1.1.2 & 1.1.3 Positive And Normative Economics & Economic Problem

Question 1

Positive economics

Answer 1

claims that can be proven through the use of evidence (data, statistics, and numbers) in order to support, or refute the claim

Question 2

Normative economics

Answer 2

subjective value judgements which usually contain “ought” or “should”. Often they have moral dimension relating to fairness

Question 3

Normative issues (when we use it)

Answer 3

Governments make value judgements on economic issues and how much they get involved in the economy

Question 4

Positive issues (when we use it)

Answer 4

economic analysis (statement of facts that can be tested against real world evidence).

Question 5

Normative issue example

Answer 5

• Private healthcare in the US vs predominantly public healthcare in the UK (NHS)
• to say the UK’s approach is ‘fairer’ is a value judgement

Question 6

Positive issue example

Answer 6

• Private healthcare in the US vs predominantly public healthcare in the UK (NHS)
• to say that the amount spent per head on healthcare in UK is less is a positive statement

Question 7

Economics

Answer 7

the study of how people and society choose, with or without the use of money, to employ scarce productive resources which could have various/alternative uses

Question 8

The problem of scarcity

Answer 8

Resources are scarce since there are infinite wants but finite resources with which to satisfy them
Scarce resources mean that decisions need to be made regarding, what, how, why and for whom goods and services are produced

Question 9

Renewable resources

Answer 9

Resources that can be replenished, so the stock level of the resources can be maintained over a period of time

• the rate of consumption of the resource is less that the rate of replenishment
• E.g commodities such as solar power

Question 10

Non renewable resources

Answer 10

Resources that can’t be renewed, so the stock level decreases over time as it is consumed.
the rate of consumption is more than the rate of replenishment
- E.g things produced from fossil fuels such as coal and oil.

Question 11

Opportunity Cost

Answer 11

the value/benefit that could have been received but passed up in pursuit of another option/alternative

Question 12

Opportunity cost example (consumers)

Answer 12

the opportunity cost of someone giving up going to see a movie to study is the cost of the movie and the enjoyment of seeing it

Question 13

Opportunity cost example (producers)

Answer 13

the opportunity cost of hiring extra staff rather than investing in more advertisements is less sales
- (Should a producer increase the dividend to shareholders or invest in capital goods?)

Question 14

Opportunity cost example (government)

Answer 14

the opportunity cost of spending money on defence rather than education might be high unemployment in the future

Question 15

Keynesian view on free markets

Answer 15

• free markets are volatile and not always self-correcting in the event of an external shock
• the free market is prone to length periods of recession
• therefore direct govt intervention is needed to restore confidence
• fiscal policy is more powerful than monetary policy (especially in liquidity trap)

Question 16

Liquidity trap

Answer 16

when central banks operate a low interest rate policy and there’s a high amount of cash balances but this is insufficient to stimulate demand

Question 17

Reasons for liquidity trap

Answer 17

• low confidence/animal spirits due to fall in asset or employment

Question 18

Keynesian view on economic policy

Answer 18

• AD is sufficient to maintain a full employment level of activity
• an economy could get stuck in a low employment trap
• favours fiscal policy

Question 19

Keynesian view during recession

Answer 19

• favours active use of fiscal policy (counter cyclical policies)
• it’s up to the govt to inject/stimulate AD

Question 20

Keynesian view on tax

Answer 20

• tend to favour target tax changes (will have more impact than VAT)
• e.g cutting employment tax

Question 21

Keynesian view on govt spending

Answer 21

• tend to favour labour intensive products (e.g transport, house building, environmental projects)

Question 22

Keynesian view on crowding out

Answer 22

• against crowding out
• depending on the size of the fiscal multiplier effect- govt borrowing will create more tax revenue (due to increase profit) which will partially finance the deficit