1) The nature of economics

• What type of science is economics?

  A social science
• What is economics?

  The study of how consumers, firms, and governments allocate resources to satisfy unlimited wants and needs.
• What do economists use to develop theories of behaviour?

  Models
• What three features does an economic model have?

  • Ceteris Parabus
  • Optimisation Maximisation
  • Distinctions between positive and normative statements
• What does Ceteris Parabus mean?

  All else being equal
• Why is Ceteris Parabus used in economic models?

  To isolate the relationship between two variables by holding all other variables constant; this simplifies analysis.
• Why is it difficult for economists to conduct scientific studies?

  • Too many variables
  • It is unethical to change people’s lives
• Why do economic models assume Optimisation Maximisation?

  If not assumed, (because people are not always rational) no predictions or theories of behaviour could be developed.
• What is a positive statement?

  A statement that is based on comments that can be tested; they are not influenced by opinion and can be verified as true or false by referencing data or evidence.
• What is a normative statement?

  A statement that is based on subjective comments and opinions. They are formed by value judgements and so they cannot be definitively proved or disproved.
• What is a value judgement?

  An assessment of something based on personal beliefs or opinions.
• What role do value judgements have in influencing economic decision-making and policy?

  The government’s decision will be affected by the leading party’s values and politics.
• What is the basic economic problem?

  The basic economic problem is the scarcity of resources relative to unlimited wants and needs.
• What four questions does the problem of scarcity raise?

  • What to produce?
  • How to produce?
  • How much to produce?
  • Whom to produce for?
• What are the factors of production?

  • Land
  • Labour
  • Capital
  • Enterprise
• What is a renewable resource?

  A resource whose stock levels can be maintained; it can be replenished.
• What is a non-renewable resource?

  A resource that cannot be replenished or replaced within a human lifespan.
• How is opportunity cost linked to scarcity?

  When resources are scarce, a choice must be made between two options, and so every action in an economy also comes with the cost of forgoing the next best alternative.
• What is a production possibility frontier?

  A diagram that illustrates the maximum potential output of an economy when all resources are employed
• What is a consumer good?

  A good that gives utility to consumers
• What is a capital good?

  A good that is used to produce another good
• Which point(s) represent all resources being employed?

  A

  B

  C

  
• Which point(s) are unattainable?

  D

  
• Which point(s) show inefficiency?

  E

  
• What is marginal analysis concerned with?

  The impact of additions or subtractions to or from the current situation
• How is opportunity cost shown on a PPF diagram?

  By moving from producing A capital goods to B capital goods, AB consumer goods have been foregone as the opportunity cost.

  Opportunity cost increases as more of one type of good is produced due to the PPF being curved

  
• Which line shows economic growth?

  B

  
• Which line shows economic decline?

  A

  
• What causes an outwards shift in PPF?

  An increase in the quantity or quality of land, labour, capital and enterprise
• What is specialisation?


  When a worker, firm or region chooses to focus their factors of production into producing only one product.
• What is division of labour?


  Workers in a production process specialise into one aspect of the process.
• Why does division of labour increase output?


  Because each worker only does one job, every worker becomes better at their given task. Because all workers’ productivity increases, the firm’s productivity increases aswell.
• Give advantages of division of labour for the worker:

  • Job satisfaction may increase
  • Productivity increasing may cause an increase in wages
• Give disadvantages of division of labour for the worker:


  • Boredom
  • Deskilling;
  • If the worker is replaced, they may become redundant
• A country may specialise in the production of certain products and export them, allowing for the country to import products from other countries which it may not have.
• What is a negative of a country specialising?


  If the product‘s demand falls, the country’s whole economy may suffer greatly
• What is money?

  Anything that is used as a means of exchange for goods and services.
• What are the four functions of money?

  • Medium of exchange
  • Store of value
  • Unit of account
  • Means of deferred payment
• What does medium of exchange mean?


  The money earned from one job can be used to pay for a different product
• What does store of value mean?


  The money can be spent for exchange at a later date; it can be saved