1. Economic Methodology And The Economic Problem

Question 1

What are positive economic statements?

Answer 1

Objective statements that can be tested against facts to be declared either true or false. However, they don’t necessarily need to be true.

Question 2

What are normative economic statements?

Answer 2

Subjective opinions or value judgements that cannot be tested against facts. These can often concern views on individuals, firms or the government should do, based on peoples ethical, moral, or political standpoints.

Question 3

What is economic policy?

Answer 3

A policy which rests on normative judgements about the ‘right’ levels of, taxes, minimum wages, or the amount of government intervention in the markets.

Question 4

What is a typical mistake concerning positive statements?

Answer 4

They do not necessarily need to be true. It simply needs to be capable of being tested to be declared true or false.

Question 5

What is a ‘need’?

Answer 5

Something that humans require to survive, such as food, shelter, and warmth.

Question 6

What is a ‘want’?

Answer 6

Something not essential to survival, but which people feel improves their standard of living, or economic welfare, eg. A new car.

Question 7

What is economic welfare?

Answer 7

The standard of living, or general well-being of individuals in society.

Question 8

What leads to an increased economic welfare?

Answer 8

Satisfying society’s needs and wants in terms of material and non-material things.

Question 9

What leads to an increased economic welfare?

Answer 9

Satisfying society’s needs and wants in terms of material and non-material things.

Question 10

What are the four factors of production?

Answer 10

• Captial
• Enterprise
• Land
• Labour

Question 11

What is capital?

Answer 11

Man-made physical equipment, used to make other goods and services, eg. Machinery and computer equipment.

Question 12

What is enterprise?

Answer 12

Entrepreneurs are individuals who take a business risk in combining the other three factors of production in order to produce a good or service.

Question 13

What is land?

Answer 13

All naturally occurring resources such as minerals, the sea, fertile land and the environment. These can be further divided into renewable and non-renewable resources.

Question 14

What is labour?

Answer 14

People that are involved in production, sometimes referred to as human capital.

Question 15

What is money called as?

Answer 15

Financial capital

Question 16

What does CELL stand for?

Answer 16

Capital, Enterprise, Land, Labour

Question 17

What is the basic economic problem?

Answer 17

Scarce economic resources compared with society’s unlimited wants.

Question 18

What are the three fundamental economic questions?

Answer 18

What to produce and in what quantities?
How should goods and services be produced?
To whom should goods see services be allocated?

Question 19

What is a consumer good?

Answer 19

Those that give satisfaction to the consumer, eg. pizza.

Question 20

What are capital goods?

Answer 20

Those that are used to produce other goods, eg. Machinery and IT equipment.

Question 21

What is the basic production decision between?

Answer 21

Labour-intensive methods (where a high proportion of human capital is used compared to capital)
Capital-intensive methods (where a high proportion of capital is used compared to human capital)

Question 22

What determines who in society gets what?

Answer 22

The free market or capitalist economy and/or the command or centrally planned economy.

Question 23

What is the free market or capitalist economy?

Answer 23

Decisions are made solely by the interactions of consumers and firms, with no government intervention.

Question 24

What is the command or centrally planned economy?

Answer 24

Decisions are made solely by the planning department of governments.

Question 25

What is opportunity cost?

Answer 25

The cost of the next best alternative that you give up when you have to make a choice.

Question 26

What does a production possibility curve (PPC) depict?

Answer 26

The maximum combinations of two goods that can be produced by an economy, assuming all resources are fully employed and used efficiently.

Question 27

What factors cause the outward shift of the PPC?

Answer 27

• Technological improvements that lead to increased productivity of capital equipment.
• Discovery of new resources, eg. Oil and gas.
• Improvements in education and training that lead to a more productive workforce.
• Changes that lead to an increase in working population, eg. Increases in immigration or a raised retirement age.

Question 28

What are factors that cause shifts of PPC driven by?

Answer 28

Changes in the quantity and efficiency (quality) of the factors of production.

Question 29

What factors cause the inwards shift of PPC?

Answer 29

• Disasters, eg. Earthquakes or floods, that devastate productive resources.
• Wars.
• Global warming/climate change, which may lead to loss of farmland, rising sea levels, and more extreme weather.
• A prolonged recession, which may lead to permanent loss of productive capacity if businesses and/or workers lose skills.

Question 30

What is economic growth?

Answer 30

An increase in the productive capacity of an economy over time.

Question 31

What are the two types of economic efficiency?

Answer 31

Productive efficiency and allocative efficiency.

Question 32

What is productive efficiency?

Answer 32

When maximum output is produced from the available factors of production and when it is not possible to produce more of one good or service without producing less of another.

Question 33

What is allocative efficiency?

Answer 33

When an economy’s factors of production are used to produce the combination of goods and services that maximises society’s welfare.