development.

Question 12

economists and value neutrality?

Answer 12

Economists strive for value neutrality by focusing on positive analysis.

They provide policymakers with objective data and analysis to inform decisions.

Example: An economist might present data on the economic impact of a carbon tax without advocating for or against it.

Question 13

ethical considerations?

Answer 13

Ethical considerations play a role in economic decisions and policies.

Decisions on resource allocation, distribution of wealth, and environmental protection often involve ethical judgments.

Example: Deciding how to allocate limited vaccine doses during a pandemic involves ethical questions of fairness and saving lives.

Question 14

public opinion and economic policy?

Answer 14

Public opinion, shaped by values and beliefs, can influence government policies.

Policymakers may align their decisions with prevailing values to gain public support.

Example: A government may increase funding for education in response to public demand for improved access to quality education.

Question 15

what is the distinction between positive and normative statements?

Answer 15

Economists use positive statements to analyse and understand economic phenomena objectively.

Normative statements are important in shaping economic policies but are influenced by personal values and beliefs.

Question 16

what policies do value judgements shape?

Answer 16

Policies such as taxation, subsidies, and regulations

Question 17

1.1.3
basic economic problem?

Answer 17

-scarcity
-unlimited needs and wants but limited resources

Question 18

implications of scarcity?

Answer 18

Choices and Trade-offs: Scarcity necessitates making choices and trade-offs due to limited resources.

Opportunity Cost: Every choice involves an opportunity cost, the value of the next best alternative forgone.

Question 19

real world example of the scarcity?

Answer 19

Example: A government’s decision to allocate funds to healthcare may mean fewer resources available for education. The opportunity cost is the educational quality and access that could have been improved with those funds.

Question 20

factor of production?

Answer 20

-an input that allows production to take place

Question 21

FOP examples?

Answer 21

-land
-labour
-capital
-enterprise

Question 22

land?

Answer 22

-physical space and raw materials
-reward = rent

Question 23

labour?

Answer 23

-the work done by the people who contribute to production
-reward = wages

Question 24

capital?

Answer 24

-money or equipment
that allows production
reward = interest

Question 25

enterprise?

Answer 25

people who use land, labour and capital to make a profit -reward = profit

Question 26

renewable resources?

Answer 26

Renewable resources can be replenished naturally over time. They include resources like solar energy, wind energy, forests, and fish stocks.

Question 27

non-renewable resources?

Answer 27

Non-renewable resources cannot be replaced naturally within a human timescale. Examples include fossil fuels (coal, oil, natural gas), minerals (e.g., iron, copper), and nuclear fuel.

Question 28

why is it important to have a distinction between renewable and non-renewable?

Answer 28

Sustainability: Understanding the difference is vital for sustainable resource management. Economic Implications: Depletion of non-renewable resources can lead to rising prices and economic challenges.

Question 29

what is opportunity cost?

Answer 29

-Opportunity cost is the value of the next best alternative foregone when a choice is made. It represents the true cost of a decision in terms of forgone opportunities.

Question 30

importance of opportunity cost for consumers?

Answer 30

Consumers make choices about spending money and time. Opportunity cost helps them make informed decisions, such as choosing between buying a new phone or saving for a vacation.

Question 31

importance of the opportunity cost for producers?

Answer 31

Producers allocate resources to maximize profits. Opportunity cost influences production decisions, like choosing which products to manufacture.

Question 32

importance of the opportunity cost for governments?

Answer 32

Governments allocate budgets to various programmes and policies. Opportunity cost informs decisions on allocating resources between healthcare, education, defence, and more.

Question 33

3 main questions when regarding economic problem?

Answer 33

-what, how and whom to produce for

Question 34

what does microeconomics focus on?

Answer 34

-how effectively we can meet wants and needs with the limited resources we have -resources should be allocated where consumers value them the most

Question 35

what is allocative efficiency?

Answer 35

-using resources as effectively as possible to meet the most highly valued needs and wants

Question 36

economic objective of individuals?

Answer 36

-higher income = more consumption of goods/services

Question 37

economic objective of firms?

Answer 37

-maximise profits

Question 38

economic objective of govs?

Answer 38

-economic growth -maximise social welfare -low unemployment =low + stable inflation

Question 39

what is the purpose of any economic activity?

Answer 39

to increase people's economic welfare by creating outputs that satisfy their various needs and wants

Question 40

1.1.4 what is the PPF?

Answer 40

-production possibility frontier -an economic model that considers the max possible production that a country can generate if it uses all of its FOP's efficiently to produce 2 goods/services

Question 41

what does a PPF show?

Answer 41

the trade-off between producing different combinations of two goods/services.

Question 42

law of diminishing marginal returns?

Answer 42

- the satisfaction from consuming an additional unit of the same thing will be less for each additional unit consumed

Question 43

what does PPF curve show?

Answer 43

-how much an economy can produce with existing resources -compares 2 different products to show trade off between production as 2 resources are switched between them

Question 44

PPF: what do we assume?

Answer 44

-all FOP are variable# -all workers have same skills and abilities -switch workers from one good to another

Question 45

what are capital goods?

