Nature of economics

Question 1

What is ceteris paribus?

Answer 1

All things remaining equal
e.g change in income means D will shift

Question 2

What is a positive statement?

Answer 2

Objective
Can be tested and proven/disproven
In the form of a hypothesis

Question 3

What is a normative statement?

Answer 3

Subjective
Opinion based
Cannot be proven/disproven

Question 4

What are value judgements?

Answer 4

Using positive statements to back up normative statements

Question 5

What is the economic problem?

Answer 5

Scarcity; people have finite needs but infinite wants but resources are finite and limited

Question 6

How to solve the basic economic problem?

Answer 6

Decide what, how and for whom to produce

Question 7

What is a renewable resource?

Answer 7

Resource with economic value which can be replaced on a level equal to consumption e.g oxygen, solar power

Question 8

What is a non renewable resource?

Answer 8

Resource with economic value that can’t be replaced by natural means on a level equal to consumption e.g fossil fuels, coals, oil

Question 9

What is opportunity cost?

Answer 9

The same resources can’t be used to produce different goods at the same time so decision are made leading to OC.
e.g have £1, can buy chocolate or crisps; choose chocolate and OC is the bag of crisps you can’t buy due to limited resources.
Consumers make choices on how to use their limited income based on level of satisfaction.
Producers choose what to do with their limited resources based on profit.

Question 10

What are the factors of production?

Answer 10

Land
Labour
Capital
Entrepreneurship

Question 11

What does the Production possibility frontiers show? (PPF)

Answer 11

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

Question 12

Why is the PPF a curve?

Answer 12

The first resources switched from capital to consumer goods production are not adding much to capital goods but will be much more productive in production of consumer goods. Vice versa

Question 13

What are consumer goods?

Answer 13

Goods demanded and bought by individuals

Question 14

What are capital goods?

Answer 14

Goods produced in order to aid the production of consumer goods in the future

Question 15

What is specialisation?

Answer 15

Production of a limited range of goods by an individual/company/country which means trade is essential as it is the only way to access what they need.

Question 16

What is the division of labour?

Answer 16

When labour becomes specialised in a particular part of the production process. To maximise goods and services produced they must ensure all factors of production do the tasks they are best at

Question 18

What did Adam smith say about labour efficiency?

Answer 18

Stated the concept of specialisation and division of labour. Showed how increase in labour productivity (output per worker) increased firms efficiency and lowers cost of production

Question 19

What are the advantages of the division of labour?

Answer 19

Increased labour productivity; quicker, better, more efficient as focus on one
Higher quality of goods/services as workers are more skilled
Time isn’t wasted moving between jobs
Workers only trained to do one specific task, saving time and money

Question 20

Disadvantages of the division of labour?

Answer 20

Work becomes boring so may produce poor quality work and people leaving the business
Reduced craftsmanship and much more standardised products
Not wide industrial training so could suffer from structural unemployment

Question 21

Advantages of specialising? (to trade)

Answer 21

Theory of comparative advantage states countries should specialise in good with a lower opportunity cost so they are the best at producing. Helps boost economy and greater output globally

Question 22

Disadvantages of specialising? (in trade)

Answer 22

Countries may become over dependent on one export; if fails economy collapses e.g crops but poor weather
Countries may specialise in non renewable resources; may run out so huge income/resource loss for them
High interdependence; problems if trade is prevented e.g due to war
More competition to cut costs so wages may fall

Question 23

What are the functions of money?
Give 4

Answer 23

Specialisation in production means a form of exchange is needed to allow everyone access to to what they need.

A medium of exchange
A measure of value
A store of value
A method for deferred payment

Question 24

What is a medium of exchange?

Question 25

What is a measure of value?

Question 26

What is a store of value?

Question 27

What is a method for deferred payment?

Question 28

What is a free market economy?

Answer 28

Individuals are free to make their own choices and owns the FOP without government interference. Resources are allocated through the price mechanism. Consumers decide based on satisfaction. Producers decide based on profit. There are no completely free markets as government must intervene somehow e.g issuing money, protecting property rights, breaking up monopolies

Question 29

What did Adam Smith say about the free market economy?

Question 30

What did Friedrich Hayek argue?

Answer 30

State control of the economy leads to loss of freedom. The poor were better off in free market economies due to more personal freedom. He said central planning by governments led to what only a small minority wanted. He believed although people don’t make supply and demand decisions based on perfect information, they know what they need in their own situation.

Question 31

Advantages of the free market?

Answer 31

Automatic system due to invisible hand; resources moved out of production of a good when people stop demanding/too high costs Consumers have freedom of choice High motivation as people know working hard could lead to high rewards so enterprise flourishes Political freedom Firms are in competition so they will produce goods at lowest costs, ensuring productive efficiency Tend to have higher growth

Question 32

Disadvantages of the free market?

Answer 32

High inequality levels since the rich own more factors of production and grow richer Lack of merit foods and little control of demerit goods Resources may be wasted on unproductive expensive like advertising If there is no competition, there may be monopolies who charge high prices and offer low quality service Problem of externalities

Question 33

What is a command economy?

Answer 33

All factors of production (except labour) is owned by the state and labour is directed by the state. No private property, everyone assumed selfless working for a common good. Resource allocation by government rather than the price mechanism G allocation may represent consumer wishes and focuses on need to expand areas but planning is so complex that some decisions are left to consumers.

Question 34

What did Karl Marx believe?

Answer 34

Believed in the command economy and criticised capitalism. Thought capitalists profit came from exploiting labour as they underpaid workers. Wanted to remove difference between incomes if owners and workers and believed capitalism would collapse due to communism. He saw business growing and workers porter creatung 2 class systems. He thought more firms would fail due to competition causing unemployment/lower wages/higher prices so discontent to working class. Theory states these workers would rise against property owners and take control of production leading to democratic society where everything is owned by everyone

Question 35

Advantages of