THEME 1 - 1.1

What type of science is economics

A social science studying human behaviour

Why do economists use models

To simplify complex real world situations

What are some assumptions in economics

People act rationally

What does ceteris paribus mean

All other factors are held constant

Why is ceteris paribus important

Used to isolate one variable

Why can’t economists run experiments like scientists

Because human behaviour is unpredictable and cannot be controlled

What is a positive economic statement

A factual testable statement

What is a normative economic statement

An opinion based statement involving value judgements

Give an example of a positive statement

“An increase in tax reduces disposable income”

Give an example of a normative statement

“Taxes are too high”

What are value judgements

Opinions that influence economic decisions and policies

What is scarcity

Limited resources but unlimited wants

What is a renewable resource

A resource that can be replenished

What is a non renewable resource

A resource that will run out

What is opportunity cost

The next best alternative forgone

Why is opportunity cost important

Because all economic decisions involve trade offs

What does a PPF show

The maximum possible output of two goods

What does a point on the PPF represent

Efficient resource allocation

What does PPF stand for

Production Possibility Frontiers

What does a point inside the graph represent

Inefficiency

What does a point outside the PPF represent

Unattainable output

What causes movement along a PPF

Reallocation of resources

What causes an outward shift of a PPF

Economic growth

Why is PPF concave

Increasing opportunity cost

What are capital goods

Goods used to produce other goods

What are consumer goods

Goods used directly by consumers

What is specialisation

Focusing on a specific task

What is division of labour

Breaking production into stages

Who introduced division of labour

Adam Smith

One advantage of specialisation

Increased efficiency

One disadvantage of specialisation

Repetitive work

What is a medium of exchange

Money used to buy goods / services

What is a store of value

Money retains value over time

What is a free market economy

An economy with no government intervention

One advantage of a free market

Efficiency

One disadvantage of a free market

Inequality

What is a command economy

An economy controlled by the government

One advantage of a command economy

More equality

One disadvantage of a command economy

Inefficiency

What is a mixed economy

A combination of free market and government intervention

What is the role of the state in a mixed economy

To correct market failures and provide public goods

EXAM QUESTION: Define opportunity cost (2 marks)

Opportunity cost is the next best alternative forgone when a decision is made

EXAM QUESTION: Explain what is meant by ceteris paribus (3 marks)

Ceteris paribus means all other factors are held constant when analysing the relationship between two variables. This allows economists to isolate the effect of one change such as price on demand

Structure

• Definition

• Applied explanation

EXAM QUESTION: Explain one reason why economics is considered a social science (4 marks)

Because is studies human behaviour which is unpredictable. Unlike natural science economists cannot conduct controlled experiments so they must rely on assumptions and models to analyse behaviour

Structure:

• Point = human behaviour

• Explain = unpredictability

• Develop = limits experiments / uses models

EXAM QUESTION: Distinguish between positive and normative economic statements (5 marks)

A positive statement is objective and can be tested using evidence for example “an increase in income leads to higher demand”. In contrast a normative statement is subjective and based on value judgement such as “income inequality is unfair”. Normative statements cannot be proven true or false as they depend on personal opinion

Making criteria:

• define both (2)

• Examples (2)

• Clear distinction (1)

EXAM QUESTION: Explain two causes of an outward shift of a PPF (6 marks)

One cause is an increase in the quantity of resources such as more labour due to population growth. This allows the economy to produce more goods and services. Another cause is improved technology which increases productivity. This means more output can be produced with the same resources shifting the PPF outward

Structure

• point 1 + explain

• Point 2 + explain

EXAM QUESTION: Explain two advantages of specialisation and divisions of labour (8 marks)

Increased efficiency as workers become more skilled at a specific task reducing time taken to produce goods. This leads to higher productivity

Lower cost of production as firms can benefit from economies of scale and faster production processes. This can lead to lower prices for consumers and increased competitiveness.

Structure

• advantage 1 (identify, explain, develop)

• advantage 2 (identify, explain, develop)

EXAM QUESTION: Explain two disadvantages of a free market economy (4 marks)

Income inequality as wealth is distributed based on ability to earn which can lead to large gaps between rich and poor

Market failure where resources aren’t allocated efficiently. For example public goods may be under provided because firms can’t make a profit from them

EXAM QUESTION: Analyse how opportunity cost can be illustrated using a PPF (8 marks)

A production possibility frontier shows maximum output of two goods an economy can produce. Opportunity cost is illustrated by movement along the PPF where producing more of one good results in less of another.

For example if an economy produces more caption goods it must sacrifice consumer goods the opportunity cost is shown by the sloping gradient of the PPF which represents how much of one good is given up to gain another.

PPF is typically concave reflecting increasing opportunity cost. As more resources are allocated to one good, resources less suited to its production are used, increasing the opportunity cost.

DRAW DIAGRAM IF NOT PROVIDED

Structure to mention

• define PPF

• Link to opportunity cost

• Develop with slope

• Develop with concavity

EXAM QUESTION: Assess the advantages and disadvantages of a command economy (12 marks)

Define: a command economy is one where the government make all the economic decisions regarding productions and allocation of resources

2 advantages:

greater equality, as government can redistribute income ensuring basic good and services are provided to citizens. This may reduce poverty

Provide public goods such as healthcare and education which may be underprovided in a free market

2 disadvantages:

Inefficiency, little incentive for firms or workers to be productive without profit motives, may lead to waste and shortages

Lack of consumer choice, production decisions are centrally planned rather than based on consumer preference

Judgement:

While command economies may promote equality and provisions of essential services, they often result in reduced choice, therefore a mixed economy may be more effective