econ

• What is a key assumption made by economists?

  Events occur with ceteris paribus
• Why do economists devise models?

  To analyze real-life scenarios without experiments
• What distinguishes positive statements from normative statements?

  Positive statements are objective and testable
• What is an example of a positive statement?

  Raising the tax on alcohol will reduce demand
• What are normative statements based on?

  Value judgements and subjective opinions
• What is the basic economic problem?

  Scarcity of resources
• What does opportunity cost represent?

  The value of the next best alternative forgone
• If you have £1 and choose crisps over chocolate, what is the opportunity cost?

  The chocolate bar
• How is opportunity cost relevant to economic agents?

  It influences their resource allocation decisions
• What are the factors of production (CELL)?

  • Capital: Physical goods for production
  • Entrepreneurship: Managerial ability and risk-taking
  • Land: Natural resources and physical space
  • Labour: Human capital or workforce
• What are renewable resources?

  Resources that can be replenished over time
• What happens if renewable resources are consumed faster than they are replenished?

  The stock of the resource will decline
• What are non-renewable resources?

  Resources that cannot be renewed once consumed
• How can the decline of non-renewable resources be mitigated?

  By 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

  
• What does the law of diminishing returns state?

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

  Resources are not used to full potential
• What does producing at point E on a PPF signify?

  Production is not attainable with current resources
• What causes a PPF to shift outwards?

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

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

  • Moving along: Uses same resources, changes output mix
  • Shifting: Changes resource quantity or quality, alters potential
• What are capital goods?

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

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

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

  By an inward shift of the curve
• Who famously stated the concept of specialization?

  Adam Smith
• What is the benefit of specialization in production?

  Increases worker productivity and efficiency
• What example did Adam Smith use to illustrate specialization?

  The trade of the pin-maker
• What does division of labor lead to according to Adam Smith?

  Increased efficiency and lower average costs
• What advantage do firms gain from increased efficiency?

  Lower average costs of production
• What example does Adam Smith use to illustrate division of labour?

  The trade of the pin-maker
• How many distinct operations are involved in making a pin according to Smith?

  About eighteen distinct operations
• What is the output of pins by ten workers in a day?

  Over forty-eight thousand pins
• What are the advantages of specialisation?

  • Higher output and potentially higher quality
  • Greater variety of goods and services
  • More opportunities for economies of scale
  • Increased competition leading to lower costs
• What are the disadvantages of specialisation?

  • Repetitive work may lower motivation
  • Increased structural unemployment
  • Decreased variety for consumers
  • Higher worker turnover
• What is one function of money as a medium of exchange?

  Eliminates the double coincidence of wants
• How does money serve as a measure of value?

  It measures relative values of goods and services
• What does it mean for money to be a store of value?

  It holds value over time without expiring
• What is a method of deferred payment in relation to money?

  Allows debts to be created and paid later
• What are the characteristics of free market economies?

  • No government intervention
  • Economic decisions by private individuals
  • Market forces allocate resources
  • Examples include Adam Smith and Friedrich Hayek