The Economic Problem

Question 1

What are the 2 kinds of Economic Statements?

Answer 1

Positive and Normative Statements

Question 2

What is a positive statement?

Answer 2

A statement that is objective and can be tested and proved by evidence

Question 3

What is a normative statement?

Answer 3

Subjective statements that include value judgements, people’s opinions.

Question 4

What is the basic economic problem?

Answer 4

There is a scarce amount of resources available to satisfy people’s wants and needs.

Question 5

What are the four factors of production?

Answer 5

Capital, Enterprise, Land and Labour

Question 6

What is labour?

Answer 6

The work done by people

Question 7

What is Capital?

Answer 7

The equipment used to produce goods and services.

Question 7

What is enterprise?

Answer 7

The willingness to take a risk in order to make a profit.

Question 8

What are the 3 economic agents?

Answer 8

Producers, Consumer & Governments

Question 9

What does a production possibility frontier(PPF) diagram show?

Answer 9

The options that are available when you consider the production of just two types of goods or services.

Question 10

What is a trade - off?

Answer 10

When you must choose between two conflicting objectives because you cannot achieve all your objectives at the same time.

Question 11

Where on the PPF curve are all factors of production being utilised?

Answer 11

Anywhere on the PPF curve

Question 12

Where on the PPF curve are all factors of production not being fully utilised?

Answer 12

Anywhere on the inside of the PPF curve

Question 13

Where on the PPF curve is it not possible to produce at that level?

Answer 13

Anywhere outside the PPF curve

Question 14

What is an opportunity cost?

Answer 14

The next best alternative that you give up in making a decision.

Question 15

What causes the PPF curve to shift outwards?

Answer 15

Increased resources, improvements to technology or labour.

Question 16

What causes the PPF curve to shift inwards?

Answer 16

When fewer total resources are available, such as after a natural disaster or a war.

Question 17

What causes the PPF curve to only shift in one direction?

Answer 17

When there is an improvement in resources only for a specific good or service

Question 18

What do markets do?

Answer 18

They are a method of allocating resouces

Question 19

What is a free market economy?

Answer 19

An economy that allocates resources based on supply and demand and the price mechanism.

Question 20

What are the 2 types of economies?

Answer 20

Free market and Command economy

Question 21

What is a command economy?

Answer 21

When a government controls how resources are allocated

Question 22

Pros of a free market economy?

Answer 22

Efficiency - Firms have the incentive to make goods in the most efficient way possible so they can sell at the highest price possible.

Entrepreneurship - Rewards for good ideas can bring lots of money, which encourages risk - taking and innovation

Choice - There is a more wide range of choice for a product.

Question 23

Cons of a free market economy?

Answer 23

Inequalities - Free market economies can lead to differences in income

Non Profitable goods may not be made, such as a firm may not sell a drug to treat a rare disease as it is not profitable.

Monopolies - Successful businesses can become dominant in a market, and could abuse its power.

Question 24

Pros of a command economy?

Answer 24

Maximise welfare - Government have more control, so they can prevent inequality and redistribute income fairly Low unemployment - Governments can try to give everyone a job. Prevent monopolies - Market dominance of monopolies can be avoided.

Question 25

What is a mixed economy?

Answer 25

An economy with a private and public sector.

Question 25

Cons of a command economy?

Answer 25

Poor decision making - Lack of information means government cannot make the best decisions Restricted choice - Consumers have limited choice, firms will produce what they are told to produce. Lack of risk - taking and efficiency - Governments don't need to take risks and be efficient because they don't need to make a profit

Question 26

What is a margin?

Answer 26

The change in variable caused by an increase of unit in another variable

Question 27

What does traditional economic theory assume about economic agent?

Answer 27

That they are utility maximisers and they always act rationally

Question 28

What does behavioural economics look at?

Answer 28

The impact of social, psychological and emotional factors on decision making.

Question 29

What causes economic agents to act irrationally?

Answer 29

Imperfect or asymmetric information, bounded rationality

Question 30

What biases can individuals be influenced by?

Answer 30

Rules of thumb - Such as saying please or thankyou Anchoring - Placing too much emphasis on on piece of information Availability bias - Where judgements are made about a product based on a piece of information that can be remembered, but has a low chance of actually happening. Social norms - Buying and smoking cigarettes just because everyone around you thinks its normal

Question 31

What is choice architecture?

Answer 31

When an individual's choice is influenced by adapting the way the choice is presented

Question 32

What are the types of choice architecture?

Answer 32

Default choice - People can't be bothered to change the choice so they leave it, such as opting out as an organ donor. Framing - The way is presented, making it look more or less desirable Nudges - Giving people some alternative to choose without removing the freedom of choice