Nature of economics

How do economists develop models?

By putting forward a model, gathering evidence, and then accepting, changing, or disregarding the model.

What term do economists use meaning 'all other things remaining equal'?

Ceteris paribus.

Why is it difficult to set up experiments in economics?

Economics is a social science, and other variables are always changing in the real world.

What is a positive statement?

A statement which is objective. They can be tested with factual evidence and can consequently be rejected or accepted. Look for words such as ‘will’ and ‘is’.

What is a normative statement?

One which is subjective and based on opinion, so cannot be proven or disproven. Look for words such as ‘should’, and if the statement is suggesting one action is more credible than another.

What is the basic problem of economics?

Scarcity

What is a renewable resource?

A resource of economic value that can be replenished or replaced on a level equal to consumption.

What is a non- renewable resource?

A resource of economic value that cannot be readily replaced by natural means on a level equal to consumption.

What is opportunity cost?

The cost of one thing in terms of the next best option which has been given up.

What does the Production Possibility Frontier (PPF) show?

The maximum possible combinations of capital and consumer goods that the economy can produce with its current resources and technology.

What does a point on the PPF curve represent?

The maximum productive potential of the economy.

How can a PPF diagram be used to work out opportunity cost?

By observing the trade-off between producing more of one good versus another.

How can economic growth be shown on a PPF?

A shift of the curve outwards.

How can economic decline be shown on a PPF?

A shift of the curve inwards.

What does a point inside the PPF indicate?

Possible but inefficient production.

What does a point outside the PPF indicate?

Unobtainable production.

What does a movement along the PPF curve indicate?

A change in the combination of goods produced.

What does a shift of the PPF curve indicate?

A change in the productive potential of the economy.

What are consumer goods?

Goods that are demanded and bought by households and individuals.

What are capital goods?

Goods that are produced in order to aid the production of consumer goods in the future.

What is the division of labour?

When labour becomes specialised in a particular part of the production process.

Who stated the concept of specialisation and the division of labour?

Adam Smith.

What are the advantages of the division of labour?

Increased labour productivity, higher quality of goods, cost-effective specialist tools, time saved, and simplified training.

What are the disadvantages of the division of labour?

Boredom, reduction of craftsmanship, production delays, and potential structural unemployment.

What does the theory of comparative advantage state?

Countries should specialise in producing those goods where they have a lower opportunity cost.

What are the disadvantages of countries specializing?

Over-dependence on one export, depletion of non-renewable resources, high interdependence, and potential wage falls.

What are the four key functions of money?

A medium of exchange, a measure of value, a store of value, and a method for deferred payment.

What is a free market economy?

Individuals are free to make their own choices and own the factors of production without government interference.

What are the advantages of a free market economy?

Automatic system, consumer freedom, high motivation, political freedom, productive efficiency, and higher growth.

What are the disadvantages of a free market economy?

High levels of inequality, lack of merit goods, resources wasted on unproductive expenses, potential monopolies, and externalities.

What is a command economy?

All factors of production, except labour, is owned by the state and labour is directed by the state.

Who believed in the command economy and criticised capitalism?

Karl Marx.

What are the advantages of a command economy?

Minimum standard of living, less wastage of resources, long term planning, cost-effective standardised products, and focus on objectives other than profit.

What are the disadvantages of a command economy?

Incorrect decisions leading to over/under supply, slow decision making, less motivation, and loss of consumer freedom.

What is a mixed economy?

An economy where both the free market mechanism and the government planning process allocate a significant amount of the total resources in the country.

What is the government's role in a mixed economy?

Creating a framework of rules, supplementing and modifying the price system, redistributing income, and stabilising the economy.

What percentage of market share can indicate monopoly power?

More than 25%.

What is the laissez-faire approach?

A policy or attitude of letting things take their own course, without interfering.

What are externalities?

A side effect or consequence of an industrial or commercial activity that affects other parties without this being reflected in the cost of the goods or services involved.