Section 1 - The Economic Problem

Question 1

What is the order of methodology in economics?

Answer 1

1. Develop theories and create economic models
2. Use simplifying assumptions to limit the number of variables
3. Test theories against relevant known facts (making use of observations, deduction, graphs, stats and other tools)
4. Use of empirical data
5. Use economic models to make predictions

Question 2

What does ‘ceteris paribus’ mean?

+ how does it link to economics

Answer 2

“All other thing remain equal”

When looking at two variables, we assume they are the only 2 factors that change

Question 3

What are the 4 things which economic decisions may be based on?

Answer 3

1. Normative statements
2. Moral view and value judgement
3. Political judgment
4. Short term positive consequences

Question 4

What are the 2 types of statements?

Answer 4

• positive
• normative

Question 5

What are positive statements? + example

Answer 5

Are objective statements that can be tested by referring to the available evidence

• “ A reduction in income will increase the amount of people shopping in pound shops”

Question 6

What is a normative statement? + example

Answer 6

Are subjective statements which contain a value judgement - they’re opinions

• “The use of fossil fuels should be taxed more highly than the use of renewable fuels”

Question 7

What is the basic economic problem?

Answer 7

Infinite wants but finite resources

Question 8

What are the 4 factors of production and their rewards?

Answer 8

1. Capital
   - interest
2. Enterprise
   - profit
3. Land
   - rent
4. Labour
   - wages

Question 9

LAND AS A FACTOR OF PRODUCTION

1. What is it
2. What natural resources are included
3. What are all natural resources on land considered to be
4. What’s the one exception
5. Their reward

Answer 9

1. The territory and all the earths natural resources on it
2. • non renewable resources e.g. natural gas
   • renewable resources e.g. wind or wood
   • materials e.g. gold
   • water
   • animals
3. Finite
4. Air
5. Rent

Question 10

LABOUR AS A FACTOR OF PRODUCTION

1. Definition
2. Name if people have more value or productive in a workplace
3. Their reward

Answer 10

1. The work done by those people who contribute to the production process
2. Human capital
3. Wages

Question 11

CAPITAL AS A FACTOR OF PRODUCTION

1. Definition
2. Why is capital different from land
3. Who pays for most of the economies capital + give an example
4. Their reward

Answer 11

1. The equipment, factories and schools that help produce goods and services
2. Because capital has to be made first
3. Governments e.g. a country’s road network
4. Interest

Question 12

ENTERPRISE AS A FACTOR OF PRODUCTION

1. Definition
2. Their reward

Answer 12

1. Refers to the people (entrepreneurs) who take risks and create things from the other 3 factors of production
2. Profit

Question 13

What is the purpose of an economic activity?

Answer 13

To increase people’s economic welfare

Question 14

What is the definition of ‘goods’?

Answer 14

Physical products you can touch e.g. books

Question 15

What is the definition of ‘services’?

Answer 15

Intangible things e.g. teaching

Question 16

What are the 3 fundamental questions linked to producing goods and services?

Answer 16

• what to produce?
• how to produce it?
• who to produce it for?

Question 17

What are the 3 agents within an economy?

Answer 17

• producers
• consumers
• governments

Question 18

What are producers?

Answer 18

Firms or people that make goods or provide services

Question 19

What are consumers?

Answer 19

People or firms who buy the goods or services

Question 20

What are governments?

Answer 20

A government sets the rules that other participants in the economy have to follow, but also produces and consumes goods and services

Question 21

What is assumed about agents of an economy?

Answer 21

It is assumed they are rational and make decisions which are best for themselves. These decisions will be based on economic incentives

Question 22

What does a production possibility frontier/curve (PPF/C) represent?

Answer 22

Shows the maximum amount of two goods or services an economy can produce

Question 23

What is a trade off linked to PPF’s?

Answer 23

When you have to choose between conflicting objectives because you cant achieve all your objectives at the same time. It involves compromising and aiming to achieve each of your objectives a bit.

Question 24

Are all points on a PPF curve productively efficient or allocatively efficient?

