1. The Economic Methodolgy And The Economic Problem

Question 1

What is the scientific method to test economic theories? (In context of the demand theory)

Answer 1

1. Observing consumer behaviour in a market place
2. Forming a hypothesis to explain how consumers spend their money
3. Develop predictions from the hypothesis
4. Use evidence to test predictions
5. Conclude that the evidence supports the hypothesis which now become the theory of demand in which further evidence will be tested. Or the evidence does not support the predictions so the hypothesis is rejected which means that a new hypothesis is needed or it needs to be revised.

Question 2

What is a positive statement?

Answer 2

A statement or fact that can be scientifically tested to see if it is correct or incorrect

Question 3

What is a normative statement?

Answer 3

A statement that includes a value judgement and cannot be refuted just by looking at the evidence

Question 4

What is the key difference between normative and positive statements?

Answer 4

Positive statements can in principle be tested and possibly falsified while normative statements cannot. Normative statements include ethical or moral judgements and use words such as ought, should, better and worse.

Question 5

How value judgements influence economic decision making and policy?

Answer 5

The difference between positive and normative statements is emphasised in economics but the decision to study on over the other is in itself a value judgement. For example, if the Government believe it’s more desirable to study what is happening in the economy rather than what ought to be, they have made a value judgement. When the Government bring in experts in certain fields to help decision making, the choice of an expert is a value judgement as they can choose someone who is sympathetic to their cause or are independent.

Question 6

What is a value judgement?

Answer 6

Whether something is desirable or not

Question 7

The impact of moral and political judgements

Answer 7

The decision on economic policy will always have winners and losers who gain or suffer as a result of the decision.

Question 8

What is a need?

Answer 8

Something that is necessary for human survival, such as food

Question 9

What is a want?

Answer 9

Something that is desirable but not necessary for human survival

Question 10

What is economic welfare?

Answer 10

The economic well being of an individual, a group within society or an economy

Question 11

How can economic welfare be improved?

Answer 11

Satisfying people’s needs and wants. Anything that makes a person happier improve their welfare. In the short term, the consumption of more material goods will improve economic welfare but in the long term it include quality of life factors such as pleasure from family time.

Question 12

What is the economic system?

Answer 12

The set of institution within which a community decides what, how and for whom to produce

Question 13

What is a market economy?

Answer 13

An economy in which goods and services are purchased through the price mechanisms in a system of markets.

Question 14

What is a command economy?

Answer 14

An economy in which government officials or planners allocate economic resources to firms and other productive enterprises.

Question 15

What is a mixed economy?

Answer 15

An economy that contains both a large market sector and a large non market sector in which the planning mechanisms operates.

Question 16

What is the role of a price mechanism?

Answer 16

Performs the central economic task of of allocating scarce resources among competing user throughout the economy

Question 17

What is production?

Answer 17

Converts inputs or factor services into outputs of goods and services

Question 18

What is a capital goods?

Answer 18

A good which is used in the production of other goods and services.

Question 19

What is a consumer good?

Answer 19

A good which is consumed by individuals or households to satisfy their needs and wants

Question 20

What are the factors of production?

Answer 20

Inputs into the production process:
Land, labour, capital and enterprise

Question 21

What are renewable resources?

Answer 21

Resources which can be renewed as it is being used such as timber

Question 22

What are non-renewable resources?

Answer 22

A resource which cannot be regenerated or their regeneration is so slow that the stock of resources cannot meaningfully increase.

Question 23

What is the fundamental economic problem?

Answer 23

How best to make decisions about the allocation of scarce resources uses so as to improve and maximise human happiness and welfare.

Question 24

What is scarcity ?

Answer 24

Results from the fact that people have unlimited wants but resources to meet these wants are limited. People want to consume than what’s available.

Question 25

What is choice in economics?

Answer 25

Choosing between alternatives when making a decision on how to use scarce resources

Question 26

What is opportunity cost?

Answer 26

The cost of giving up the next best alternative

Question 27

What is a production possibility frontier?

Answer 27

A curve depicting the various combinations of two products that can be produced when all the available resources are fully and efficiently employed.

Question 28

What is technical progress?

Answer 28

New and better ways of making goods and new techniques for producing more output from scarce resources.

Question 29

What is economic growth ?

Answer 29

The increase in the potential level of real output the economy can produce over a period of time.

Question 30

What is short run economic growth?

Answer 30

Ensuring all resources are fully utilised for growth. It makes use of spare capacity and takes up the slack in the economy,

Question 31

What is long run economic growth?

Answer 31

The outward movement of the frontier. Long run growth increases total productive capacity.

Question 32

What is full employment?

Answer 32

When all who are able and willing to work are employed

Question 33

What is unemployment?

Answer 33

When not all of those who are able and willing to work are employed.

Question 34

What is resource allocation?

Answer 34

The process through which the available factors of production are assigned to produce different goods and services.

Question 35

What is productive efficiency?

Answer 35

For the economy as a whole occurs when it is impossible to produce more of one without producing less of another. For a firm it occurs when the average total cost of production is minimise