Theme 1 - Introduction to Markets and Market Failure (1.1 - The Nature of Economics)

Question 1

Describe what is meant by the “Ceteris Paribus” theory. [1]

(Ref - 1.1.1 - Economics as a Social Science)

Answer 1

The assumption that, while effects of a change in one variable is measured, all other variables are constant. [1]

Question 2

Define a normative statement [1]

(Ref - 1.1.1 - Economics as a Social Science)

Answer 2

A statement which is a value judgement, so cannot be supported or opposed. [1]

Question 3

Define a positive statement [1]

(Ref - 1.1.1 - Economics as a Social Science)

Answer 3

A statement which can be supported or opposed with evidence. [1]

Question 4

What is the main theory of the Basic Economic Problem? [2]

(Ref - 1.1.3 - The Economic Problem)

Answer 4

Wants are infinite, but resources are scarce. [1]

Therefore, resources must be allocated between competing uses. [1]

Question 5

Define and give an example of opportunity cost [2]

(Ref - 1.1.3 - The Economic Problem)

Answer 5

Opportunity cost is the lost benefits of the next best alternative [1]

e.g. The opportunity cost of buying a house is 2 cars. [1]

Question 6

State the 4 resources which are commonly known as the factors of production. [4]

(Ref - 1.1.3 - The Economic Problem)

Answer 6

1. Land
2. Labour
3. Capital
4. Entrepreneurship

Question 7

Describe the 2 types of capital and their properties [4]

(Ref - 1.1.3 - The Economic Problem)

Answer 7

Working capital [1] - Stocks of raw materials and manufactured goods waiting to be sold. [1]

Fixed capital [1] - Stocks of offices, factories, machinery etc. [1]

Question 8

Describe the role of entrepreneurs in an economy/business. [4]

(Ref - 1.1.3 - The Economic Problem)

Answer 8

Organising production [1] - Organising the production of goods/services from land, labour and capital [1]

Taking risks [1] - Buying more factors of production with the hopes of more profit. [1]

Question 9

Describe 2 rewards to the factor of production [2]

(Ref - 1.1.3 - The Economic Problem)

Answer 9

Owners of fixed capital can earn profits from renting equipment [1]

Entrepreneurs can earn considerable profit from risking financial capital [1]

Question 10

What does the Production Possibility Frontier (PPF) show? [1]

Answer 10

The maximum potential output of goods of an economy. [1]

Question 11

If an economy decides to produce more capital goods at the production possibility, what would most likely occur? [1]

(Ref - 1.1.4 - Production Possibility Frontiers)

Answer 11

The amount of consumer goods produced decreases. [1]

Question 12

Describe how the Production Possibility Frontier represents opportunity cost [2]

(Ref - 1.1.4 - Production Possibility Frontiers)

Answer 12

Generally, if an economy is working in line with the production possibility, [1] the more capital or consumer good produced [1], the less of the other good is produced [1].

Question 13

How does the shape of the PPF affect the opportunity cost? [2]

(Ref - 1.1.4 - Production Possibility Frontiers)

Answer 13

A straight line PPF shows a constant opportunity cost [1].

A curved line PPF will cause variation in opportunity cost along the PPF. [1]

Question 14

Define Specialisation [2]

(Ref - 1.1.5 - Specialisation and the Division of Labour)

Answer 14

Production of a limited range of goods by an individual/firm [1] in co-operation with others to produce a complete range of goods. [1]

Question 15

Define Division of Labour [1]

(Ref - 1.1.5 - Specialisation and the Division of Labour)

Answer 15

When production is broken down into many separate tasks, as individuals undergo constant repetition. [1]

Question 16

Explain 2 advantages of division of labour [4]

(Ref - 1.1.5 - Specialisation and the Division of Labour)

Answer 16

Increases in workers productivity [1] as workers are undergoing repetition on a specific task, which makes them more skilled in performing it. [1]

Competitive advantages by increasing sales [1] as the end product will be of higher quality, therefore there is more customer loyalty. [1]

Question 17

Explain 2 disadvantages of the division of labour [4]

(Ref - 1.1.5 - Specialisation and the Division of Labour)

Answer 17

Decreased productivity in workers [1] which means that the worker will undergo boredom, therefore experience less motivation to work. [1]

Harder to find replacements [1] as if one worker is not present, it would be harder to find a replacement, therefore the economy suffers [1]

Question 18

Explain 1 advantage and disadvantage of specialisation in terms of trade. [4]

(Ref - 1.1.5 - Specialisation and the Division of Labour)

