1.1 Nature of Economics

Question 1

What are the assumptions made about RATIONAL economic agents

Answer 1

Firms - Maximise profit
Consumers - Maximise utility
Government - Improve economic and social welfare of its citizens

Question 2

What is a Positive Statement

Answer 2

Objective statements that can be tested against evidence.

E.g. The temperature in Newcastle is 20 degrees

Question 3

What is a normative statement

Answer 3

Subjective statements - they carry value judgements which can vary from person to person

This leads to controversy in political policies

Question 4

Opportunity Cost

Answer 4

The benefit of next best alternative foregone when making a decision

Question 4

Factors of production (FOP) and Factor rewards.

Answer 4

Capital - Goods used in the supply of other products e.g. machines. The reward is interest

Enterprise - Organising FOP. Reward is Profit

Land - Natural resources used in production. Reward is rent

Labour - Human input in production, reward is wages

Question 5

The Basic economic problem

Answer 5

People have unlimited wants but there are only limited resources.

Question 6

What does the PPF show

Answer 6

All the Maximum combination of two goods and services that can be produced in a given period with available resources being used efficiently

Question 7

PPF and efficiency

Answer 7

Any point on the PPF is productively efficient

Any point inside the PPF is productively inefficient

Any point outside PPF is not yet attainable

Question 8

Shifts on the PPF

Answer 8

Outward shift - Growth or an increase in productive capacity ( Links to LRAS on theme 2 )

Inward shift - Recession or even a depression, could be due to a natural disaster for example

Question 9

Movement along PPF

Answer 9

Reallocation of resources

Question 10

The law of increasing costs
( Why the PPF is concave )

Answer 10

“The opportunity cost of additional units of a good generally increases as society attempts to produce more of the good”

This occurs due to some resources being better suited for production than others

Imagine a country that can produce both cars and computers. Initially, shifting resources from computer production to car production might be relatively easy and efficient. However, as the country produces more and more cars, it might have to use resources (like factories or workers) that are less suited for car production, leading to a higher opportunity cost (more computers given up) for each additional car produced.

Question 11

Specialisation

Answer 11

The process by which firms/economies concentrate on producing goods and services in which they have an advantage

Question 12

Division of Labour

Answer 12

The process where the production process is broken down into a sequence of stages with workers assigned to particular stages

Question 13

Advantages of division of labour

Answer 13

Higher productivity:

Workers specialise in tasks they do best - tasks are done more quickly

Workers become more specialised and skilled over time - tasks are done quicker

Less time wasted from moving from one task to another

Capital machinery can be used continuously which speeds up production process

Time saved in training workers

All of this leads to lower cost per unit of output.

Question 14

Disadvantages of division of labour
(Can be Applied to all specialisation)

Answer 14

Monotony:

Staff turnover (leaving) which leads to more hiring costs for the business

Workers are less motivated and work at a lower quality

Chance of structural unemployment - more likely to be replaced by machines

Greater interdependence - If one part of the process breaks down, whole process stops

Question 15

Free market economy

Answer 15

Where scarce resources are allocated entirely by price mechanism

Question 16

Mixed economy

Answer 16

Where scarce resources are allocated partly by the price mechanism and partly by the state

Question 17

Command economy

Answer 17

Where scarce resources are allocated entirely by the state

Question 18

Advantages of free markets

Answer 18

Competition - Firms compete for profits and, to survive, they should strive to increase efficiency

Increased consumer choice as firms produce goods in response to demand

Lower/no taxation gives workers a greater incentive to work and businesses more incentive to make profits

Question 19

Disadvantages of free markets

Answer 19

Inequality - No state provision or public services. People who are in poverty will remain in poverty

Market failure - There is no government/regulatory body to intervene in market failure

Question 20

Adam smith beliefs

Answer 20

Founder of Classical economics

Price mechanism would lead to the optimum allocation of resources “the invisible hand”.

Question 21

Hayek beliefs

Answer 21

Free market beliefs with government provision of public goods.

(Free market but trying to solve market failure)

Question 22

Karl Marx beliefs

Answer 22

Socialist - didn’t want the employers to