1.1 Nature of Economics

Flashcards based on Edexcel Economics (A) A-level Theme 1: Introduction to Markets and Market Failure 1.1 Nature of Economics Detailed Notes.

Why do economists develop models?

To explain how the economy works, such as theories of supply and demand or the circular flow of income.

What does 'ceteris paribus' mean in economics?

All other things remaining equal

Why is it difficult to test hypotheses in economics compared to natural sciences?

Economics is a social science and it is difficult to set up experiments to test hypotheses.

What is the difference between a positive and a normative economic statement?

A positive statement is objective and can be tested, while a normative statement is subjective and based on opinion.

What is the problem of scarcity in economics?

People have infinite wants but resources are finite and limited.

What is the difference between renewable and non-renewable resources?

Renewable resources can be replenished at a rate equal to consumption, while non-renewable resources cannot.

What is opportunity cost?

It is 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 PPF shows the maximum possible combinations of capital and consumer goods an economy can produce with current resources and technology.

When is economic efficiency achieved?

When resources are used for their best use, represented by points on the PPF.

What do movements and shifts of the PPF indicate?

A movement along the PPF indicates a change in the combination of goods produced, while a shift indicates a change in the productive potential of the economy.

What are specialisation and division of labor?

Specialisation is the production of a limited range of goods, while the division of labour is when labour becomes specialised in a particular part of the production process.

What are the advantages of the division of labour?

It increases labor productivity, leads to higher quality goods and services, and is more cost effective to develop specialist tools.

What are the disadvantages of the division of labour?

Work can become boring, there is a reduction of craftsmanship, and production delays in one process can halt others.

What does the theory of comparative advantage state?

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

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 own the factors of production and make their own choices without government interference.

How does the free market system function automatically?

Resources are moved out of production when people stop wanting a good or costs are too high.

What are the disadvantages of a free market economy?

High levels of inequality, lack of merit goods, waste of resources, monopolies, and externalities.

What is a command economy?

All factors of production, except labour, are owned by the state and resource allocation is carried out by the government.

What are the advantages of a command economy?

It provides a minimum standard of living, less wastage of resources, long term planning, and standardized products.

What are the disadvantages of a command economy?

It is impossible for the state to make so many decisions correctly, decision making will be slow, and there is less motivation and efficiency.

What is a mixed economy?

Both the free market mechanism and government planning 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 does a movement along the Production Possibility Frontier (PPF) signify?

A movement along the PPF indicates a change in the combination of goods produced. This happens when resources are reallocated between the production of two goods, without any change in the total resources or technology available.

What does a shift of the Production Possibility Frontier (PPF) indicate?

Indicates a change in the economy's productive potential.

• Outward means can produce more of both goods.

• Inward, the means of the economy's production capacity have decreased.

What are the main causes for shifts in the PPF?

Changes in the quantity or quality of factors of production (land, labor, capital, and entrepreneurship) and advancements in technology.

What could cause an outward shift in the PPF

Increased investment in capital goods, technological advancements, and improvements in education and training can lead to economic growth, shifting the PPF outward.

What are specialisation and division of labor?

Specialisation is the production of a limited range of goods, while the division of labour is when labour becomes specialised in a particular part of the production process.

What are the advantages of the division of labour?

It increases labor productivity, leads to higher quality goods and services, and is more cost effective to develop specialist tools.

What are the disadvantages of the division of labour?

Work can become boring, there is a reduction of craftsmanship, and production delays in one process can halt others.

What does the theory of comparative advantage state?

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

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 money as a medium of exchange?

Money is accepted as a means of payment.

What is money as a measure of value?

Money provides a standard unit for assigning value.

What is money as a store of value?

Money holds its value over time, allowing people to save.

What is money as a method for deferred payment?

Money can be used for future payments, like loans.

What is a free market economy?

In a free market economy, individuals own the factors of production and make their own choices without government interference.

How does the free market system function automatically?

Resources are moved out of production when people stop wanting a good or costs are too high.

What are the disadvantages of a free market economy?

High levels of inequality, lack of merit goods, waste of resources, monopolies, and externalities.

What is a command economy?

All factors of production, except labour, are owned by the state and resource allocation is carried out by the government.

What are the advantages of a command economy?

It provides a minimum standard of living, less wastage of resources, long term planning, and standardized products.

What are the disadvantages of a command economy?

It is impossible for the state to make so many decisions correctly, decision making will be slow, and there is less motivation and efficiency.

What is a mixed economy?

Both the free market mechanism and government planning 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 are capital goods?

Capital goods are goods used in the production of other goods and services. Examples include machinery, equipment, and factories.

What are consumer goods?

Bought and used by consumers for their own personal use. E.g. food, clothing, and electronics.

What is the key distinction between capital and consumer goods?

Capital goods are used to produce other goods, while consumer goods are used directly by consumers to satisfy their needs and wants.

How do capital goods contribute to economic growth?

Investment in capital goods can increase productivity and efficiency, leading to economic growth.

Give examples of capital goods.

Examples of capital goods are industrial machinery, computers for business use, transportation vehicles like delivery trucks, and tools used in construction.

Give examples of consumer goods.

Examples of consumer goods are groceries, clothing, cars for personal use, smartphones, and furniture for a home.

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