1.1 Nature of economics

Question 1

What is meant economics when describing economics as a social science

Answer 1

It is a study of how human beings allocate scarce resources to satisfy wants of humans.

Question 2

Whats is the purpose of theories and models in economics?

Answer 2

to explain why something is as it is
- they’re simplified to make them more useful

Question 3

what is different in the way theories and models are expressed?

Answer 3

• Theories are expressed in words
• Models are due to requiring greater precision are expressed in mathematicalterms

Question 4

what must occur when there are too many variables that can change within an economic model?

Answer 4

assumptions must be made

Question 5

What is ‘Ceteris Paribus’ meaning?

Answer 5

all other things remaining equal

Question 6

What makes economics a social science?

Answer 6

-it is difficult to set up experiments to test hypothesis
-economists gather data in the everyday world, thus other variables are always changing

Question 7

What are positive statements?

Answer 7

-statement that is objective and made without any obvious value judgements or emotions
-They can be tested to be proven or disproven and they are often expressed in the form of a hypothesis that can be analysed and evaluated
-statements about the future can be positive if they can be proven or disproven in the future

Question 8

What are normative statements?

Answer 8

a statement that is subjective and based on opinion
- so cannot be proven or disproven
-includes words such as ought, maybe, should or says that one action is better than another

Question 9

When do economists use positive and normative statements?
-The role of value judgments

Answer 9

They use positive statements to back up normative statements

Question 10

What do value judgements do?

Answer 10

influence economic decision making and policy
- different economists may make different judgments from the same statistic

Question 11

What is the basic economic problem (BEP)?

Answer 11

-how scarce resources are allocated to satisfy infinite human wants
- an economy seeks to allocate resources by using the price mechanism and by the government

Question 12

What are the 3 ways economies use to solve the basic economy problem

Answer 12

-working out what to produce
-how to produce it
- for whom to produce

Question 13

What is the concept of scarcity in economics?

Answer 13

-where there are unlimited wants and finite resources
-a relative concept as resources are not necessarily scarce themselves but are scarce in relation to the demands placed upon them

Question 14

What is a renewable resource?

Answer 14

a resource that can be replenished as long as the rate of consumption is less than or equal to the rate of replenishment, the stock will not decrease

Question 15

what is a non-renewable resources?

Answer 15

a resource that cannot be readily replaced by natrual means on a level to consumption
- a finite resource

Question 16

Define opportunity cost?

Answer 16

the cost of the next best alternative that is forgone when a choice is made

Question 17

What are the 4 factors of production?

Answer 17

-Land
-Labour
-Capital
-Enterprise

Question 18

Define the factor of production, Land:

Answer 18

all natural resources
-includes all physical land and the raw material that naturally occurs in it
- includes the sea and anything that naturally occurs in it

Question 19

Define the factor of production, Labour:

Answer 19

human resources
- the physical and mental abilities of the population
-these are distributed unevenly amongst the population
- its possible to develop some of these abilities via education and training.
-making the worker more productive

Question 20

Define the factor of production, Capital:

Answer 20

man-made resources
-refers to goods made by man with the specific purpose of producing other goods or services
-not useful in itself
- not purchased by consumers
- used by producers to make
other goods or services
-purchased by producers for use in the production of other goods

Question 21

Define the factor of production, Enterprise:

Answer 21

organisational resources
-entrepreneurship is the willingness and ability to take the risks of combining the other factors of production in order to make a product or services
-successful entrepreneurs earn profit from their activities

Question 22

What does the production possibility fronteir (PPF) show?

Answer 22

the maximum possible combination of capital and consumer goods that the economy can produce with its current resources and technology

Question 23

what is the PPF used for?

Answer 23

to test the concepts of opportunity cost

Question 24

What are capital goods?

Answer 24

goods used to help produce other goods
-e.g. machinery, tools, factories

Question 25

what are consumer goods?

Answer 25

goods that satisfy needs

Question 26

What is the gradient of the PPF?

