Nature of Economics!

Question 1

What does ceteris paribus mean?

Answer 1

All other factors being equal.

Question 2

What are positive statements?

Answer 2

Objective statements that can be tested with factual evidence, and be accepted or rejected.

Question 3

What are normative statements?

Answer 3

Subjective opinions based on a value judgement.

Question 4

What’s the basic economic problem?

Answer 4

There are unlimited wants but scarce resources.

Question 5

What’s the basic economic question?

Answer 5

What to produce, how to produce it and who to produce it for.

Question 6

What’s opportunity cost?

Answer 6

The value of the next best alternative forgone.

Question 7

What are the factors of production?

Answer 7

Capital, enterprise, land and labour.

Question 8

What’s capital?

Answer 8

Man-made goods which can be used in the production process.

Question 9

What’s the reward/incentive of capital?

Answer 9

Interest from the investment.

Question 10

What’s enterprise?

Answer 10

Someone who takes risks and uses the other factors of production to produce a good or service.

Question 11

What’s the reward/incentive of enterprise?

Answer 11

Profit (an incentive to take risks).

Question 12

What’s land?

Answer 12

Natural resources such as oil, coal, wheat or water that are used in the production process.

Question 13

What’s the reward/incentive of land?

Answer 13

Rent.

Question 14

What’s labour?

Answer 14

Human capital, which is the workforce of the economy.

Question 15

What’s the reward/incentive of labour?

Answer 15

Wages.

Question 16

What’s a renewable resource?

Answer 16

A resource that can be replenished, so the stock level of resources can be maintained over a period of time. We have to assume that the rate of consumption is less than the rate of replenishment.

Question 17

What’s a non-renewable resource?

Answer 17

Resources that cannot be replenished.

Question 18

What’s a production possibility frontier?

Answer 18

A diagram that shows the maximum possible combinations of capital and consumer goods that an economy can produce with its current resources. It can show the opportunity cost between different goods.

Question 19

What do the positions on a PPF curve show?

Answer 19

Inside the curve shows an inefficient usage of resources. On the curve shows an efficient use of current resources. Outside the curve is unattainable with current resources.

Question 20

How is economic growth shown on a PPF curve?

Answer 20

Short term - an outward movement inside of the curve.
Long term - a shift of the curve itself.

Question 21

What are capital goods?

Answer 21

Goods which can be used to produce other goods.

Question 22

What are consumer goods?

Answer 22

Goods which can’t produce other goods.

Question 23

What’s specialisation?

Answer 23

Concentrating on a specific product or task, to make the production process faster and cheaper.

Question 24

What are the advantages of specialisation?

Answer 24

Higher output and higher quality.
A greater variety of products.
Firms can take advantage of economies of scale.
More competition can lead to lower prices for consumers.

Question 25

What are the disadvantages of specialisation?

Answer 25

Less motivation and productivity.
Worse quality.
More structural unemployment.
Less variety.
Higher costs.

Question 26

What are the functions of money?

Answer 26

A medium of exchange, a measure of value, a store of value and as a method for deferred payment.

Question 27

What’s a free market economy?

Answer 27

Where government leave markets to their own devices, leaving the forces of demand and supply to allocate scarce resources.

Question 28

What are the advantages of a free market economy?

Answer 28

Firms can be more efficient.
There can be lower costs.
The disadvantages of government intervention are avoided.
More personal freedom.

Question 29

What are the disadvantages of a free market economy?

Answer 29

Can lead to greater inequality.
Increased number of monopolies.
Overconsumption of demerit goods.
No provision of public goods.

Question 30

What’s a command economy?

Answer 30

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

Question 31

What are the advantages of a command economy?

Answer 31

Easier to coordinate resources in times of crisis.
The government can compensate for market failure.
Inequality should be reduced.
Prevents the abuse of monopolies.

Question 32

What are the disadvantages of a command economy?

Answer 32

Governments can also fail.
They may not meet consumer preferences.
It limits democracy and personal freedom.