1.1 Economic Methodolgy And The Economic Problem

Question 1

(1.1.1)
What is a positive statement?

Answer 1

An objective statement that can be proven or disproven by the use of empirical evidence.

Question 2

(1.1.1)
What is a normative statement?

Answer 2

A subjective statement that expresses a value judgment about whether a situation is desirable or undesirable

Question 3

(1.1.1)
What is a value judgement?

Answer 3

A judgment made when decisions are based on personal views, feelings and attitudes

Question 4

(1.1.2)
What is the central purpose of economic activity?

Answer 4

Satisfying wants and needs through the production of goods and services

Question 5

(1.1.2)
What are the key economic decisions?

Answer 5

• What to produce – there needs to be a choice because resources are scarce
• How to produce – what are the best ways? Using labour or capital intensive methods?
• For whom to produce – should everyone receive the same amount? Should everyone benefit in the same way?

Question 6

(1.1.3)
What are the factors of production?

Answer 6

• Capital – man-made used in production
• Enterprise – managing and coming up with ideas
• Labour – workers
• Land – natural resources used in production

Question 7

(1.1.3)
Why is the environment an example of a scarce resource?

Answer 7

The environment is a common good and can not be efficiently replaced and many of the materials it holds are limited

Question 8

(1.1.4)
What is the basic economic problem?

Answer 8

Unlimited wants and scarce resources means no society can produce sufficient products to satisfy everyone’s wants so choices have to be made

Question 9

(1.1.4)
Why are wants unlimited?

Answer 9

• New products emerge
• replacement of worn out or broken goods
• greed
• change in consumer tastes

Question 10

(1.1.4)
What is scarcity?

Answer 10

When there are insufficient resources to meet all of society’s wants

Question 11

(1.1.4)
What is opportunity cost and why do all choices have one?

Answer 11

The next best alternative foregone
Opportunity cost is the options given up when faced with a choice between different things

Question 12

(1.1.4)
How are resources allocated?

Answer 12

Resources are allocated between competing alternative uses and it is the job of the economy to decide how

Question 13

(1.1.5)
What can a production possibility curve show?

Answer 13

Different parts of the economic problem
- resource allocation
- opportunity cost and trade-offs
- unemployment of economic resources
- economic growth

Question 14

(1.1.5)
What do parts of the PPF diagram show in relation to economic efficiency?

Answer 14

Inside the PPF: resources are unemployed or used inefficiently
Outside the PPF: unattainable at the moment given the current quantity and quality of resources
On the PPF: most efficient employment of resources

Question 15

(1.1.5)
How is an outward shift of a PPF achieved and what does it show?

Answer 15

Requires an increase in the quantity, quality or efficiency of resources and/or an improvement in technology.
It shows growth in our potential economic growth and capacity.

Question 16

(1.1.5)
Why is a PPF not a straight line?

Answer 16

Not all resources are perfectly suitable substitute so the replacement chosen may not be as efficient

Question 17

(1.1.5)
What does an inward shift of a PPF show and what can be the causes?

Answer 17

A decrease in economic potential if there is a fall in quantity or quality of the factors of production
Destruction through war or natural hazards, large scale labour migration or recession