1.1 Economic methodology and the economic problem

Question 1

Scarcity

Answer 1

Limited quantities of resources to meet unlimited wants

Question 2

Fundamental economic problem

Answer 2

how best to make decisions about the allocation of scarce resources among competing uses so as to improve and maximise human happiness and welfare

Question 3

Value judgement

Answer 3

Subjective statement of opinion

Question 4

Hypothesis

Answer 4

a proposed explanation for a phenomenon

Question 5

Economic theory (model)

Answer 5

used to show the essential characteristics of complicated economic conditions in order to analyse them and predict the result of changes in variables. These are hypotheses which are capable of being proved wrong by empirical evidence.

Question 6

Scientific method

Answer 6

a method which subjects theories or models, and hypotheses to falsification by empirical evidence

Question 7

Law

Answer 7

a theory or model which has been verified by empirical evidence

Question 8

Positive statement

Answer 8

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

Question 9

Normative statement

Answer 9

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

Question 10

Production

Answer 10

converting inputs or factors of production into outputs

Question 11

Factors of production

Answer 11

Inputs into the productive process, such as land, labour, capital, and enterprise

Question 12

Land

Answer 12

natural resources used as a factor or production. the reward given for the use of this is rent

Question 13

Labour

Answer 13

human input used as a factor of production. the reward given for the use of this is wages

Question 14

Capital

Answer 14

manufactured resources used as a factor of production. the reward given for this is interest

Question 15

Enterprise

Answer 15

the seeking out of profitable opportunities for production and risk taken to achieve these as a factor of production. the reward given for the use of this is profit.

Question 16

Good

Answer 16

something that is consumed to satisfy wants and provides utility

Question 17

Utility

Answer 17

the satisfaction or economic welfare an individual gains from consuming a good

Question 18

Choice

Answer 18

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

Question 19

Opportunity cost

Answer 19

the cost of giving up the next best alternative

Question 20

Trade-off

Answer 20

a sacrifice made when making choices

Question 21

Production Possibility Frontier (PPF)

Answer 21

a curve depicting the various combinations of two products (or types of products) that can be produced when all the available resources are fully and efficiently employed

Question 22

Consumer goods

Answer 22

goods which are used by consumers to satisfy their wants and needs

Question 23

Capital goods

Answer 23

manufactured goods used to produce other goods and services

Question 24

Productively efficient

Answer 24

a situation where it would not be possible to produce any more of one good without sacrificing production of another good (given a fixed quantity of FofP and technology)

Question 25

Substitutable

Answer 25

capable of being used as a replacement

Question 26

Constant opportunity cost

Answer 26

as production of one kind of good increases, the opportunity cost of producing each unit stays the same (shown by a downwards linear PPF)

Question 27

Increasing opportunity cost

Answer 27

as production of one kind of good increases, the opportunity cost of producing each unit increases (shown by a curved PPF)

Question 28

Law of increasing opportunity cost

Answer 28

As the output of one good increases, the resources needed to produce it become scarcer, causing the opportunity cost of additional units to increase

Question 29

Planned/command economy

Answer 29

government planning allocates resources to resolve the fundamental economic problem

Question 30

Characteristics of planned economies (2)

Answer 30

• necessary but unprofitable goods produced
• all people have access to necessities

Question 31

Mixed economy

Answer 31

both government planning and the market mechanism allocate resources to address the fundamental economic problem

Question 32

Free market economy

Answer 32

the market mechanism allocates resources to resolve the fundamental economic problem

Question 33

Characteristics of a free market economy (3)

Answer 33

• necessary but unprofitable goods not produced
• unemployed people suffer from a lack of goods
• poor people lack basic necessities

Question 34

Market mechanism

Answer 34

the process through which changes in prices allocate resources

Question 35

Privatisation

Answer 35

the transfer of publicly owned assets to the private sector

Question 36

Contractualisation

Answer 36

services that are provided by the government being contracted to private sector bidders

Question 37

Marketisation

Answer 37

the provision of goods and services shifting from the non-market sector to the market sector

Question 38

Deregulation

Answer 38

the removal of rules which restrict economic action

Question 39

Public ownership

Answer 39

ownership of industries, firms, and other assets by the government

Question 40

Regulation

Answer 40

imposition of rules, controls, and constraints, which restrict freedom of economic action in the market place

Question 41

Private sector

Answer 41

the part of the economy which is owned by individuals, companies, and charities

Question 42

Public sector

Answer 42

the part of the economy where production is organised by the state or government