4.1.1 Economic Methodology and the economic problem

Question 1

Why is economics considered a social science?

Answer 1

Because it looks at the behavior of humans and their use of scarce resources.

Question 2

In what way is economic methodology similar to other sciences?

Answer 2

The use of simplifying assumptions such as cetris paribus, and the testing of theories and models against relevant known facts.

Question 3

What is the ceteris paribus?

Answer 3

“All other things remaining equal” is an assumption used to make looking at the relationship between two factors easier.

Question 4

What is a normative statement and give an example.

Answer 4

A normative statement is one that contains a value judgement, an opinion. An example is “The use of cars should be banned.”

Question 5

What is a positive statement and give an example.

Answer 5

An objective statement that can be tested against facts. An example would be “500 people die every year to sharks” it does not matter if its true or not.

Question 6

What are three things someone might base a decision on?

Answer 6

Moral views, short-term positive consequences and political judgement.

Question 7

How might a decision be influenced by a political judgement?

Answer 7

Lowering taxes may win votes however once the election is won the government won’t have as much spending power.

Question 8

Why is choice an important element in the economic problem?

Answer 8

Limited resources have different applications so a choice must be made of where to allocate the resources.

Question 9

What are the four factors of production?

Answer 9

Capital, Enterprise, Land and Labor.

Question 10

What is the economic problem?

Answer 10

How can scarce resources be used to satisfy people’s infinite need and wants as effectively as possible?

Question 11

What does the existence of scarcity imply?

Answer 11

That individuals must make choices.

Question 12

What’s an example of an economic consumption activity?

Answer 12

Someone enjoying the flowers in a public park.

Question 13

What’s one reason that the free market fails to achieve optimal allocation of resources?

Answer 13

Because there is underproduction of goods with positive externalises.

Question 14

Define scarcity?

Answer 14

Limited quantities of resources to meet unlimited wants

Question 15

What is an example of a scare resource and why?

Answer 15

Demand for water, food, energy, land and minerals is rising substantially, making natural resources increasingly scarce and more expensive. Hence the environment is a scarce resuly.

Question 16

What is the fundamental economic problem?

Answer 16

how best to make decisions about the allocation of scarce resources among competing uses so as to improve and maximise human happiness and welfare

Question 17

How do choices have an opportunity cost?

Answer 17

trading off the expected value of one opportunity against the expected value of its best alternative.

Question 18

What is the central purpose of economic activity?

Answer 18

The production of goods and services to satisfy needs and wants.

Question 19

What are the key economic decisions?

Answer 19

what to produce, how to produce, and who is to benefit from the goods and services produced.

Question 20

What is a production possibility diagram?

Answer 20

A diagram that shows the options available when you consider the production of just two types of goods or services.

Question 21

Define the term “trade-off”.

Answer 21

A trade-off occurs when you have to choose between conflicting objectives.

Question 22

What is an opportunity cost?

Answer 22

An opportunity cost is the second best thing you have given up to have the “best thing”.

Question 23

What might cause an outward shift on a PPF?

Answer 23

Improved technology, improvements to labour (Economic growth)
Innovation
Discovery/ extraction of new resources
Better management of factors imports

Question 24

What might cause an inward shift on a PPF?

Answer 24

Natural disasters (Negative economic growth)
A trend in decline in productivity
large scake net outward labour migration

Question 25

Why are all the points on a PPF productively efficient?

Answer 25

Because all possible resources are being used to produce the maximum possible output.

Question 26

Why are all points on a PPF not allocatively efficient?

Answer 26

Because allocative efficiency refers to people getting what they want or need and not all points on a PPF will represent this.

Question 27

What does a production possibility frontier illustrate?

Answer 27

The various combinations of output an economy is currently capable of producing with its limited resources.

Question 28

Why all points on the boundary are productively efficient but not all points on the boundary are allocatively efficient?

Answer 28

All points on the boundary are productively efficient. This is because resources are being used to their productive potential so it is efficient. However, not all points are allocatively efficient. This is because more of one good cannot be produced without reducing the amount of the other product available.

Question 29

What does it mean if the ppf Line is straight?

Answer 29

• It is an indication of perfect factor substitutability of resources,
• If the ppf is a straight line thenmarginal opportunity cost of switching resources between consumers and capital goods is constant.

Question 30

Give examples of resource depreciation?

Answer 30

• Machinery
• Skills atrophy
• Buildings
• Basic infrastructure.

Question 31

Give examples of resource depletion?

Answer 31

• Human capital flight
• Capital scrapping
• Natura disasters
• Deforestation

Question 32

What causes when there’s unemployed resources or when resources are used inefficently?

Answer 32

Combinations of the output of consumer and capital goods lying inside the ppf happen.

Question 33

Combinaions of goods and services that lie beyond the ppf are …..

Answer 33

unattainable

Question 34

An outward shift in the ppf a country will require a ….

Answer 34

Increase in factor resources, an increase in productivity, and or an improvement in technology to achieve an outward shift in the ppf

Question 35

what does producing more of both goods with the same rsoures represent?

Answer 35

An improvement on welfare and a fall in allocative efficency