1.1 Nature of economics

Question 1

Define Ceteris Paribus

Question 2

Inability in economics to make scientific experiments

Question 3

Difference between Positive and Normative Statement

Answer 3

A positive statement is one which is factual or can be tested and aren’t linked to individuals’ viewpoints. Whereas a normative statement is more judgemental, an example of this can be seen in extract A, where the prime minister says that “A price cap will not be good for customers.” This is a normative statement because it cannot be proved. However a positive statement would be where it states that households can save on £100. This is a positive statement, as it can be proved.

Question 4

What is the problem of scarcity/economic problem

Answer 4

There are not enough resources available to produce the goods and services which satisfy our infinite wants.

Question 5

What is opportunity cost

Answer 5

the next best alternative foregone when an economic decision is made

Question 6

Which goods do not involve opportunity cost

Answer 6

Free goods (i.e. sunlight) are renewable, therefore they aren’t scarce and have no opportunity cost

Question 7

What does a Production possibility frontier show

Answer 7

It shows the maximum combination of goods and services which can be produced in a given time period. If all the rescources (FOP) are effectively utilised.

Question 8

Production possibility frontier, show:

Answer 8

Any point on the curve shows max productive potential
If it is just one point, it is specialising in consumer goods or capital goods
Any point inside the curve represents inefficiency
Any point outside the curve is unattainable production

Question 9

Causes of shifts and movements

Answer 9

A movement along the PPF occurs when there is a change in the allocation of existing resources in the economy.

An outwards shift demonstrates economic growth, when there is an increase in the productive potential of an economy. An increase in quality or quantity of FOP.
An inwards shift demonstrates economic decline, when the quality or quantity of available FOP falls.

Question 10

Define the division of labour

Answer 10

When a task is broken up into several component tasks

Question 11

Adam Smith - specialisation and division of labour

Answer 11

Division of labour allows workers to specialise by focusing on one (or a few) of the components of the production process. This results in increased output per worker and increased productivity

Question 12

Advantages of specialisation and division of labour [production]

Answer 12

• high productivty lowers the COP
• lower costs can be passed on to consumers in the form of lower prices
• lower costs = increased profits
• increased productivity allows firms to expand (even globally)
• creates many low skilled jobs

Question 13

Disadvantages of specialisation and division of labour [production]

Answer 13

• task repetition can lead to boredom and decreased motivation
• decreased motivation leads to decreased productivity and poorer manufacturing quality
• may increase staff turnover rates
• mass produced products can lack variety and don’t take customer preference into account
• if workers lose their jobs they will find it hard to find a job as they are only skilled in one job (skills aren’t transferable)

Question 14

Advantages of specialisation and division of labour [trade]

Question 15

Disadvantages of specialisation and division of labour [trade]

Question 16

What are the 4 functions of money

Answer 16

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

Question 17

A medium of exchange

Answer 17

Money easily facilitates the exchange of goods as no double coincidence of wants is necessary

Question 18

A measure of value

Answer 18

Ascribes value to different goods/services
Knowing the price allows producers and consumers to male decisions in their best interest

Question 19

A store of value

Answer 19

Money holds its value over time
Money remains valuable in exchange over long periods of time

Question 20

A method of deferred payment

Answer 20

Money is an acceptable way to arrange terms of credit and settle any future debts
Allows producers/consumers to acquire goods in the present and pay in the future

Question 21

free market

Answer 21

there is little/no govt intervention that provides the most efficient allocation of resources.

Question 22

mixed economy

Answer 22

there was a role for govts to ensure there is an efficient allocation of resources and provide public and merit goods. believed the economy functions best when private individuals work in their own best interest.

Question 23

command economy

Answer 23

believed that freee markets lead to capitalism, exploiting workers and creating an inequality which would break down the classes. the social role of the state is to share between society equally. state shoudl be the central planner

Question 24

pros/cons of command economy

Question 25

pros/cons of free market

Answer 25

+ encourages no over-dependency
+

Question 27

The role of the state in a mixed economy

Answer 27

Governmentintervention occurs mainly through taxation (toraiserevenue) andthen
spendingthatrevenuetoredistributeincomeandprovideessential goods/services
Therearemanydierenttypeof taxintervention includingpersonal incometax,
corporation tax, valueaddedtax,tarion imports, inheritancetax etc.
Incomeis redistributedthrough thecreation ofa welfaresystemwhich often includes
unemploymentbenefits, healthcare, andpension provision
Government spendingis often focusedon infrastructure, merit goods (e.g. schools)
andpublicgoods (e.g.nationaldefense)

Question 28

give an example of each economy philosophy

Answer 28

free market - USA
command economy - UK
command economy - North Korea