1.3.1 introductive concepts

Question 1

positive statement

Answer 1

based on facts, objective

Question 2

normative statements

Answer 2

concerned with value judgements, subjective

Question 3

scarcity

Answer 3

economic agents can only obtain a limited amount of resources at any moment

Question 4

opportunity cost

Answer 4

the benefit lost from the next best alternative
arises because resources are limited but wants are infinite

Question 5

economic goods

Answer 5

resources that are scarce and have an opportunity cost

Question 6

free goods

Answer 6

resources that are not scarce and have no opportunity cost
- abundant in supply
- can be consumed as much as is required without reducing the availability to others
HOWEVER it may diminish over time and may need to be paid for and/or produced
—> becomes an economic good

Question 7

factors of production

Answer 7

land, labor, capital, entrepreneur

Question 8

land

Answer 8

land and all the natural resources below the earth
1. non renewable resource
2. renewable resource

Question 9

non-renewable resource

Answer 9

once used cannot be replaced, non-sustainable, finite

Question 10

renewable

Answer 10

can be replaced when used, infinite, naturally replenishes, can be used over and over

Question 11

production possibility frontiers (PPF)

Answer 11

assumes that only 2 goods are produced in the economy
represents the production possibilities for a particular time period only

Question 12

movement along the PPF

Answer 12

reallocation of resources from the production of one product to another

Question 13

outside the PPF

Answer 13

unattainable as there are not enough resources

Question 14

inside the PPF

Answer 14

the economy is producing less output than it is capable of
there is an unemployment of resources and/or productive inefficiency
wastage of resources
it is possible to produce more of one or both goods without opportunity cost

Question 15

point on PPF

Answer 15

the economy is productive the greatest possible output
factors of production are being used to their maximum potential
output is produced at lowest possible cost = productive efficiency

Question 16

law of diminishing returns

Answer 16

occurs because not all factor inputs are equally suited to producing items

Question 17

inward shift of PPF

Answer 17

economic decline: decrease in productive potential of economy
- fewer factors of production available
- can produce fewer consumer and capital goods with the factors available

Question 18

outwards shift of PPF

Answer 18

economic growth: increase in the productive potential of the economy
- more resources available for production
- quality of resources improves

Question 19

actual output

Answer 19

point inside PPF
all economies have some unemployment of resources or productive inefficiency

Question 20

capital goods

Answer 20

assets a company uses in the production process to manufacture goods and services that consumers will use later

Question 21

consumer goods

Answer 21

any terms purchased to satisfy the wants and needs of the buyer

Question 22

division of labor

Answer 22

occurs when the production process i s broker down into tasks and each worker specialises on 1 or small range of tasks

Question 23

specialisation

Answer 23

the production of a limited range of goods by an individual, firm or country in co-operation with others
specialisation by individuals is called division of labor
improves our standard of living

Question 24

advantages of division of labor

Answer 24

1. workers get better by doing the same task repeatedly
2. more productive
   - every worker is very good at what they do
3. more cost efficient
   - less wastage: workers are very good at what they do
   - equipment and training only given to those who need it
4. time saving
   - each worker remains at their post and less time is spent moving around
5. easier to identify problem areas in the production process

Question 25

disadvantages of division of labour

Answer 25

1. workers may not be motivated to complete their tasks well - they may quit or not show up to work 2. when one part of the production process stops, the whole process could stop - since the workers/ machines are specialists, no one can replace the 3. over-specialisation of workers may cause them to lack flexibility to do other jobs - when their industry dies they won’t have other jobs = structural unemployment 4. machines can easily replace people - may cause unemployment 5. not all companies can utilise this principle - only some type of production processes can use it

Question 26

how can the disadvantages of DoL be addressed effectively?

Answer 26

1. job rotation policy: increases flexibility of workers 2. pay workers well/ benefits: prevents them from quitting

Question 27

function of money

Answer 27

money encourages trade and facilitates specialisation 1. medium of exchange 2. measure of value 3. store of value 4. method of deferred payment

Question 28

financial markets

Answer 28

buyers and sellers trade services or assets that are monetary in nature, allows participants to invest & speculate and make financial gains

Question 29

product market

Answer 29

buying and selling of physical goods or services

Question 30

factor markets

Answer 30

buying and selling of land, labor, capital

Question 31

roles of financial markets

Answer 31

1. to facilitate saving, eg banks, stocks, property 2. make funds available to businesses and individuals, eg banks, investors - enable borrowing by firms and individuals to take place - firms are able to buy capital goods and expand its output 3. to facilitate the exchange of goods and services, eg cash, bank cheques - create payment systems for goods and services to be traded quickly 4. to provide a market for equities - equity finance: issuing shares can enable companies to raise capital/ money to finance their expansion - owners of shares benefit by owning a share of the profits of the company, being able to save and make financial gains, being able to buy and sell the shares and make a profit - stock markets provide opportunities for buyers and sellers to exchange shares, encourages people to purchase new shares knowing that they can sell it later if they want 5. to provide forward markets in commodities and currencies - prices of many commodities and currencies are subject to much fluctuation - purchasing forward contracts involves agreeing on a future price today to reduce the risk - increases certainty for firms by creating more predictable prices for goods to be traded on a future date

Question 32

evaluation points of financial markets

Answer 32

1. accumulation of debt 2. levels of interest rates may be too low for savings 3. transaction fees may be high 4. volatile stock markets, fluctuating commodity markets 5. moral hazard and market bubbles

Question 33

free market economy

Answer 33

all resources are allocated through market forces of demand and supply with no intervention by the government the price mechanism allocates resources through bringing together buyers and sellers who agree on a price for the product. service

Question 34

command economy

Answer 34

all resources allocated through administrative decision, eg by the government

Question 35

mixed economy

Answer 35

resources are partly allocated through the market and partly by the government

Question 36

what does the government do in a mixed economy?

Answer 36

1. provides welfare benefits 2. provides healthcare 3. provides education

Question 37

advantages of free market economy

Answer 37

1. more choices and lower prices for consumers 2. higher quality and innovation of products because of competition and profuse incentives 3. more efficient 4. more economic growth: more output nad better resource allocation 5. more inequality because only winners get rewards 6. higher risk: there is no safety net if they fail 7. more political freedom/ choice

Question 38

advantages and disadvantages of command economy

Answer 38

1. less choice as consumers 2. lower quality because lacking profit incentive 3. less efficient because there is no incentive to allocate resources efficiently 4. more equal: more unemployment, welfare and education benefits 5. less freedom, more government control