1.1 Economic Methodology and The Economic Problem

Question 1

What are social sciences?

Answer 1

1. How humans interact
2. Tests are dynamic

Question 2

What are natural sciences?

Answer 2

1. e.g Maths, Biology
2. Natural events
3. Objective (facts)
4. Tests are static

Question 3

What does ceteris paribus mean?

Answer 3

‘all other factors remain the same or unchanged’

Question 4

What is a positive statement?

Answer 4

1. Objective, factually based
2. Can be tested to see if true

“unemployment rate is at 8%”

Question 5

What is a normative statement?

Answer 5

1. Subjective, opinion
2. Difficult to test
3. Require value judgements

“increasing income tax is unfair”

Question 6

What is a value judgement?

Answer 6

a statement put forward by an individual that are difficult to test

Question 7

What is economic activity?

Answer 7

the production of goods and services to satisfy the needs and wants of society

this improves economic welfare

Question 8

What is economic welfare?

Answer 8

the benefit gained by individuals, firms and society in the production of goods and services

individuals = benefit gained from products

firms = profit

Question 9

Who are economic agents?

Answer 9

the individuals and firms that partake in economic activity

Question 10

What is a free market economy?

Answer 10

when firms decide what goods and services to produce with limited intervention from the government

Question 11

What are the economic decisions?

Answer 11

1. What to produce? - economic incentives provide economic agents with information.
2. How to produce? - firms combine factors of production in order to produce goods
3. Whom to produce for? - according to demand and supply

Question 12

What is a controlled economy?

Answer 12

when governments tell firms what to produce

e.g North Korea

Question 13

What are the factors of production?

Answer 13

the resources used by firms to produce goods and services
1. Land –> Rent
2. Labour –> Wages
3. Capital –> Interest
4. Enterprise –> Profit

Question 14

Land

Answer 14

natural resources that come from the earth
used up in the production of goods and services

e.g Beef in the production of a burger in a takeaway

Question 15

Labour & Human Capital

Answer 15

includes all of the workforce in an economy
Human capital = value of a worker e.g income, education level etc.

Question 16

Capital

Answer 16

has a number of meanings. e.g money
1. Factors of production –> man-made aids e.g machinery
2. Capital goods –> stream of income in the future rather than being consumed today

Question 17

Enterprise

Answer 17

entrepreneur takes land, labour, capital and organises them in order to produce products for profit
1. Takes risks therefore creates wealth and employment in economy
2. is then rewarded with profits

Question 18

What is the economic problem?

Answer 18

society has unlimited wants, however there aren’t enough resources available to supply all these wants. creates problem of scarcity.

infinite wants, finite resources

Question 19

What is an opportunity cost?

Answer 19

the benefit lost of the next best alternative when making a decision

e.g Pepsi or Fanta? If I buy pepsi, opportunity cost is the fanta

Question 20

What is a trade-off?

Answer 20

the product you didn’t buy because you got the better alternative

Question 21

What is a Production possibility curve? (PPC)

Answer 21

it can be used to show different combinations of output for 2 products

e.g. as output of good x increases that of good y decreases, vice versa

Question 22

What is an investment good?

Answer 22

those that produce a stream of income in the future

e.g machinery

Question 23

What is a consumption good?

Answer 23

those that produce a stream of income today

e.g. car for personal use

Question 24

What is economic growth?

Answer 24

economic growth can be caused by an increase in factor inputs. causes PPC to shift outwards.

Question 25

What does it mean when something is Productively efficient?

Answer 25

when all the resources are being used up.

anywhere along the PPC

Question 26

What does it mean when something is Allocative efficient?

Answer 26

takes into account the desires of consumers and occurs when social welfare is maximised.

only one point on the PPC