Answer 18

Lower prices, due to increased output causing EoS [1] therefore increased demand for those exports. [1]

More vulnerable to volatile commodity prices [1] which can reduce export revenue during low prices. [1]

Question 19

State the 4 functions which money must fulfill [4]

(Ref - 1.1.5 - Specialisation and the Division of Labour)

Answer 19

1. It must be a medium of exchange [1]
2. It must be a measure of value [1]
3. It must be a store of value [1]
4. It must be a method of payment [1]

Question 20

Describe how a medium of exchange and a measure of value relates to money [2]

(Ref - 1.1.5 - Specialisation and the Division of Labour)

Answer 20

(Medium of exchange) - It can be used to buy or sell goods. [1]
(Measure of value) - The amount of money a product costs determines it’s value. [1]

Question 21

Describe how a store of value and a method of payment relates to money [2]

(Ref - 1.1.5 - Specialisation and the Division of Labour)

Answer 21

(Store of value) - Money that can hold a fixed worth over time. [1]
(Method of payment) - Widely accepted as a reward for goods/services. [1]

Question 22

Define a Free Market Economy [1]

(Ref - 1.1.6 - Free Market, Mixed, and Command Economies)

Answer 22

Scarce resources are allocated entirely by the price mechanism [1]

Question 23

Define a Mixed Market Economy [1]

(Ref - 1.1.6 - Free Market, Mixed, and Command Economies)

Answer 23

Scarce resources are allocated partly by price mechanisms and partly by governments [1]

Question 24

Define a Command Economy [1]

(Ref - 1.1.6 - Free Market, Mixed, and Command Economies)

Answer 24

Scarce resources are allocated entirely by governments [1]

Question 25

Explain 2 advantages of free markets [4] | (Ref - 1.1.6 - Free Market, Mixed, and Command Economies)

Answer 25

Competition/efficiency [1] - Free markets compete for profits. Therefore there is more motive to be more efficient. [1] Consumer Choice [1] - There will be many businesses competing in an economy, which provides a variety of goods/services for consumers [1]

Question 26

Explain 2 disadvantages of free markets [4] | (Ref - 1.1.6 - Free Market, Mixed, and Command Economies)

Answer 26

Inequality [1] - There is no government to provide state benefits. Those on low incomes will remain in poverty. [1] Impact of market failure [1] e.g. negative production externality (e.g. local pollution), with no gov. intervention (e.g. tradeable pollution permits.) [1]

Question 27

State and explain 2 advantages of Command economies [4] | (Ref - 1.1.6 - Free Market, Mixed, and Command Economies)

Answer 27

Guaranteed standard of living [1] - A command economy provides a base standard of living for all consumers e.g. lowering IE via taxation. [1] Solving market failure [1] - Government intervention (e.g. public services) can solve market failures [1]

Question 28

State and explain 2 disadvantages of Command Economies [4] | (Ref - 1.1.6 - Free Market, Mixed, and Command Economies)

Answer 28

Low economic growth [1] - Large command economies have little competition, therefore less incentive for productivity causes low economic growth [1] Low consumer choice. [1] Low number of competing firms produce a small variety of goods. [1]

Question 29

Describe the role of the state in a mixed economy [2] Give an example of this role in the economy [1] | (Ref - 1.1.6 - Free Market, Mixed, and Command Economies)

Answer 29

Intervention in order to solve market failure [1] and provide a minimum standard of living for it's citizen's. [1] E.g. Governments progressively taxing the rich, to redistribute income to people with lower incomes. [1]

Question 30

State 3 key people who had key views on how the economy works and runs [3] | (Ref - 1.1.6 - Free Market, Mixed, and Command Economies)

Answer 30

Adam Smith [1] Karl Marx [1] Frederick Hayek [1]

Question 31

Describe Adam's view of the types of economies [2] | (Ref - 1.1.6 - Free Market, Mixed, and Command Economies)

Answer 31

He believed that competition between firms was essential [1] He believed that the price mechanism should be used to maximise business profits and consumer utility [1]

Question 32

Describe Friedrich Hayek's view of the types of economy [2] | (Ref - 1.1.6 - Free Market, Mixed, and Command Economies)

Answer 32

Hayek believed that governments should not intervene in resource allocation (Communism) [1] Hayek believed that free market economies provided a communication network, leading to efficient resource allocation [1]

Question 33

Describe Karl Marx's view of the economy [2] | (Ref - 1.1.6 - Free Market, Mixed, and Command Economies)

Answer 33

Karl believed that there was large amounts of income inequality in a capitalist system. [1] Karl believed that capitalism would eventually be replaced by communism [1]