The nature of economics

Question 1

Positive Statement

Answer 1

statements based on evidence or facts that can be proved or disproved.

Question 2

Normative Statement

Answer 2

statements based on value judgements and cannot be proved or disproved.

Question 3

ceteris paribus

Answer 3

All other things (factors) remaining the same’
The assumption that all other variables within a model remain constant whilst the change is being considered.

Question 4

What is The Economic Problem?

Answer 4

Resources are scarce but wants are infinite

Question 5

How do they solve the economic problem

Answer 5

working out what to produce, how to produce it and for whom production should take place.

Question 6

What is Scarcity

Answer 6

The world’s resources are limited, there are only limited amounts of land, water, oil, food, etc..

Question 7

Who are the economic agents

Answer 7

Consumer, Business and Governments.
Agents involved in Economic transactions.

Question 8

Four factors of production

Answer 8

Land, Labour, Capital, Enterprise

Question 9

Land

Answer 9

includes all natural resources, raw materials

Question 10

Labour

Answer 10

human effort involved in production of goods and services.

Question 11

Capital

Answer 11

any man-made aid to production including machinery, factory buildings.

Question 12

Enterprise

Answer 12

involves an entrepreneur taking risks

Question 13

renewable resources

Answer 13

A resource whose stock level can be replenished naturally over a period of time.

Question 14

non-renewable resources

Answer 14

will eventually be depleted

Question 15

define opportunity cost

Answer 15

loss of the next best alternative when making a decision

Question 16

What is the importance of opportunity costs to economic agents?

Answer 16

Due to the problem of scarcity, choices have to be made about how to best allocate limited resources amongst competing wants and needs.

Question 17

Economic Goods

Answer 17

resources limited in supply and so are scarce.

Question 18

Free goods

Answer 18

Goods that are unlimited in supply and therefore have no opportunity cost.
e.g sunlight

Question 19

Define production possibility frontiers

Answer 19

illustrates the maximum potential output of an economy when all resources are fully employed.

Question 20

Define economic growth

Answer 20

Increase in an economy’s productive potential.

Question 21

Define economic decline

Answer 21

Decrease in an economy’s productive potential.

Question 22

Define division of labour

Answer 22

Specialisation of workers on specific tasks in the production process.

Question 23

Define specialisation

Answer 23

The process of breaking down the production process into steps and then each worker is assigned a step

Question 24

Adam Smith

Answer 24

The Father of Economics;
- The Invisible Hand (workings of the Price Mechanism)
- Specialisation
- Increase in Division of Labour

Question 25

Advantages of specialisation and division of labour in production

Answer 25

- each worker specialises in tasks for which that worker is best suited - training costs are lower, one task - Less time wasted because a worker doesn't have to move from one task to another

Question 26

Disadvantages of specialisation and division of labour in production

Answer 26

- Monotony and boredom of workers= decrease in productivity - loss of skills = limited skills

Question 27

Advantages of specialisation and division of labour in trade

Answer 27

one country's specialisation in the production = trades with another country = benefit from increased output, greater choices and lower prices.

Question 28

Disadvantages of specialisation and division of labour in trades

Answer 28

country becomes over-dependent on imported goods and services.

Question 29

What are the limits to the division of labour

Answer 29

- Size of market: smaller market makes it more difficult to specialise. - type of product: designer fashion products are unique and not suitable for dol. - transport costs: high = dol not possible

Question 30

What is money

Answer 30

Anything which is acceptable to a wide number of people and organisations as payment for goods and services.

Question 31

What are the four functions of money

Answer 31

- a medium of exchange - a store of value - a measure of value - a means of deferred payments

Question 32

How is money used as a medium of exchange

Answer 32

exchanging the money earned from doing a specialist job for the goods and services they wish to buy.

Question 33

How is money used as a store of value

Answer 33

enabling people to save in order to buy goods in the future

Question 34

How is money used as a measure of value

Answer 34

assess the value of different goods and services by comparing prices.

Question 35

How is money used as a means of deferred payments

Answer 35

enabling people to buy goods and pay for them on credit

Question 36

Define a free market economy

Answer 36

prices are determined by supply and demand with no government intervention.

Question 37

What are the characteristics of a free market economy?

Answer 37

- private ownership of resources - Producers aim to maximise profits. - consumers aim to maximise satisfaction - resources are allocated by the price mechanism

Question 38

Who believed in the free market and what were the beliefs

Answer 38

- Friedrich Hayek - provided the most efficient allocation of resources. - identified information gaps between what the economies actually required and what the central planners in command economies were saying it required - These gaps led to shortages or surpluses of goods/services in command economies. - He felt that the threat to efficiency and economic growth is government intervention

Question 39

Advantages of a free market economy

Answer 39

- flexibility as the market system can respond quickly to changes in consumer wants. - Increased choice -efficiency as competition and the profit motive help to promote an efficient allocation of resources.

Question 40

Disadvantages of a free market economy

Answer 40

- Inequality with those who own resources and those who don't - Monopolies= firm may become the sole supplier of a product and then exploit consumers by charging a higher price than the free market equilibrium. - Externalities= not taken into account when producing a good or services.

Question 41

Define a command economy

Answer 41

an economy in which all of the resources are owned by the state and the government controls the distribution of goods/service.

Question 42

What are the characteristics of a command economy

Answer 42

- public ownership of resources - the state determines price - producers aim to meet production targets set by the state.

Question 43

Who believed in the command economy and what were the beliefs

Answer 43

- Karl Marx - free markets lead to capitalism in which the owners of the factors of production (Capitalists) exploited the workers. -share means of ownership and production

Question 44

Advantages of a command economy

Answer 44

- greater equality as everyone can have a minimum standard of living - full employment - external benefits and costs will be taken into account when planning production

Question 45

Disadvantages of a command economy

Answer 45

- inefficiency due to lack of competition and motives - shortages and surpluses if gov miscalculates supply and demand.

Question 46

Define a mixed economy

Answer 46

a blend of the free market and planned economy as individuals, firms and the government own factors of production and distribute goods/services.

Question 47

The role of the state in a mixed economy

Answer 47

- defence and internal security - provision of public goods - health and education ( public services) and infrastructure. - redistribution from the rich to the poor. Welfare system.

Question 48

Who believed in the mixed economy and what were the beliefs?

Answer 48

- Adam Smith - a role for governments to ensure efficiency in the allocation of resources and provide public and merit goods. - economies function best when private individuals work in their own self interest.