1.1 Nature of Economics

Question 1

Positive Statements

Answer 1

Objective statements that can be tested as true or false using empirical evidence.

Question 2

Normative Statements

Answer 2

Subjective statements which contain value judgements and cannot be tested as true or false using empirical evidence.

Question 3

Opportunity Cost

Answer 3

The value of the next best alternative forgone.

Question 4

Scarcity

Answer 4

A limited number of resources compared to the infinite needs and wants of society.

Question 5

What causes a ppf to shift?

Answer 5

Quality
Quantity
Capital
Enterprise
Land
Labour

Question 6

Division of Labour?

Answer 6

Separating the production process into multiple separate tasks.

Question 7

What are the issues with the division of labour?

Answer 7

1. Boredom
2. Occupational immobility

Question 8

Specialisation

Answer 8

The process of concetrating resources on a narrow range of goods and services which a country has comparative advantage.

Question 9

What are the potential gains from specialisation?

Answer 9

• Managerial EoS
• Economic growth
• Higher quality goods

Question 10

Adam Smith

Answer 10

• Free market economy
• Output would increase with the division of labour and specialisation.

Question 11

Friedrich Hayek

Answer 11

Free market economy

Question 12

Karl Marx

Answer 12

Command economy

Question 13

What is the role of the state in a mixed economy?

Answer 13

Some resources are publicly owned, some resources are privately owned.

Question 14

What is the relationship between PED and Total Revenue?

Answer 14

Elastic - Elastic
Only - Opposite
Irritates - Inelastic
Skin - Same

Question 15

Price Mechanism

Answer 15

The way price changes in response to changes in Supply & Demand, ensuring the economy produces at equilibrium.

Question 16

Advantages and Disadvantages of a free market economy.

Answer 16

Advantages:
+ Competition drives innovation
+ Increased entrepreneurship creates jobs
+ Product differentiation creates more options for consumers.

Disadvantages:
- Lack of public goods (free rider problem)
- Income inequality
- Environmentle degradation

Question 17

What are the advantages and Disadvantages of a command economy?

Answer 17

Advantages:
+ Government can ensure allocative efficiency
+ Government can prevent the free rider problem
+ Supernormal profits are reinvested

Disadvantages:
- Lack of incentive to innovate
- Lack of incentive to be efficient
- May widen the budget deficit

Question 18

Why does the Demand curve slope downwards?

Answer 18

1. Substitute effect
2. Income effect
3. Diminishing marginal utility

Question 19

Substitute effect

Answer 19

As PL falls, goods become cheaper than substitutes, leading to an extension in QDD.

Question 20

Income effect

Answer 20

As PL falls, consumers have increased purchasing power, leading to an extension in QDD.

Question 21

Diminishing Marginal Utility

Answer 21

As more units of a good are consumed, satisfaction per unit decreases, leading to firms lowering PL, leading to an extension in QDD.

Question 22

What are the assumptions about producers and consumers?

Answer 22

• Producers aim to maximise profits
• Consumers aim to maximise utility

Question 23

What is the difference between long run and short run PES?

Answer 23

• In the SR, at least one factor of production is fixed.
• In the LR, all factors of production are variable.

Question 24

What is a renewable resource?

Answer 24

A resource of economic value which can be replenished/replaced naturally over a lifetime.

Question 25

What is a non-renewable resource?

Answer 25

A non-renewable resource is a resource of economic value that cannot be readily replaced by natural means on a level equal to consumption. e.g. Fossil fuels.

Question 26

Consumer good

Answer 26

Goods and services that are used by people to satisfy their needs and wants.

Question 27

Human Capital

Answer 27

The value of the productive potential of an individual or group of workers, made up of education and skills to represent the value of future earnings and production.

Question 28

Capital Goods

Answer 28

Goods that are used as a factor of production to produce others goods/services

Question 29

What does a PPF show?

Answer 29

The maximum potential output of a combination of 2 goods in an economy.

Question 30

What is meant by utility?

Answer 30

The satisfaction gained from consuming a good or service.

Question 31

What are the negatives of specialisation?

Answer 31

- Overdependency on an industry or product - Increased vulnerability - Reduced flexibility

Question 32

What is a free market economy?

Answer 32

Resources are allocated through markets rather than through the government.

Question 33

What is a mixed economy?

Answer 33

Some resources are allocated by the government, whilst some resources are allocated by the free market.

Question 34

What efficiencies can and can't be shown on a PPF?

Answer 34

Can: - Productive efficiency - Pareto efficiency Can't: - Allocative efficiency

Question 35

Pareto Efficiency

Answer 35

The point at which a firm can't produce 1 more unit of a good without sacrificing a unit of another good.