The Nature of Econimcs

Question 1

Economics

Answer 1

The allocation of scarce resources to provide for unlimited human wants.

Question 2

Ceteris paribus

Answer 2

“All other things being equal”.

Question 3

Normative Economic statement

Answer 3

Based on value judgements that cannot be tested as either true or false.

Question 4

Scarcity

Answer 4

There are finite resources compared to infinite human wants so choices have to be made about how to use these resources.

Question 5

Renewable resource

Answer 5

A resource who’s stock level can be replenished naturally over a period of time.

Question 6

Non-renewable resource

Answer 6

A resource who’s stock level decreases over time as it is consumed.

Question 7

Capital good

Answer 7

A good that is used to produce consumer goods or services, such as a machine that helps make chocolate bars. It is not wanted for its own sake but rather for the consumer goods and services it can produce.

Question 8

Production possibility frontier

Answer 8

The maximum potential output of a combination of goods an economy can achieve when all its resources are fully and efficiently employed, given the current level of technology.

Question 9

Positive Economic statement

Answer 9

Based on facts that can be tested as true or false and are value free.

Question 10

Opportunity cost

Answer 10

The value of the next best alternative forgone.cost

Question 11

Consumer good

Answer 11

A good (such as a chocolate bar) that directly provides utility (benefit) to consumers. It is wanted for the satisfaction it gives.

Question 12

Specialisation

Answer 12

When an individual, firm, region or country concentrates on the production of a limited range of goods and services.

Question 13

Division of Labour

Answer 13

The specialisation of workers on specific tasks in the production process.

Question 14

Money

Answer 14

Anything that is generally acceptable in the payment of a good or service, or of a debt.

Question 15

Free market Economy

Answer 15

Where all resources are privately owned and allocated via the price mechanism. There is minimal government intervention.

Question 16

Command Economy

Answer 16

Where there is public ownership of resources and these are allocated by the government

Question 17

Mixed Economy

Answer 17

Where some resources are owned and allocated by the public sector and some by the private sector.

Question 18

What is the opportunity cost of you staying on at school to study A levels?

Answer 18

The opportunity cost is the next best alternative foregone. For example, earning income from a job or joining an apprenticeship scheme to learn a trade.

Question 19

How might opportunity cost be shown on a production possibility frontier?

Answer 19

Opportunity cost can be shown by a movement along a production possibility frontier, for example, from position A to B. An extra 10 units of manufactured goods are obtained at the expense of 5 units of services.

Question 20

What is the state of the economy if it is operating at a point within its production possibility frontier?

Answer 20

There must be unemployed resources in the economy - spare capacity exists.

Question 21

Outline the factors that might lead to an outward shift of the production possibility frontier for a country

Answer 21

An outward shift of the production possibility frontier might be caused by an increase in the quality or quantity of labour, an increase in capital goods (investment), new technology, enterprise and discovery of natural resources.

Question 22

Why does the Division of Labour increase productivity or output per head?

Answer 22

The division of Labour means workers become more skilled at what they do through experience and repetition of tasks. it thereby leads to greater output.

Question 23

Which type of economic system best describes the UK?

Answer 23

The UK is a mixed economy since both private enterprise and government decide how resources are allocated for production and distribution.

Question 24

Production Possibility Frontier

Answer 24

Shows the maximum potential level of output for two goods or services that an economy can achieve when all of its resources are fully an efficiently employed, given the level of technology available.

Question 25

What is the purpose of a Production Possibility Frontier?

Answer 25

It is used to illustrate scarcity and opportunity cost.

Question 26

What is the opportunity cost if you move along the curve from point Z to point W?

Answer 26

You have increased the production of capital goods by 20 units, where there is an opportunity cost of 30 consumer goods.

Question 27

What would happen to the rate of economic growth if you move along the curve from point Z to point W?

Answer 27

The rate of economic growth would increase since capital goods are crucial for increasing production. However, the loss of 30 units of consumer goods means that current living standards will fall in order to enable future living standards to rise at a faster rate.

Question 28

How is economic growth shown on a Production Possibility Frontier?

Answer 28

Economic growth is shown by an outward shift of the Production Possibility Frontier.

Question 29

What does it mean if an economy is at position U?

Answer 29

It means that there is an inefficient allocation of resources as not all are being used.

Question 30

Is it possible to increase both consumer and capital goods at position U?

Answer 30

Yes, there will be no opportunity cost since there is an inefficient allocation of resources anyway.

Question 31

What does Diminishing Returns mean?

Answer 31

At a certain point, employing an additional factor of production causes a relatively smaller increase in output.

Question 32

Why is a production possibility frontier curved?

Answer 32

Because it shows that as more of one good is produced, an increasing amount of another is foregone. the opportunity cost rises. This is because not all resources are as efficient as other resources in the production of goods. E.g. If I grow wheat in one part of the UK (where it is suitable to grow wheat) and livestock in another (where it is suitable to cultivate livestock). If I decide to grow wheat on the livestock land, I will grow a lower volume of wheat per acre than in the place where it is suitable to grow wheat. therefore the opportunity cost rises.