Theme 1 Economics

• What is economics the study of?

  How resources are allocated
• Economics is concerned with the allocation of scarce resources to meet unlimited wants
• What does economics seek to understand about individuals in an economy?

  How they interact
• List the four key questions addressed in economics regarding the production and exchange of goods and services

  1️⃣ What goods/services should be produced?

  2️⃣ How should these goods/services be produced?

  3️⃣ For whom should they be produced?

  4️⃣ How should these goods/services be distributed?
• What does the acronym CELL stand for in economics?

  Capital, Entrepreneurship, Land, Labour
• What is scarcity in economics?

  Unlimited wants, finite resources
• Match the rationing system with its description:

  Tradition and Culture ↔️ Allocation via norms

  Planning and Government Command ↔️ Mathematical tables for output

  Markets ↔️ Prices communicate resource availability
• What is an example of a durable consumer good?

  TV
• Capital goods are used to produce other goods.
• What does opportunity cost measure?

  Value of next best alternative
• Why do economists make assumptions when creating models?

  To simplify complex relationships
• Ceteris paribus means "all other things being equal."
• What are positive statements in economics?

  Objective and verifiable
• What are normative statements in economics?

  Subjective and not verifiable
• A normative statement can be rephrased into a positive statement to make it testable.
• Opportunity cost arises when choosing between alternative uses of scarce resources.
• What does a production possibility frontier (PPF) show?

  All possible combinations of two goods
• A point inside the PPF indicates inefficient use of resources
• What does productive efficiency mean on a PPF?

  Using fewest resources possible
• Productive efficiency occurs when output is produced using the fewest possible resources.
• Allocative efficiency occurs when resources are used to produce society’s preferred bundle of goods
• Steps to calculate the opportunity cost of producing more of one good

  1️⃣ Identify the maximum output of the good if no other good is produced.

  2️⃣ Determine the output of the good if production of another good increases.

  3️⃣ Calculate the difference between the two outputs.
• Marginal opportunity cost is the opportunity cost of producing each additional unit of output.
• If the PPF is a straight line, the opportunity cost is constant
• Why is a PPF typically concave in real-life economies?

  Law of diminishing marginal returns
• Potential economic growth is illustrated by an outward shift of the PPF.
• Mechanisation in the 18th and 19th centuries allowed the UK to become the world's first fully industrialised economy
• What does the division of labor allow workers to specialize in?

  Narrow range of activities
• Match the factor that shifts the PPF inward with its effect:

  Resources run out ↔️ Reduces productive capacity

  Failure to invest ↔️ Reduces future output

  Natural disaster ↔️ Destroys infrastructure
• What trade-off does an economy face when it allocates more resources to capital goods?

  Reduced short-term consumption
• Specialisation occurs when a firm or country focuses on producing a narrow range of goods or services.
• Specialisation leads to higher output and lower prices.
• Steps of the division of labor in a pin-making factory, as described by Adam Smith

  1️⃣ Break down the work process into separate tasks.

  2️⃣ Assign each task to a specialized worker.

  3️⃣ Increase efficiency and output through specialisation.
• What historical period saw the widespread adoption of division of labor?

  Industrial Revolution
• In division of labor, each worker becomes a cog in a large machine
• Who recognized the increased productivity of labor after division?

  Adam Smith
• Workers in division of labor become more skilled due to specialization and practice.
• What increases in a factory when workers specialize in one process?

  Productivity and quality
• Time is saved in division of labor by eliminating the need to move from one operation
• Why does division of labor lower the average cost of production?

  Cheaper worker training