What do economists develop to explain how the economy works
Models
What is the purpose of economic theories and models
To explain why something is as it is
Why are economic models simplified
To make them more useful
What term do economists use to mean “all other things remaining equal
” Ceteris paribus
What is a challenge in conducting experiments in economics compared to natural sciences
Other variables are always changing
Why do some argue economics is not a science
It studies human behavior
What type of science is economics classified as
A social science
What allows economists to test hypotheses despite difficulties in experimentation
Gathering and analyzing data
What is an example of an economic assumption made in a model
Ceteris paribus in demand changes due to income
What is the difference between theories and models in economics
Theories can be expressed in words
What is a positive economic statement
A statement that is objective and can be tested or proven
How are positive statements usually expressed
In the form of a hypothesis that can be analyzed and evaluated
What is an example of a positive statement
“Raising taxes will lead to an increase in tax revenue.”
What is a normative economic statement
A subjective statement based on opinions or value judgments
What types of words often appear in normative statements
Words like “should
What is an example of a normative statement
“The government should increase taxes.”
Can normative statements be proven or disproven
No
How do economists often use positive statements
To support normative statements
What role do value judgments play in economics
They influence economic decision-making and policy
Why might different economists interpret the same statistic differently
Due to their individual value judgments
What is the basic economic problem
Scarcity
Why does scarcity occur
Finite resources but infinite wants
How is scarcity described as a relative concept
Resources are scarce in relation to the demands placed upon them
What are the three questions economies must answer to solve the basic economic problem
What to produce
What is a renewable resource
A resource that can be replenished at a rate equal to consumption
What is an example of a renewable resource
Solar power
What is a non-renewable resource
A resource that cannot be replaced readily at the rate of consumption
What is an example of a non-renewable resource
Fossil fuels
What is opportunity cost
The cost of the next best alternative foregone
What does opportunity cost imply about resource allocation
Choices must be made due to limited resources
What are the four factors of production
Land
What does the factor “land” refer to
Natural resources used in production
Give two examples of “land” as a factor of production
Minerals and water
What does the factor “labor” refer to
Human effort used in the production process
How is the quality of labor determined
By education
What does the factor “capital” refer to
Man-made goods used in production
Give two examples of “capital” as a factor of production
Machines and tools
What does the factor “enterprise” refer to
The organization and risk-taking ability of entrepreneurs
What is the role of an entrepreneur in production
To combine the other factors of production and take risks
Which factor of production involves risk-taking
Enterprise
What is the reward for land as a factor of production
Rent
What is the reward for labor as a factor of production
Wages
What is the reward for capital as a factor of production
Interest
What is the reward for enterprise as a factor of production
Profit
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
Why is the PPF typically drawn as a curve
Because resources are not equally efficient in producing all goods
What does any point on the PPF curve represent
The maximum productive potential of the economy
What does a point inside the PPF curve indicate
Inefficient resource allocation
What does a point outside the PPF curve indicate
An unobtainable level of production with current resources and technology
What happens when the PPF shifts outward
Economic growth
What happens when the PPF shifts inward
Economic decline
How does the PPF illustrate opportunity cost
By showing the trade-off between two goods when moving along the curve
What does a movement along the PPF curve represent
A reallocation of resources between the production of different goods
What can cause the PPF to shift outward
Factors like technological advancements or increased resources
What can cause the PPF to shift inward
Factors like natural disasters or depletion of resources
What does specialization along the PPF typically result in
Increased efficiency in production of a specific good
What is specialisation
The production of a limited range of goods by an individual
Why is trade essential for specialisation
It allows access to goods and services that are not produced locally
What is the division of labour
When labour becomes specialised in a particular part of the production process
Who first introduced the concept of specialisation and division of labour
Adam Smith
What did Adam Smith observe about specialisation in a pin factory
Splitting production into 18 operations increased output to 5
What is an advantage of the division of labour for workers
Increased labour productivity
How does the division of labour lead to higher quality goods
Workers become more skilled and efficient at their specific tasks
Why is time saved in the division of labour
Workers avoid switching between tasks or tools
What is a disadvantage of the division of labour for workers
Repetitive tasks can cause boredom
How can division of labour increase unemployment risk
Workers may lack broad skills and face structural unemployment
What is a potential risk for firms relying on division of labour
Delays in one process can halt the entire production chain
What does the theory of comparative advantage suggest about specialisation
Countries should produce goods with the lowest opportunity cost
What is a disadvantage of specialisation for countries
Over-dependence on a single export can harm the economy if it fails
How does specialisation increase global output
It enables countries to focus on what they produce best
What are the four functions of money that support specialisation
Medium of exchange
What are the three types of economies discussed in 1.1.6
Free market
What is a free market economy
An economy where individuals make their own choices and own the factors of production with minimal government interference
How are resources allocated in a free market economy
Through the price mechanism
Who determines what is produced in a free market economy
Consumers
What concept did Adam Smith associate with free market economies
The “invisible hand” that allocates resources efficiently
What is a key advantage of a free market economy
High motivation and innovation due to potential rewards
What is a disadvantage of a free market economy
High levels of inequality
What problem arises when monopolies develop in free market economies
High prices and low-quality services
What is a command economy
An economy where the state owns all factors of production except labor and allocates resources
Who proposed the theory supporting command economies
Karl Marx
What is a key advantage of a command economy
A minimum standard of living for all citizens
What is a disadvantage of a command economy
Lack of motivation and efficiency due to equal wages for all workers
What is a common problem with decision-making in command economies
Slow bureaucracy leading to resource misallocation
What is a mixed economy
An economy that combines free market principles with government intervention
What percentage of resources is typically allocated by the government in a mixed economy
Between 40% and 60%
What are four key roles of the government in a mixed economy
Creating rules
How does the government redistribute income in a mixed economy
Through taxation and welfare benefits
What is one way the government stabilizes the economy in a mixed economy
By using fiscal and monetary policies to manage demand