1.1 nature of economics

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89 Terms

1

What do economists develop to explain how the economy works

Models

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2

What is the purpose of economic theories and models

To explain why something is as it is

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3

Why are economic models simplified

To make them more useful

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4

What term do economists use to mean “all other things remaining equal

” Ceteris paribus

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5

What is a challenge in conducting experiments in economics compared to natural sciences

Other variables are always changing

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6

Why do some argue economics is not a science

It studies human behavior

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7

What type of science is economics classified as

A social science

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8

What allows economists to test hypotheses despite difficulties in experimentation

Gathering and analyzing data

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9

What is an example of an economic assumption made in a model

Ceteris paribus in demand changes due to income

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10

What is the difference between theories and models in economics

Theories can be expressed in words

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11

What is a positive economic statement

A statement that is objective and can be tested or proven

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12

How are positive statements usually expressed

In the form of a hypothesis that can be analyzed and evaluated

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13

What is an example of a positive statement

“Raising taxes will lead to an increase in tax revenue.”

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14

What is a normative economic statement

A subjective statement based on opinions or value judgments

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15

What types of words often appear in normative statements

Words like “should

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16

What is an example of a normative statement

“The government should increase taxes.”

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17

Can normative statements be proven or disproven

No

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18

How do economists often use positive statements

To support normative statements

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19

What role do value judgments play in economics

They influence economic decision-making and policy

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20

Why might different economists interpret the same statistic differently

Due to their individual value judgments

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21

What is the basic economic problem

Scarcity

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22

Why does scarcity occur

Finite resources but infinite wants

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23

How is scarcity described as a relative concept

Resources are scarce in relation to the demands placed upon them

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24

What are the three questions economies must answer to solve the basic economic problem

What to produce

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25

What is a renewable resource

A resource that can be replenished at a rate equal to consumption

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26

What is an example of a renewable resource

Solar power

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27

What is a non-renewable resource

A resource that cannot be replaced readily at the rate of consumption

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28

What is an example of a non-renewable resource

Fossil fuels

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29

What is opportunity cost

The cost of the next best alternative foregone

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30

What does opportunity cost imply about resource allocation

Choices must be made due to limited resources

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31

What are the four factors of production

Land

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32

What does the factor “land” refer to

Natural resources used in production

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33

Give two examples of “land” as a factor of production

Minerals and water

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34

What does the factor “labor” refer to

Human effort used in the production process

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35

How is the quality of labor determined

By education

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36

What does the factor “capital” refer to

Man-made goods used in production

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37

Give two examples of “capital” as a factor of production

Machines and tools

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38

What does the factor “enterprise” refer to

The organization and risk-taking ability of entrepreneurs

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39

What is the role of an entrepreneur in production

To combine the other factors of production and take risks

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40

Which factor of production involves risk-taking

Enterprise

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41

What is the reward for land as a factor of production

Rent

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42

What is the reward for labor as a factor of production

Wages

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43

What is the reward for capital as a factor of production

Interest

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44

What is the reward for enterprise as a factor of production

Profit

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45

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

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46

Why is the PPF typically drawn as a curve

Because resources are not equally efficient in producing all goods

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47

What does any point on the PPF curve represent

The maximum productive potential of the economy

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48

What does a point inside the PPF curve indicate

Inefficient resource allocation

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49

What does a point outside the PPF curve indicate

An unobtainable level of production with current resources and technology

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50

What happens when the PPF shifts outward

Economic growth

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51

What happens when the PPF shifts inward

Economic decline

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52

How does the PPF illustrate opportunity cost

By showing the trade-off between two goods when moving along the curve

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53

What does a movement along the PPF curve represent

A reallocation of resources between the production of different goods

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54

What can cause the PPF to shift outward

Factors like technological advancements or increased resources

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55

What can cause the PPF to shift inward

Factors like natural disasters or depletion of resources

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56

What does specialization along the PPF typically result in

Increased efficiency in production of a specific good

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57

What is specialisation

The production of a limited range of goods by an individual

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58

Why is trade essential for specialisation

It allows access to goods and services that are not produced locally

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59

What is the division of labour

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

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60

Who first introduced the concept of specialisation and division of labour

Adam Smith

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61

What did Adam Smith observe about specialisation in a pin factory

Splitting production into 18 operations increased output to 5

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62

What is an advantage of the division of labour for workers

Increased labour productivity

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63

How does the division of labour lead to higher quality goods

Workers become more skilled and efficient at their specific tasks

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64

Why is time saved in the division of labour

Workers avoid switching between tasks or tools

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65

What is a disadvantage of the division of labour for workers

Repetitive tasks can cause boredom

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66

How can division of labour increase unemployment risk

Workers may lack broad skills and face structural unemployment

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67

What is a potential risk for firms relying on division of labour

Delays in one process can halt the entire production chain

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68

What does the theory of comparative advantage suggest about specialisation

Countries should produce goods with the lowest opportunity cost

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69

What is a disadvantage of specialisation for countries

Over-dependence on a single export can harm the economy if it fails

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70

How does specialisation increase global output

It enables countries to focus on what they produce best

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71

What are the four functions of money that support specialisation

Medium of exchange

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72

What are the three types of economies discussed in 1.1.6

Free market

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73

What is a free market economy

An economy where individuals make their own choices and own the factors of production with minimal government interference

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74

How are resources allocated in a free market economy

Through the price mechanism

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75

Who determines what is produced in a free market economy

Consumers

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76

What concept did Adam Smith associate with free market economies

The “invisible hand” that allocates resources efficiently

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77

What is a key advantage of a free market economy

High motivation and innovation due to potential rewards

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78

What is a disadvantage of a free market economy

High levels of inequality

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79

What problem arises when monopolies develop in free market economies

High prices and low-quality services

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80

What is a command economy

An economy where the state owns all factors of production except labor and allocates resources

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81

Who proposed the theory supporting command economies

Karl Marx

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82

What is a key advantage of a command economy

A minimum standard of living for all citizens

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83

What is a disadvantage of a command economy

Lack of motivation and efficiency due to equal wages for all workers

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84

What is a common problem with decision-making in command economies

Slow bureaucracy leading to resource misallocation

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85

What is a mixed economy

An economy that combines free market principles with government intervention

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86

What percentage of resources is typically allocated by the government in a mixed economy

Between 40% and 60%

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87

What are four key roles of the government in a mixed economy

Creating rules

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88

How does the government redistribute income in a mixed economy

Through taxation and welfare benefits

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89

What is one way the government stabilizes the economy in a mixed economy

By using fiscal and monetary policies to manage demand

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