1.1 nature of economics

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