Theme 1 Economics

• What is the purpose of assumptions in economic models?

  To simplify analysis and explain choices
• What does the ceteris paribus assumption imply?

  All other factors are held constant
• Why might economists' assumptions be criticized?

  They may not reflect real-world complexity
• What are the four main categories of factors of production?

  Land, labour, capital, enterprise
• What is the definition of opportunity cost?

  Cost of the alternative given up
• If the government spends on healthcare, what is a potential opportunity cost?

  Less funding for education or transport
• What distinguishes positive statements from normative statements?

  Positive statements are objective and testable
• How do value judgements influence economic policies?

  They vary across individuals and groups
• What is the basic economic problem?

  Scarcity and choice
• What are non-renewable resources?

  Finite resources that cannot be replenished
• What is the significance of production possibility frontiers (PPFs)?

  They show maximum output combinations of goods
• What does a point inside the PPF indicate?

  Inefficient allocation of resources
• What happens when resources are reallocated from one good to another?

  Opportunity cost is incurred
• What are the characteristics of capital goods?

  • Used to produce consumer goods
  • Include machinery and factories
  • Can replace labor in production
• What are the differences between renewable and non-renewable resources?

  • Non-renewable: finite, cannot be replenished
  • Renewable: replaceable, if extraction is sustainable
• What is the role of specialisation in production?

  • Increases efficiency
  • Allows for trade and exchange
  • Enables consumption beyond PPF
• What are the implications of diminishing returns in production?

  • Increased input leads to smaller output gains
  • Resources are not equally suited for all goods
  • Efficiency decreases as production shifts
• What is the relationship between economic growth and PPF?

  • Economic growth shifts PPF outward
  • Indicates increased productive capacity
  • Reflects improvements in technology or resources
• How does the price mechanism function in economics?

  • Signals to producers and consumers
  • Allocates resources efficiently
  • Balances supply and demand
• What is the significance of consumer and producer surplus?

  • Measures economic welfare
  • Indicates efficiency in markets
  • Reflects benefits to consumers and producers
• What are indirect taxes and subsidies?

  • Indirect taxes: levies on goods/services
  • Subsidies: financial support to encourage production
  • Both affect market prices and supply
• What are the types of market failure?

  • Externalities
  • Public goods
  • Information gaps
• What is government failure?

  • Inefficiencies caused by government actions
  • Can lead to worse outcomes than market failures
  • Results from poor policy decisions
• What does a PPF represent for a small farm?

  Combinations of goods produced
• What do combinations of goods inside the PPF indicate?

  Unemployed resources or inefficiency
• What is true about combinations beyond the PPF?

  They are unattainable
• What is required to reach combinations beyond the PPF?

  More factors of production or improved technology
• What does combination D represent on the farm?

  It is unattainable
• How does specialization and trade affect consumption?

  Allows consumption beyond the PPF
• What does reallocating resources from one good to another involve?

  Opportunity cost
• If output of cotton increases, what happens to wheat production?

  Wheat production decreases
• What does a concave PPF indicate about opportunity cost?

  It increases with more output
• What causes an outward shift in the PPF?

  Gaining more factors of production
• What does a straight-line PPF indicate?

  Perfect substitutability of resources
• What is balanced growth in the context of PPF?

  Growth in all types of goods production
• What can cause an inward shift of the PPF?

  Fall in productive potential
• What are some causes of inward shifts in the PPF?

  Natural disasters, war, migration
• What is resource depletion?

  Decline in total stock of resources
• What is resource depreciation?

  Decline in productivity with age/use
• What happens in the short-run when producing more capital goods?

  Movement along the PPF occurs