1.1 Nature of economics

Question 1

Ceteris Paribus

Answer 1

The assumption that other things are being held equal or constant, so nothing else changes.

Question 2

What type of statement is a positive statement?

Answer 2

Objective

Question 3

Why are positive statements objective?

Answer 3

Because they can be tested with factual evidence

Question 4

What are normative statements based on?

Answer 4

Value judgements

Question 5

What is the basic economic problem?

Answer 5

Scarce resources, as wants are unlimited but resources are finite, so choices need to be made.

Question 6

What is the opportunity cost?

Answer 6

The value of the next best alternative forgone.

Question 7

4 factors of production

Answer 7

Capital, Entrepreneurship, Land and Labour

Question 8

Description of Capital

Answer 8

The equipment, factories and schools that are needed to produce goods and services.

Question 9

How is capital different from land?

Answer 9

Capital needs to be produced first.

Question 10

Who pays for capital?

Answer 10

Much of capital is paid for by governments.

Question 11

What is enterprise?

Answer 11

willingness to take a risk to make a profit.

Question 12

What is Land?

Answer 12

Territory and natural resources.

Question 13

What is Labour?

Answer 13

Human capital

Question 14

What does a PPF show?

Answer 14

What is possible using a particular level of resources.

Question 15

What can shift the PPF curve?

Answer 15

• Increased resources

- Improved technology or improvement to labour.

Question 16

How to find out if there was economic growth from a PPF?

Answer 16

An outward shift

Question 17

Difference between capital goods and consumer goods

Answer 17

Capital goods are goods that can be used to produced others goods. E.G. Machinery
Consumer goods are goods which cannot be used to produce other goods e.g. clothing.

Question 18

Specialisation

Answer 18

When each workers completes a specific task in a production process

Question 19

Who stated specialisation?

Answer 19

Adam Smith.

Question 20

How does a division of labour lower average costs of production?

Answer 20

(1) Through the division of labour,
(2) Each workers’ productivity increases
(3) Firms then take advantage of this increased efficiency
(4) lower their costs of production.

Question 21

Advantages of specialisation

Answer 21

• Higher output and higher quality, because production focuses on what people and businesses are best at.
• Greater variety of goods and services produced
• More opportunities for economies of scale, so the size of the market increases
• More competition gives an incentive for firms to lower their costs, which helps keep their prices down.

Question 22

Disadvantages of specialsiation

Answer 22

• Repetitive work, lowers motivation of workers affecting quality and productivity.
• Structural unemployment since skills aren’t transferable
• Higher worker turnover for firms.
• Increased specialisation may decrease variety for consumers.

Question 23

4 functions of money

Answer 23

Medium of exchange
Measure of value
Store of value
Method of deferred payment

Question 24

Money as a medium of exchange

Answer 24

Without money, trade was done through bartering. However people didn’t always get exactly what they wanted or needed, and goods and services exchanged weren’t always of the same value. Exchange could only occur if there is a double coincidence of wants. Money defeats this issue.

Question 25

Money as a store of value

Answer 25

Money is able to keep its value and doesn't expire. With bartering, goods may expire and would therefore lose their value.

Question 26

Money as a measure of value

Answer 26

Money places a value of different goods and services, money also places a value on labour

Question 27

Money as a method of deferred payment

Answer 27

Money can allow for debts to be created so that people can pay later, however this relies on money keeping its value.

Question 28

What are markets?

Answer 28

A way of allocating resources

Question 29

How does a free market economy work?

Answer 29

Resources are allocated based on supply and demand and the price mechanism.

Question 30

Under a free market economy who makes economic decisions?

Answer 30

Private individuals and firms.

Question 31

How does a government intervene in a free market economy?

Answer 31

They implement laws and public services.

Question 32

Examples of free market economists

Answer 32

Adam Smith and Hayek

Question 33

Free market economy: What to produce?

Answer 33

Determined by consumer preference

Question 34

Free market economy: How to produce it?

Answer 34

Producers seeking profit

Question 35

Free market economy: For whom to produce it for?

Answer 35

Anyone who has the purchasing power to buy the good.

Question 36

Advantages of a free market economy

Answer 36

- Efficiency - as any product can be sold only those with the best value will be demanded so firms are encouraged to be efficient. - Entrepreneurship - the reward for new ideas can make entrepreneurs good money. This would encourage risk-taking and innovation. - Choice - incentive for innovation can lead to an increase in choice for consumers

Question 37

Disadvantages of a free market economy

Answer 37

- Inequality - large differences in wealth, anyone that is unable to work would receive no income. - Non-profitable goods may not be made - E.g. drugs to treat rare conditions may not be produced as there isn't potential profit. - Monopolies, successful businesses may become the only suppliers of a product

Question 38

How does a command economy work?

Answer 38

Where the government allocates all of the resources in an economy to where they think they're most needed.

Question 39

Economists who support command economies

Answer 39

Karl Marx

Question 40

Command economy: What to produce?

Answer 40

Determined by government preference

Question 41

Command economy: How to produce it?

Answer 41

Government and their employees

Question 42

Command economy: For whom to produce it:

Answer 42

Who the government prefers.

Question 43

Advantages of a command economy

Answer 43

- Maximise welfare - prevent inequality by redistributing income fairly. - Low unemployment - the government can try and provide all with a job + salary. - Prevent monopolies

Question 44

Disadvantages of a command economy

Answer 44

- Poor decision making - lack of information makes decisions poor and slow. - Restricted choice - consumers have limited choice. - Lack of innovation - no incentives to take risks as there is no profit.

Question 45

Role of state in a mixed economy

Answer 45

Provide public goods and merit goods.

Question 46

Adam Smith

Answer 46

- Believes in free market - 'Invisible hand', would allocate resources in society's best interests. This is because of self-interest, consumer want to maximise own benefits, producers want to maximise profits. - Believed in order for free market to work properly, there can be monopolies. - Monopolies can be prevented through low barriers to entry which would increase competition. - Also wrote about specialisation of labour

Question 47

Karl Marx

Answer 47

- Critical of FM as small rling class would dominate and exploit the larger working class. - Exploitation would lead to revolution , where proletariat would take over and control production, giving everyone a share in ownership of resources - Led to communism in 20th, but collapse of communism led to him being discredited.

Question 48

Friedrich Hayek

Answer 48

- Supports FM. - Govs shouldn't intervene to allocate resources because govs lack information in allocating them to most benefit society - Individual consumers + producers have the best knowledge and therefore allocation of resources should be left to them and price mechanism. - P. Mechanism is a signalling device between consumers and producers and will allocate resources efficiently.