3.1.1 - Economic Methodology

Question 1

What is a normative statement?

Answer 1

A statement that is an opinion based on facts. They are subjective.

Question 2

What is a positive statement?

Answer 2

A statement of fact that can be scientifically tested.

Question 3

What are the 3 key economic decisions

Answer 3

1. WHAT to produce
2. HOW to produce
3. WHO benefits from what is produced

Question 4

Name the 4 factors of production, and how can FOP be defined?

Answer 4

1. Land
   I.e wheat, land for building
2. Labour
   I.e managers, employees
3. Capital
   I.e building, cooking equipment
4. Enterprise
   I.e entrepreneurs who start the business

FOP: resource inputs into the production process

Question 5

Define a need

Answer 5

Necessity that cannot be lived without

Question 6

Define a want

Answer 6

Something that is desired but not required in order to live

Question 7

What it the economic problem?

Answer 7

How to allocate scarce resources among competing uses

Results from limited resources and unlimited wants

Question 8

Define opportunity cost

Answer 8

The value / benefits of the next best alternative that has now foregone

Question 9

What does a PPF curve depict?

Answer 9

Demonstrates combinations of 2 products that can be produced when all available resources are fully / efficiently employed

Question 10

are all points on the PPF curve boundary productively and allocatively efficient?

Answer 10

All points on the boundary are productively efficient but not all points are allocatively efficient because resources could be ‘better allocated’ elsewhere

Question 11

For what reasons would a PPF curve shift rightwards (outwards)?

Answer 11

• advances in technology
• migration into the country
• long-run economic growth: increase in level of input

Question 12

Reasons for a leftwards (inwards) PPF curve shift?

Answer 12

• war
• natural disaster
• resource depletion

Question 13

Difference between capital and consumer goods?

Answer 13

Capital goods:
Goods which can be used to produce other goods i.e machinery

Consumer goods:
Goods which cannot be used to create other goods I.e clothing

Question 14

Define allocative efficiency

Answer 14

When available economic resources are used to produce the combination of goods / services that best match peoples tastes

Question 15

Define productive efficiency

Answer 15

When it is impossible to produce more of one good without producing less of another

Question 16

What is the law of diminishing returns?

Answer 16

An economic principle stating that as investment in a particular area increases, the rate of profit from that investment, after a certain point, cannot continue to increase if other variables remain constant