Answer 24

Productively efficient because all resources are being used efficiently as possible to produce the maximum possible output.

It wouldn’t be allocatively efficient as not all points will reflect the production of goods and services that people want or need

Question 25

What does a point inside the PPF represent?

Answer 25

An economy that is productively inefficient

Question 26

Definition of opportunity cost of a decision?

Answer 26

The next best alternative forgone

Question 27

Why is opportunity cost so important to be represented in economics?

Answer 27

It is used to ensure a more efficient allocation of resources

Question 28

What are some problems with using the concept of opportunity cost? (4)

Answer 28

1. Often not all alternatives are known 2. Some factors don’t have alternative uses 3. There may be a lack of information on alternatives and their costs 4. Some factors (e.g. land) can be hard to switch to an alternative use

Question 29

What 3 main things could cause an increase in the PPF?

Answer 29

1. Improved technology 2. Improvements to labour 3. Increased resoruces

Question 30

What is the thing most likely to cause a decrease in the PPF? + what does it show about the economy

Answer 30

A natural disaster where factors of production are lost + negative economic growth

Question 31

What is a free market?

Answer 31

A market that allocates resources based on supply and demand and the price mechanism. Anything can be sold at any price that people will pay for it

Question 32

What are the pros of a Free Market Economy? (3)

Answer 32

1. Efficiency - any product can be bought or sold, only those of the best value will be in demand. So firms have an incentive to try and make goods in as efficient a way as possible 2. Entrepreneurship - the rewards for good ideas (e.g. new products) can make entrepreneurs a lot of money. Encourages risk taking and innovation 3. Choice - incentives of innovation can lead to an increase in choice for consumers

Question 33

What are the con of a Free Market Economy? (3)

Answer 33

1. Inequalities - market economies can lead to huge differences in income. Controversial as large differences can be viewed as unfair > in a completely free market, anyone not working would receive no income 2. Non profitable goods may not be made - e.g. drugs for rare medial conditions as not many are needed 3. Monopolies - market dominance occurs

Question 34

What is a Command Economy?

Answer 34

In a command (or planned) economy, its the government (not market) that decides how resources should be allocated E.g. communist countries > USSR

Question 35

What are the pros of a Command Economy? (3)

Answer 35

1. Maximise welfare - govs have more control so can prevent inequality and redistribute income fairly. Ensure production of goods which are needed and beneficial for society 2. Low unemployment - gov can try to provide job + salary to everyone 3. Prevent monopolies - market dominance prevented

Question 36

What are the cons of a Command Economy? (3)

Answer 36

1. Poor decision making - a lack of info means govs may make poor and slow decisions about what needs to be produced 2. Restricted choice - consumes have limited choice in what they can consume + firms will make what they’re told to make 3. Lack of risk taking and efficiency - no incentive to incr efficiency, take risks or innovate because they don’t need to make profit

Question 37

How does market failure occur?

Answer 37

When free markets result in undesirable outcomes

Question 38

How can governments intervene in market failure (not in depth)?

Answer 38

- change law - offer tax breaks - create incentives - can buy or provide goods and services

Question 39

What are privately owned businesses and the government know as in a mixed economies?

Answer 39

Privately owned businesses > private Gov > public

Question 40

Definition of a mixed economy?

Answer 40

An economic system combining private and state enterprise

Question 41

Key ideas of Adam Smith? (1723-1790)

Answer 41

- big believer of a free market + ‘invisible hand’ - consumers + producers motivated by self interest - for free market to work, cannot be monopolies + barriers to entry must be low - wrote about specialisation + the division of labour

Question 42

Key ideas of Karl Marx? (1818-1883)

Answer 42

- critical of free market + argued created a small ruling class of producers (the bourgeoisie) that exploited the larger working class (the proletarial) - led to rise of communism in 20th century

Question 43

Key ideas of Friedrich Hayek? (1899-1992)

Answer 43

- keen supporter of a free market + critic of command economies - govs shouldn’t intervene

Question 44

P12

Question 45

P13

Question 46

P14

Question 47

P15