Answer 45

-assets that help a firm or nation to produce output Capital goods are goods used to produce other goods and services. They include machinery, factories, infrastructure, and technology. Investment in capital goods can lead to economic growth.

Question 46

what are consumer goods?

Answer 46

-end products that have no further use, for personal consumption They include clothing, food, electronics, and automobiles. Consumption of consumer goods satisfies immediate needs and wants.

Question 47

importance of distinction between capital and consumer goods?

Answer 47

Capital goods are essential for long-term economic growth and development. Consumer goods satisfy current consumption desires but do not contribute directly to future growth.

Question 48

real world example for consumer and capital goods?

Answer 48

Example: Investment in new manufacturing machinery (a capital good) can increase a country's production capacity, while an increase in consumer spending on luxury cars (consumer goods) does not directly contribute to long-term economic growth.

Question 49

using PPF to describe productive potential?

Answer 49

-on curve = efficient allocation of resources - inside curve = not all resources being used -outside curve = impossible with current FOP

Question 50

PPF; marginal analysis?

Answer 50

Marginal analysis involves analysing the cost and benefit of producing one more unit of a good.

Question 51

PPF to describe opportunity cost?

Answer 51

-to produce one more unit of capital goods, economy must give up production of some units of consumer goods PPF helps illustrate opportunity cost through the slope of the curve. The steeper the slope, the higher the opportunity cost.

Question 52

what causes an outward shift in the PPF

Answer 52

-higher productivity of factor inputs -innovation of new products -increase in stock of capital and labour supply -better management of factor inputs -represents economic growth

Question 53

what causes an inward shift in the PPF?

Answer 53

-damaging effects of natural disaster -large scale net outward labour migration - trend decline in labour productivity = negative net investment - destruction of factor inputs -represents economic decline -reduction in productive capacity

Question 54

movement along the PPF?

Answer 54

Movements along the curve represent changes in the quantity produced of one good while holding the production of the other constant. Typically caused by changes in resource allocation

Question 55

shifts in the PPF?

Answer 55

Shifts represent changes in the economy's overall production potential. Caused by factors like technological progress, increased resources, or improvements in labour productivity.

Question 56

when does economic growth occur?

Answer 56

- when there is an increase in the productive potential of an economy

Question 57

what is a trade off?

Answer 57

when you have to choose between conflicting objectives because you can't achieve them all at the same time

Question 58

what is the opportunity cost?

Answer 58

the loss of the next best alternative when you make a decision

Question 59

what are some problems with using the concept of opportunity cost?

Answer 59

-often, not all alternatives are known -some factors don't have alternative uses -may be a lack of information on the alternatives -some factors may be hard to switch

Question 60

why is Understanding PPFs, movements along and shifts in them, and the difference between capital and consumer goods essential?

Answer 60

essential for analysing an economy's productive potential, resource allocation, and growth prospects.

Question 61

1.1.5 division of labour?

Answer 61

The division of labour is a form of specialization where tasks are divided among workers.

Question 62

what is specialisation?

Answer 62

Specialization refers to the concentration of individuals, firms, or nations on producing a limited range of goods or services.

Question 63

what are markets a method for?

Answer 63

allocating scarce resources

Question 64

Adam Smith?

Answer 64

-father of economics -the wealth of nations -developed ideas of division of labour and specialisation -He argued that specialization leads to increased productivity and economic growth.

Question 65

agglomeration?

Answer 65

benefits that come when firms and people locate near one another

Question 66

advantages of specialisation?

Answer 66

-higher labour productivity -learning by doing increases output - higher surplus of output that can be traded internationally = economic growth -lower prices

Question 67

higher labour productivity? [specialisation]

Answer 67

= lower unit cost of supply = higher business profits = outward shift in PPF - Specialization allows workers to become more skilled in specific tasks, leading to higher efficiency.

Question 68

higher surplus of output that can be traded internationally? [specialisation]

Answer 68

higher levels of economic growth

Question 69

lower prices? [specialisation]

Answer 69

= higher real incomes and GDP growth Reduced training time and waste contribute to cost savings.

Question 70

disadvantages of specialisation?

Answer 70

-higher worker turnover -little training -Monotony: -Dependency:

Question 71

disadvantages of specialisation; monotony?

Answer 71

Workers may find repetitive tasks monotonous, leading to job dissatisfaction. unskilled work

Question 72

disadvantages of specialisation; dependency?

Answer 72

An economy heavily dependent on a single industry or export can be vulnerable to economic shocks

Question 73

disadvantages of specialisation; little training?

Answer 73

= occupational immobility -mass produced goods lack variety

Question 74

Advantages of Specializing for Trade?

Answer 74

-comparative advantage -increased standard of living

Question 75

Advantages of Specializing for Trade; comparative advantage?

Answer 75

Nations can focus on producing goods and services where they have a comparative advantage, leading to higher efficiency.

Question 76

Advantages of Specializing for Trade; increased standard of living?

Answer 76

trade allows access to a wider variety of goods and services, enhancing overall living standards.

