nature of economics

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

  Ceteris paribus
• What does ceteris paribus mean in economics?


  It means that other things are being held equal or constant
• Why can't economists conduct scientific experiments like natural scientists?


  Because they rely on real-life scenarios to build models
• What are positive statements in economics?


  Objective statements that can be tested with factual evidence
• What words are commonly found in positive statements?


  Words such as 'will' and 'is'
• Give 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 judgments and subjective opinions
• What words are commonly found in normative statements?


  Words such as 'should'
• Give an example of a normative statement.


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


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


  Scarcity
• Why do choices have to be made in economics?


  Because wants are unlimited and resources are finite
• What is an example of a choice made due to scarcity?


  Choosing between a chocolate bar and a packet of crisps with £1
• What is opportunity cost?


  The value of the next best alternative forgone
• What is the opportunity cost of choosing crisps over a chocolate bar?


  The chocolate bar
• How is opportunity cost illustrated with a car's depreciation?


  The opportunity cost of keeping the car is the value lost by not selling it
• Why is opportunity cost important for economic agents?


  Because they must make choices due to finite resources
• What are the factors of production (CELL)?


  • Capital: Physical goods used in production (e.g., machines, buildings)
  • Entrepreneurship: Managerial ability and risk-taking
  • Land: Natural resources (e.g., oil, coal, wheat)
  • Labour: Human capital, the workforce of the economy
• What is the reward for capital in the factors of production?


  Interest from the investment
• What is the reward for entrepreneurship in the factors of production?


  Profit
• What is the reward for land in the factors of production?

  Rent
• What is the reward for labour in the factors of production?


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


  • Renewable resources: Can be replenished (e.g., solar power, fish)
  • Non-renewable resources: Cannot be renewed (e.g., coal, oil)
• What happens if renewable resources are consumed faster than they can be replenished?


  The stock of the resource will decline over time
• What is the significance of the Worldwide Fund for Nature's claim about resource consumption by 2050?


  It suggests that two planets will be required to meet global demand if current consumption continues
• How can the decline of non-renewable resources be mitigated?


  Through recycling and finding substitutes
• What do production possibility frontiers (PPFs) depict?


  • Maximum productive potential of an economy
  • Combination of two goods or services
  • Efficient use of resources
• How do PPF curves illustrate opportunity cost?


  They show the trade-off between producing different goods
• What does the law of diminishing returns state?


  The opportunity cost of producing more of one good increases
• What does it mean to produce at points C or D on the PPF?


  It indicates inefficiency and underutilization of resources
• What does producing at point E on the PPF signify?


  It is not attainable with current resources
• What factors can shift the PPF curve outward or inward?


  • Outward shift: Increase in quantity or quality of resources
  • Inward shift: Decrease in quantity or quality of resources
• What is the difference between moving along the PPF and shifting the PPF?


  Moving along uses the same resources, while shifting changes the quantity or quality of resources
• What are capital goods and consumer goods?


  • Capital goods: Used to produce other goods (e.g., machinery)
  • Consumer goods: Cannot be used to produce other goods (e.g., clothing)
• How is economic growth represented on a PPF?


  By an outward shift of the PPF curve
• How is economic decline represented on a PPF?


  By an inward shift of the PPF curve
• What is specialization in production?


  • Each worker completes a specific task
  • Increases productivity through division of labor
  • Reduces average costs of production
• Who famously stated the concept of specialization?

  Adam Smith
• How does the division of labor affect productivity?


  It can increase worker productivity
• What example did Adam Smith use to illustrate specialization?


  The trade of the pin-maker