1.1 Nature of Economics (Edexcel A Level Economics A)

Economists deal with the complexity of human interactions by building simplified models and using ceteris paribus.

Correlation in economics refers to a relationship between variables, while causation implies that one variable directly causes a change in another.

Positive economics is concerned with objective statements of how a market or an economy works.

Normative economics focuses on value judgements about what the best economic policies or solutions may be.

True.

Positive economic statements can be proven true or false.

Value judgements in economics are opinions, viewpoints or beliefs about what the best economic policies or solutions may be. They cannot be proved or disproved.

Positive statements are based on facts and can be tested, while normative statements are based on value judgements that cannot be tested.

An example of a positive economic statement is "The UK unemployment rate has fallen from 4% to 3.7% in the past three months."

True.

Normative statements often include the word 'should' but not always.

An example of a normative economic statement is "Every economy should aim to provide free healthcare for its citizens".

Value judgements influence economic decisions by affecting choices made by individuals, businesses, and governments.

"Prices in the UK have risen dramatically" is a positive economic statement.

False.

Normative statements are based on value judgements, not necessarily on empirical evidence.

Positive statements contribute to economic analysis by providing factual information that can be tested and verified.

The basic economic problem is that resources are finite and human wants are infinite.

Scarcity in economics refers to the finite resources available in relation to the infinite wants and needs that humans have.

Factors of production are the resources used in the production of goods and services: Land, Labour, Capital and Enterprise.

False.

Economics is the study of scarcity and its implications for resource allocation in society

Opportunity cost is the next best alternative foregone when making a decision.

Scarcity affects prices in a free market by generally causing scarcer resources to have higher prices.

Renewable resources can be used repeatedly, are naturally replenished and have no opportunity cost with consumption, while non-renewable resources cannot be naturally replenished at a pace that keeps up with consumptions so do have an opportunity cost.

False.

Opportunity cost applies to decisions made by consumers, producers, and governments.

The economic problem of scarcity is caused by limited or finite resources and unlimited or infinite human wants.

Scarcity affects economic decision-making by forcing choices to be made about the best use of limited resources.

An example of opportunity cost for a government is the loss of funding for rural libraries when deciding to provide free school meals.

True.

All non-renewable resources are scarce in economics.

A Production Possibility Frontier is an economic model that shows the maximum possible production combinations of two economic goods/services that an economy can produce using all of its factors of production fully and efficiently.

The axes on a PPF typically represent two different goods or services, often capital goods and consumer goods

False.

Points inside the PPF curve represent inefficient production.

A point on the PPF curve represents full and efficient use of an economy's resources/factors of production.

Opportunity cost is shown on a PPF by the amount of one economic good that must be given up/foregone to produce more of another economic good.

An outward shift of the PPF is caused by economic growth, which increases the productive potential of an economy through an increase in the quantity and/or quality of resources/factors of production.

False.

An inward shift of the PPF represents economic decline.

Capital goods are assets that help a firm or nation to produce output, such as machinery, technology or equipment.

Education can cause an outward shift of the PPF by improving the quality of labour, a factor of production.

A point outside the PPF curve represents unattainable production given the current resources/factors of production.

True.

A movement along the PPF curve represents a change in resource allocation.

Consumer goods are end products that have no future productive use, such as food or clothing.

Adam Smith is considered the 'Father of Economics'.

The division of labour is when a job is broken up into several component tasks.

Specialisation in economics is when workers focus on one or a few component tasks in the production process.

False.

Specialisation typically increases productivity.

An advantage of the division of labour is higher labour productivity which lowers the cost per unit for firms.

A disadvantage of specialisation in production is that task repetition often leads to boredom and a decrease in worker motivation.

Specialisation in international trade can lead to increased exports and economic growth for nations.

False.

Specialisation occurs at individual, business, regional, and global levels.

The four functions of money are:

• a medium of exchange

• a measure of value

• a store of value

• a method of deferred payment

Money solves the double coincidence of wants problem by acting as a universally accepted medium of exchange.

The 'double coincidence of wants' is the situation in barter where two people must each want what the other has for an exchange to occur.

False.

Money does not always hold its value over time due to factors like inflation.

A free-market economy is an economy that allocates resources and distributes goods/services through the price mechanism in the private sector with no government intervention.

A command economy is an economy in which all of the resources are owned by the state/government in the public sector to control and allocate the distribution of goods/services.

A mixed economy is a combination of the free market and command economy characteristics where individuals and firms in the private sector and the government in the public sector own and allocate the factors of production to distribute goods/services.

False.

Adam Smith advocated for free markets with little or no government intervention.

The three fundamental economic questions are:

• What to produce?

• Who to produce for?

• How to produce it?

An advantage of a free market economy is that the profit incentive motivates people to work or develop entrepreneurial/innovative ideas.

A disadvantage of a command economy is that receiving the same wage for different skilled work disincentivises people from gaining higher skills.

True.

In a command economy, all workers receive the same wage regardless of their role.

The government intervenes in a mixed economy mainly through taxation, spending, and regulation to redistribute income and provide essential goods/services whilst also discouraging the production and consumption of less desirable goods and services.

Karl Marx believed that free markets lead to capitalism, in which the owners of the factors of production would exploit the workers.

False.

Friedrich Hayek believed that command economies were flawed and inefficient.

In a free market economy, competition leads to better quality of goods/services, lower prices, and encourages innovation.