1.1 econ

• What is the key assumption made by economists when analyzing events?

  Ceteris paribus
• Why do economists devise models instead of conducting scientific experiments?

  Because they cannot conduct scientific experiments like in the natural sciences
• What are positive statements in economics?


  Objective statements that can be tested with factual evidence
• What is an example of a positive statement?


  "Raising the tax on alcohol will lead to a fall in the demand for alcohol"
• What are normative statements based on?


  Value judgements and opinions
• What is an example of a normative statement?


  "The free market is the best way to allocate resources"
• How can value judgements influence economic decision making?

  Different economists may draw different conclusions from the same statistic
• What is the basic economic problem?

  Scarcity
• What does scarcity imply about resources and wants?

  Wants are unlimited while resources are finite
• What is the opportunity cost of choosing to buy a packet of crisps over a chocolate bar if you only have £1?

  The value of the chocolate bar
• What is the opportunity cost of keeping a car that depreciates in value?

  The value that could have been gained by selling the car
• What are the factors of production represented by the acronym CELL?

  Capital, Entrepreneurship, Land, Labour
• What are the descriptions and rewards for the factors of production?

  • **Capital**: Physical goods used in production; Reward: Interest
  • **Entrepreneurship**: Managerial ability and risk-taking; Reward: Profit
  • **Land**: Natural resources; Reward: Rent
  • **Labour**: Human capital; Reward: Wages

  
• What is the difference between renewable and non-renewable resources?

  Renewable resources can be replenished, while non-renewable resources cannot
• What is an example of a renewable resource?

  Solar power
• What happens if renewable resources are consumed faster than they can be replenished?

  The stock of the resource will decline over time
• What can be done to manage renewable resources sustainably?

  Preventing deforestation and imposing fishing quotas
• What is depicted by production possibility frontiers (PPFs)?


  The maximum productive potential of an economy
• How do PPFs illustrate opportunity cost?

  By showing the trade-off between producing different goods
• What does producing at points A and B on a PPF indicate?


  Efficient combinations of output
• What does the law of diminishing returns state?

  The opportunity cost of producing more of one good increases
• What does producing at points C or D on a PPF indicate?

  That resources are not used to their full productive potential
• What does producing at point E on a PPF signify?


  That production is not yet attainable with current resources
• What can cause a PPF curve to shift outwards?

  An increase in the quantity or quality of resources
• What can cause a PPF curve to shift inwards?

  A decrease in the quality or quantity of resources
• What is the difference between moving along the PPF and shifting the PPF?

  Moving along the PPF uses the same resources, while shifting the PPF changes the quantity or quality of resources

  
• What are capital goods?


  Goods used to produce other goods
• What are consumer goods?

  Goods that cannot be used to produce other goods
• How can economic growth be shown on a PPF?

  By an outward shift of the PPF
• How can economic decline be depicted on a PPF?

  By an inward shift of the PPF
• Who famously stated the concept of specialization in production?

  Adam Smith
• What is the effect of specialization on productivity?

  It can increase worker productivity
• How does the division of labor relate to specialization?

  It allows workers to focus on specific tasks, increasing efficiency
• What are the implications of specialization in production according to Adam Smith?

  • Increased efficiency
  • Lower average costs of production
  • Enhanced productivity through division of labor
• What advantage do firms gain from increased efficiency and lower average costs of production?

  Firms can take advantage of increased efficiency and lower average costs of production.
• What example does Adam Smith use to illustrate the division of labor?

  He uses the example of the pin-maker.
• How does the division of labor affect the production of pins according to Adam Smith?

  It increases the output of pins significantly by dividing the production into 18 distinct operations.
• What are the advantages of specialization in production?

  • Higher output and potentially higher quality
  • Greater variety of goods and services produced
  • More opportunities for economies of scale
  • Increased competition leading to lower costs and prices

  
• What are the disadvantages of specialization in production?

  • Work becomes repetitive, lowering motivation
  • Potential for structural unemployment due to non-transferable skills
  • Decreased variety of goods for consumers
  • Higher worker turnover due to dissatisfaction

  
• What is one function of money as a medium of exchange?

  It eliminates the problem of double coincidence of wants in transactions.