Answer 26

the opportunity cost ratio

Question 27

What does it mean when the PPF is a straight line?

Answer 27

• a constant opportunity cost ratio

Question 28

What does it mean when the PPF is a concave shape?

Answer 28

the opportunity cost increases the more we produce of a product

Question 29

What does it mean when the PPF moves further away from the origin?
Why may this happen?(5)

Answer 29

• an economy has grown because it can produce more of both goods.
• Increasing quantity of resources
• Quality of resources increases
• stock of capital increases
• improvements in technical knowledge and training

Question 30

What does it mean when the PPF moves towards the origin?
Why may this happen? 3

Answer 30

• the economy is declining thus producing less goods than previously
• natural disasters destroy factors of production
• decrease in quantity or quality of labour due to
  
  • war
  • migration
  • pandemics
  • fall in spending on education

Question 31

When does specialisation occur?

Answer 31

When each worker completes a specific task in a production process.

Question 32

Who stated the concept of specialisation?

Answer 32

Adam smith

Question 33

What did Adam smith believe ?

Answer 33

That worker productivity can increase.
- firms can then take advantage of increased efficiency and lower average costs of production

Question 34

What are advantages of specialisation? (4)

Answer 34

• higher output and potentially higher quality, since production focuses on what people and businesses are best at
• there could be a greater variety of goods and services produced
• there are more opportunities for economies of scale, so the size of the market increases
• there is more competition and this gives an incentive for firms to lower their costs, which helps to keep prices down

Question 35

What are disadvantages of specialisation?(4)

Answer 35

• work becomes repetitive, which could lower the motivation of workers, potentially affecting quality and productivity. Workers could become dissatisfied
• there could be more structural unemployment, since skills might not be transferable, especially because workers have focussed on one task for so.
• by producing a lot of one type of good through specialisation, variety could in fact decrease for consumer
• there could be higher worker turnover for firms, which means employees become dissatisfied with their jobs and leave regularly

Question 36

What are the 4 functions of money?

Answer 36

• a medium of exchange
• a measure of value
• a store of value
• a method of deferred payment

Question 37

What is a free market economy?

Answer 37

Where governments leave markets to their own devices, so the market forces of supply and demand allocate scarce resources

Question 38

What are the two main free market economists?

Answer 38

Adam smith
Friedrich hayek

Question 39

What are 3 advantages of free market economies?

Answer 39

• firms are likely to be efficient because they have to provide goods and services demanded by consumers. They are also likely to lower their averages cost and make better use of scarce resources. Therefore, overall output of the economy increases
• the bureaucracy from govt intervention is avoided
• some economists might argue the freedom gained from having a free economy leads to more personal freedoms

Question 40

What are 4 free market economy disadvantages?

Answer 40

• the free market ignores inequality, and tends to benefit those who hold most of the wealth. There are no social security payments for those on low incomes
• there could be monopolies, which could exploit the market by charging higher prices
• there could be overconsumption of demerit goods, which have large negative externalities such as tobacco.
• Public goods are not provided in a free market, such as national defence. Merit goods, such as education, are under provided

Question 41

What is a command economy?

Answer 41

When the government allocates all of the scarce resources in an economy to where they think there is a greater need

Question 42

What are advantages of a command economy? (4)

Answer 42

• it might be easier to coordinate resources in times of crises, such as wars
• the government can compensate for market failure, by reallocating resources. They might ensure everyone can accesss basic necessities.
• inequality in society could be reduced, and society might maximise welfare rather than profit
• the abuse of monopoly power could be prevented.

Question 43

What are disadvantages of command economy?(3)

Answer 43

• government fail, as do markets, and they may not be fully informed for what to produce
• they may not necessarily meet consumer preferences
• it limits democracy and personal freedom

Question 44

What is a mixed economy?

Answer 44

A mix of both command and free market economies, the most common economic system today.
- market controlled by both government and the forces of supply and demand