1.1 The nature of Economics

Question 1

What is the primary economic assumption, and what does it mean?

Answer 1

“ceteris paribus” - all other things being equal

Question 2

What is a positive economic statement?

Answer 2

Based on facts, can be tested as true or false

Question 3

What is a normative economic statement?

Answer 3

A value judgement that cannot be proved or disproved

Question 4

What is the economic problem?

Answer 4

Scarcity - how to distribute scarce resources

Question 5

What is an opportunity cost?

Answer 5

The value of the next best alternative forgone

Question 6

What are the two types of resources?

Answer 6

1. Renewable - stock can naturally be replenished
2. Non renewable - stock is finite

Question 7

What are the two types of goods?

Answer 7

1. Consumer goods
2. Capital goods

Question 8

What is the difference between the two types of goods?

Answer 8

• Consumer goods provides utility to customers
• Capital goods are used to make more consumer goods

Question 9

How can you represent the trade off between capital and consumer goods?

Answer 9

On a production possibility frontier (PPF) - shows the maximum potential output of a combination of goods

Question 10

What would cause a PPF to shift outwards?

Answer 10

An increase in production potential

Question 11

Why is the PPF curved?

Answer 11

Not all resources are as efficient as other resources in the production of goods