3.1.1 - Economic Methodology and the Economic Problem

Question 1

What does economics study?

Answer 1

The choices people take under conditions of scarcity and uncertainty.

Question 2

What is microeconomics the study of?

Answer 2

Economics at the individual, industry or household level.

Question 3

What is a positive statement?

Answer 3

A statement that can be tested, proved and/or amended due to evidence.

Question 4

What is a normative statement?

Answer 4

A subjective statement.

Question 5

What are the 3 assumptions microeconomists make?

Answer 5

1. Rational consumers want to maximize satisfaction
   from the products they purchase.
2. Producers/Companies wish to maximize profits by
   producing goods at the lowest cost.
3. Government operates in the best interests of it’s
   citizens by improving the economic and social
   welfare of the aforementioned.

Question 6

What is opportunity cost?

Answer 6

It measures the cost of a choice compared to the next best option.

i.e. If you go out for food, the opportunity cost is that you didn’t put that money into savings.

On a more macro scale, if you use land for agriculture and farming, you can’t then also use that land for education or healthcare.

Question 7

What are the factors of production?

Answer 7

Land
Labour
Enterprise
Capital

Question 8

What does land mean?

Answer 8

The scarce physical natural resources available for production.

Question 9

What is labour?

Answer 9

The human input to create goods.

Question 10

What is enterprise?

Answer 10

The people who own the companies that manufacture the goods.

Question 11

What is capital?

Answer 11

The goods used in the supply of other products.
i.e. technology, machinery etc.

Question 12

What are capital goods?

Answer 12

Goods that are used to make and manufacture consumer goods and services.

Question 13

What are the three types of consumer goods?

Answer 13

Consumer durables
Consumer non-durables
Consumer services

Question 14

Give an example of a consumer durable.

Answer 14

A washing machine

Question 15

Give an example of a consumer non-durable.

Answer 15

A latte
Turning on the heating.

Question 16

Give an example of a consumer service.

Answer 16

Hair cut
Tickets to a show

Question 17

What does the rate of extraction of finite resources depend on?

Answer 17

It depends in part on the current market price. In a free market economy, businesses that extract resources such as oil will have a greater incentive to do so.

Question 18

What are the two main economies?

Answer 18

Free market
Command
(Mixed)

Question 19

What are the principles of a free market?

Answer 19

Markets allocate resources to people.
The economy is driven by the profit motive (i.e. this thing costs more therefore companies will make more of it).
Limited role of state because everything is privatised.

Question 20

What are the principles of a command economy?

Answer 20

Most if not all resources are state-owned.
Planning from the state allocates resources.
Very little role for market prices.

Question 21

What are the advantages of free market competition?

Answer 21

A natural efficient allocation of scarce resources (i.e. resources tend to go where market return is highest)
Competition tends to improve the quality of goods through innovation.
Competition means consumers can choose between companies to purchase from.
The profit motive stimulates capital investment lowering prices in the long run.

Question 22

What is the role of State in a mixed economy?

Answer 22

There is a mix of private and public sectors.

State-owned industries (i.e. RBS or Network Rail)
Welfare (State pension, free healthcare etc.)
Spending on public services (Education and health investment)

Question 23

What do normative statements have to contain?

Answer 23

A value judgement, be it implicit or explicit.

Question 24

What is a value judgement?

Answer 24

Whether something is desirable or not.