1.1 The Nature of Economics

Question 1

what is the basic economic problem

Answer 1

how best to use the finite resources to solve unlimited wants and needs

Question 2

what are the four factors of production

Answer 2

Capital
Enterprise
Land
Labour

Question 3

what is the opportunity cost

Answer 3

the next-best alternative forgone

Question 4

what is a trade-off

Answer 4

the decision between our resource options

Question 5

define scarcity

Answer 5

the world has a limited number of resources

Question 6

why is economics known as a social science

Answer 6

you cannot perform scientific experiments

Question 7

what is a positive economic statement

Answer 7

a statement that can be tested for factual correctness

Question 8

what is a normative economic statement

Answer 8

a statement that cannot be objectively tested

Question 9

what is illustrated by a PPF

Answer 9

changes in economic welfare

Question 10

what axis is consumer goods on a PPF

Answer 10

x axis

Question 11

what axis is capital goods on a PPF

Answer 11

y axis

Question 12

what is true about a point outside the PFF line

Answer 12

there are not enough resources so it is not feasible

Question 13

what is true about a point inside the PFF line

Answer 13

the economy is not making full use of its resources (unemployment of resources)

Question 14

when will the PPF shift outwards

Answer 14

• higher productivity
• better management of inputs
• increase in total stock of capital and labour supply
• innovation and invention of new products and resources
• discovery of new natural resources (land)

Question 15

what happens if the PPF is a straight line

Answer 15

all this means is that as resources are transferred from one good to another (the change is constant)

Question 16

what is specialisation

Answer 16

occurs when FoP are focused on a narrow range of tasks (adam smith)

Question 17

what is division of labour

Answer 17

when you break down the production of a good into smaller repeatable tasks that can be performed by one person (adam smith)

Question 18

disadvantages of specialisation and the division of labour

Answer 18

• relies on others for productivity
• chain can break down easily if one thing goes wrong
• tedious = demotivating
• high staff turnover
• high recruitment + training cost
• absentism
• low job satisfaction = decrease in productivity

Question 19

what is a free market economy

Answer 19

in a free market, there is private ownership of everything and prices are dependent on supply and demand

Question 20

what is a mixed economy

Answer 20

in a mixed economy, there is more government involvement in the allocation of resources

Question 21

what is a command market economy

Answer 21

part of a political system in which a central governmental authority dictates the levels of production that are permissible and the prices that may be charged for goods and services. Most industries are publicly owned.

Question 22

what are the four functions of money

Answer 22

• medium of exchange
• store of value
• unit of account
• standard of deferred payment

Question 23

what does a medium of exchange mean

Answer 23

money allows for goods and services to be traded without the need for a barter system (where a double coincidence of wants are needed)

Question 24

how does money store value

Answer 24

this can refer to any assets whose “value” can be used more or used in the future

Question 25

how is money a unit of account

Answer 25

this refers to anything that allows the value of something to be expressed in an understandable way

Question 26

what does standard of deferred payment mean

Answer 26

this refers to expressing the value of debt

Question 27

what does ceteris paribus mean

Answer 27

shorthand indication of the effect one economic variable has on another, provided all other variables remain the same.

Question 28

what economist is associated with free market economies

Answer 28

Adam Smith

Question 29

how are the 3 fundamental questions of economics answered in a free market

Answer 29

by both producers and consumers in a market economy, with little or no government intervention.

Question 30

advantages of a free market economy

Answer 30

efficient resource allocation, competition, innovation, and product variety.

Question 31

disadvantages of a free market economy

Answer 31

monopolies, no government intervention, poor working conditions, and unemployment.

Question 32

what economist is associated with command economies

Answer 32

Karl Marx

Question 33

how are the 3 fundamental question of economics answered in command economies

Answer 33

a command economy answers the three economic questions by making allocation decisions centrally by the government.

Question 34

advantages of command economy

Answer 34

efficiency, theoretical equality between citizens (lack of inequality), focus on the common good as opposed to profits, speed, and low or non-existent unemployment.

Question 35

disadvantages of command economy

Answer 35

lack of efficient resource allocation, lack of innovation, and the needs/preferences of society may be ignored due to poor planning.

Question 36

what economist is associated with mixed economies

Answer 36

John Keynes

Question 37

how are the 3 fundamental questions of economics answered in a mixed economy

Answer 37

the mixed economy answers these questions by using individual decisions mixed with government intervention.

Question 38

what is the role of the state in a mixed economy

Answer 38

the government is involved in planning the use of some resources and can exert control over businesses in the private sector.