1.1 Nature of Economics

Question 1

What do economists develop to explain how the economy works?

Answer 1

Models and theories

Examples include theories of supply and demand or the circular flow of income.

Question 2

What is the term used by economists to mean ‘all other things remaining equal’?

Answer 2

Ceteris paribus

Used to simplify economic models and theories.

Question 3

What distinguishes positive statements from normative statements?

Answer 3

Positive statements are objective and can be tested, while normative statements are subjective and based on opinion.

Question 4

Give an example of a positive economic statement.

Answer 4

Raising taxes will lead to an increase in tax revenue.

Question 5

What is an example of a normative economic statement?

Answer 5

The free market is the best way to allocate resources.

Question 6

What is the basic economic problem of scarcity?

Answer 6

People have finite needs but infinite wants.

Question 7

What is the difference between renewable and non-renewable resources?

Answer 7

Renewable resources can be replenished, while non-renewable resources cannot be readily replaced.

Question 8

Define opportunity cost.

Answer 8

The cost of one thing in terms of the next best option that has been given up.

Question 9

What does a Production Possibility Frontier (PPF) show?

Answer 9

The maximum possible combinations of capital and consumer goods that an economy can produce.

Question 10

What does a movement along the PPF indicate?

Answer 10

A change in the combination of goods produced.

Question 11

What does a shift of the PPF indicate?

Answer 11

A change in the productive potential of the economy.

Question 12

What is the role of specialisation in economics?

Answer 12

The production of a limited range of goods, making trade essential for accessing all needed goods.

Question 13

Who introduced the concept of specialisation and the division of labour?

Answer 13

Adam Smith.

Question 14

List some advantages of the division of labour.

Answer 14

• Increased labour productivity
• Higher quality of goods and services
• More cost-effective to develop specialist tools
• Less time wasted in job transitions
• Specialized training saves time and money.

Question 15

What are some disadvantages of specialisation?

Answer 15

• Boredom leading to poor quality of work
• Reduction of craftsmanship
• Production delays in one process affect all tasks
• Lack of wide industrial training leading to structural unemployment.

Question 16

What is the theory of comparative advantage?

Answer 16

Countries should specialise in producing goods with lower opportunity costs to boost their economy.

Question 17

What are the four key functions of money?

Answer 17

• Medium of exchange
• Measure of value
• Store of value
• Standard of deferred payment.

Question 18

Fill in the blank: The opportunity cost of producing one consumer good is _______.

Answer 18

3 capital goods.

Question 19

True or False: Specialisation can lead to over-dependence on one export.

Answer 19

True.

Question 20

What can cause a decline in an economy’s production capabilities?

Answer 20

• Natural disasters
• Depletion of resources
• Decrease in labor quantity/quality.

Question 21

What happens to economic efficiency at points on the PPF?

Answer 21

Resources are allocated efficiently.

Question 22

What does it mean if a production point is beyond the PPF?

Answer 22

It is an unobtainable production level due to insufficient resources/technology.

Question 23

What are the four key functions of money?

Answer 23

• A medium of exchange
• A measure of value
• A store of value
• A method for deferred payment

These functions address the limitations of barter systems.

Question 24

Define ‘medium of exchange’.

Answer 24

It can be used to buy and sell goods and services and is acceptable everywhere.

Question 25

What is meant by 'measure of value' in relation to money?

Answer 25

It can compare the value of two goods and put a value on labour.

Question 26

What does 'store of value' refer to?

Answer 26

It is able to keep its value over time and can be saved for future use.

Question 27

Explain 'method for deferred payment'.

Answer 27

Money allows for debts to be created, enabling future payments.

Question 28

What characterizes a free market economy?

Answer 28

Individuals make their own choices and own production factors without government interference.

Question 29

How are resources allocated in a free market economy?

Answer 29

Through the price mechanism, determined by consumer spending.

Question 30

What is 'consumer sovereignty'?

Answer 30

The freedom of consumers to make choices that determine what is produced.

Question 31

Who is associated with the concept of the 'invisible hand'?

Answer 31

Adam Smith.

Question 32

What did Adam Smith believe about competition?

Answer 32

It causes lower prices and benefits consumers.

Question 33

What are the advantages of a free market economy?

Answer 33

* Automatic resource allocation * Consumer freedom of choice * High motivation and potential rewards * Political freedom * Productive efficiency due to competition * Higher growth rates ## Footnote These advantages highlight the benefits of competition and individual choice.

Question 34

List some disadvantages of a free market economy.

Answer 34

* High levels of inequality * Lack of merit goods * Waste of resources on unproductive expenses * Risk of monopolies * Externalities issues ## Footnote These disadvantages emphasize the potential downsides of unregulated markets.

Question 35

What defines a command economy?

Answer 35

All factors of production, except labour, are owned by the state.

Question 36

What is the role of the government in a command economy?

Answer 36

Resource allocation is carried out by the government rather than the price mechanism.

Question 37

Who is a key figure associated with the command economy concept?

Answer 37

Karl Marx.

Question 38

What are the advantages of a command economy?

Answer 38

* Minimum standard of living * Less resource wastage * Long-term planning * Cost-effective standardized products * Focus on objectives other than profit ## Footnote These advantages illustrate the potential for equitable resource distribution.

Question 39

Identify some disadvantages of a command economy.

Answer 39

* Difficulty in making correct decisions * Slow decision-making processes * Lack of motivation and efficiency * Loss of consumer freedom ## Footnote These disadvantages highlight the challenges faced by centrally planned economies.

Question 40

What is a mixed economy?

Answer 40

An economy that combines elements of free market and government planning.

Question 41

What is the typical government control range in a mixed economy?

Answer 41

Between 40-60%.

Question 42

List the roles of government in a mixed economy.

Answer 42

* Creating a framework of rules * Supplementing and modifying the price system * Redistributing income * Stabilizing the economy ## Footnote These roles ensure a balance between market freedom and government oversight.

Question 43

What is the purpose of consumer protection laws?

Answer 43

To protect consumers from poor quality products or services.

Question 44

Fill in the blank: A _______ economy is characterized by both free market mechanisms and government planning.

Answer 44

mixed

Question 45

True or False: In a command economy, all workers tend to receive the same wage.

Answer 45

True

Question 46

What does Friedrich Hayek argue about state control of the economy?

Answer 46

It leads to the loss of freedom.