Question 77

Disadvantages of Specializing for Trade?

Answer 77

-vulnerability to external shocks -income inequality

Question 78

Disadvantages of Specializing for Trade; vulnerability to external shocks?

Answer 78

reliance on trade exposes nations to risks, such as changes in global demand or supply disruptions.

Question 79

Disadvantages of Specializing for Trade, income inequality?

Answer 79

Specialization may benefit certain industries or regions more than others, leading to income inequality.

Question 80

what are consumer goods?

Answer 80

-goods that satisfy needs and wants -3 types - durable and non durable, services

Question 81

consumer durable goods?

Answer 81

-provide a steady flow of satisfaction

Question 82

consumer non-durables?

Answer 82

products used up in the act of consumption

Question 83

what is production?

Answer 83

a measure of the value of output of goods and services -measured by national GDP or an index function

Question 84

what is productivity?

Answer 84

- a measure of the efficiency of the FOP -measured by output per worker per hour -major determinant of economic growth and inflation

Question 85

calculate output of goods and services?

Answer 85

factor inputs + factor productivity

Question 86

what does higher productivity allow?

Answer 86

-businesses to pay higher wages and achieve increased profits at the same time

Question 87

what does specialisation cause to increase?

Answer 87

-increases productivity as capital and skills become more effective

Question 88

what are the functions of money?

Answer 88

- act as a means of exchange -store of value -measure of value -standard of deferred payment

Question 89

medium of exchange?

Answer 89

Money facilitates the exchange of goods and services, eliminating the need for barter. Example: You can use money to buy groceries without needing to trade goods directly.

Question 90

measure of value?

Answer 90

Money serves as a unit of account, providing a common measure of the value of goods and services. Example: Prices are expressed in a monetary unit, making it easier to compare the value of different items.

Question 91

store of value?

Answer 91

Money can be saved or stored for future use, preserving its value over time. Example: You can save money in a bank account to use for future expenses.

Question 92

method of deferred payment?

Answer 92

Money allows for transactions where payment occurs at a later date. Example: Credit purchases enable consumers to buy now and pay later using money as a medium of exchange.

Question 93

characteristics of money?

Answer 93

-widely accepted -hard to counterfeit -durable -holds value over time

Question 94

1.1.6 free-market economy?

Answer 94

-low levels of gov intervention -decision making is de-centralised -no pure free markets In a free market economy, economic decisions are primarily made by private individuals and firms. Key figures: Adam Smith, who advocated for the "invisible hand" of the market to allocate resources efficiently.

Question 95

command economies?

Answer 95

-high levels of gov intervention -gov controls allocation of resources -price mechanism has no role -karl marx

Question 96

mixed economies?

Answer 96

gov provides some goods and tries to reduce consumption of other goods In a mixed economy, both the private sector and the government play significant roles in economic decision-making. Mixed economies combine elements of free market and command economies.

Question 97

advantages of a free market?

Answer 97

-higher income after tax -Efficiency: Competition incentivizes firms to produce efficiently and innovate, an incentive to provide high quality goods -Consumer Choice: Consumers have a wide range of choices in products and services. -Economic Growth: Free markets can lead to rapid economic growth and higher living standards.

Question 98

disadvantages of a free market?

Answer 98

-businesses can exploit consumers -markets can be dominated by a few businesses -higher inequality -public goods may not be produced -under provision of merit goods

Question 99

advantages of a command economy?

Answer 99

-lower inequality than in a free market -prevents monopoly abuse -Equality: Command economies aim to reduce income inequality through central planning. -Stability: Central control can provide stability during crises. -Prioritizing Social Goals: Resources can be directed toward public services and social welfare.

Question 100

disadvantages of a command economy?

Answer 100

-lack of choice in products -less income after tax -Lack of Incentives: Central planning may discourage innovation and individual initiative. -businesses struggle to maintain high production levels -inefficient allocation of resources can lead to shortages or surpluses.

Question 101

advantages of a mixed economy?

Answer 101

-similar level of economic development to a free market economy -under consumed products provided by the state

Question 102

disadvantage of mixed economies?

Answer 102

-gov intervention can lead to inefficiencies -higher inequality than command

Question 103

Roles of the State in a Mixed Economy 1. regulation

Answer 103

The state regulates various aspects of the economy, such as consumer protection, environmental standards, and financial markets.

Question 104

Roles of the State in a Mixed Economy; 2. public goods and services

Answer 104

The government provides public goods and services that may not be adequately supplied by the private sector, including infrastructure, education, and healthcare. Example: Public schools and highways are funded and operated by the government.

Question 105

Roles of the State in a Mixed Economy; 3. welfare and redistribution

Answer 105

Governments implement social safety nets and income redistribution policies to address poverty and inequality. Example: Welfare programs and progressive taxation aim to reduce income disparities.

Question 106

Roles of the State in a Mixed Economy; 4. stabilization and economic planning

Answer 106

Governments may use fiscal and monetary policies to manage economic cycles and prevent economic crises. Example: Central banks adjust interest rates to control inflation and promote economic growth.