4.1.1 Economic methodology and the economic problem

Question 1

Define positive statements and what makes them different from negative statements

Answer 1

Positive statements are objective. They can be tested with factual evidence, and can consequently be rejected or accepted.

The key thing here is that these statements can be tested, the results can be examined and the statement can then be rejected or accepted.

Question 2

Define negative statements and what makes them different from positive statements

Answer 2

Normative statements are based on value judgements. These are subjective and based on opinion rather than factual evidence.

Question 3

Briefly explain economics as a social science

Answer 3

Economists need to make assumptions. A key assumption that is made is assuming that events occur with ceteris paribus.

This assumption is that other things are being held equal or constant, so nothing else changes.

Question 4

How value judgments influence economic decision making and policy

Answer 4

Value judgements can influence economic decision making and policy. Different economists may make different judgements from the same statistic. For example,
the rate of inflation can give rise to different conclusions.

People’s views concerning the best option are influenced by the positive consequences of different decisions and by moral and political judgements.

Question 5

Define opportunity cost

Answer 5

Opportunity cost is the next best alternative foregone.

Question 6

What is the economic problem

Answer 6

Infinite needs and wants but their is finite resources

Question 7

Outline the purpose of economic activity

Answer 7

The purpose of economic activity is to produce goods and services which satisfy
consumer needs and wants.

This requires using resources (inputs in the form of the factors of production) to
produce outputs (the goods and services).

Question 8

What do economists have to make decision about how to use scare resources?

Answer 8

What is to be produced?
The government and private sector is faced with this decision. They also have to consider how much of each good is to be produced. Due to the problem of opportunity cost, they have to be careful about the decisions made.

How should it be produced?
This considers how the goods and services produced will be distributed. The rewards from each factor of production are considered. Firms aim to minimise costs and maximise profits, so production needs to be efficient. They will consider how much each factor of production costs and how productive it is. This will help them decide between labour intensive production and capital intensive production.

Who will benefit from the goods and services produced?
Consumers who have purchasing power can benefit from the goods and services produced. Those who are willing and able to pay the price charged for a good or service will get the good or service.

Question 9

Outline the factors of productions

Answer 9

Capital = (Physical) : goods which can be used in the production process Fixed: Machines; buildings Working:
finished or semi-finished consumer goods
Rewards/incentive : Interest from the investment

Entrepreneurship= (Managerial ability): The entrepreneur is someone who takes risks, innovates, and uses the
factors of production. Resources are drawn together into the production process.
Rewards/Incentive: Profit- an incentive to take risks

Land Natural resources such as oil, coal, wheat, water. It
can also be the physical space for fixed capital. Rewards/Incentive: Rent

Labour Human capital, which is the workforce of the economy. Reward/Incentive: Wages

Question 10

What type of resource is the environment

Answer 10

The environment is a scarce resource. There are only a limited amount of resources on the planet. These are made up of renewable and non-renewable resources.

Question 11

Define renewable resources

Answer 11

Renewable resources can be replenished, so the stock level of the resources can be maintained over a period of time. For example, commodities such as oxygen, fish, or
solar power are renewable assuming the rate of consumption of the resource is less than the rate of replenishment. If the resource is consumed faster than it is renewed, the stock of the resource will decline over time.

Question 12

Define non-renewable resources

Answer 12

Non-renewable resources cannot be renewed. For example, things produced from fossil fuels such as coal, oil and natural gas are non-renewable. The stock level
decreases over time as it is consumed. Methods such as recycling and finding substitutes, such as wind farms, can reduce the rate of decline of the resource.

Question 13

Why is opportunity cost important

Answer 13

Opportunity cost is important to economic agents, such as consumers, producers and governments. For example, producers might have to choose between hiring extra staff and investing in a new machine. The government might have to choose between spending more on the NHS and spending more on education. They cannot
do both because of finite resources, so a choice has to be made for where resources are best spent.

Question 14

Outline what a PPF diagram dictates

Answer 14

Production possibility frontiers (PPFs) depict the maximum productive potential of an economy, using a combination of two goods or services, when resources are fully and efficiently employed. PPF curves can show the opportunity cost of using the scarce resources

Question 15

Draw a PPF diagram

Question 16

Outline the law of diminishing returns

Answer 16

The law of diminishing marginal returns is a theory in economics that predicts that after some optimal level of capacity is reached, adding an additional factor of production will actually result in smaller increases in output

Question 17

Give explanations of different point on the PPF diagrams

Answer 17

Producing at inside the PPF graph is inefficient, and resources are not used to their full productive potential. There is the potential to use these resources more efficiently, which would shift production closer to the curve. In other words, there is the unemployment of economic resources.

Question 18

Outline the PPF diagram in terms of economic growth and decline

Answer 18

The PPF can also depict economic growth or decline. Only production under and on the PPF is attainable. Production outside of the PPF is not obtainable. However, only production on the PPF uses resources efficiently (A and B). It is inefficient to produce below the PPF (point C).

Economic growth can be shown by an outward shift in the PPF, from the curve with point A on it, to the curve with point B on it. A decline in the economy would be depicted by an inward shift.

An increase in the quantity or quality of resources shifts the PPF curve outwards, so the productive potential of the economy increases, and there is economic growth. This can be achieved with the use of supply side policies.

Moving along the PPF is different to shifting the PPF. Moving along the PPF uses the same number and state of resources, and shifts production from fewer consumer
goods to more capital goods, for instance. This incurs an opportunity cost. Shifting the PPF curve outwards, for example, uses either more resources or resources of a
greater quality. This reduces the opportunity cost of producing either capital or consumer goods, since more goods can be produced overall.

Question 19

Define capital goods

Answer 19

Capital goods are goods which can be used to produce other goods, such as machinery

Question 20

Define Consumer goods

Answer 20

Consumer goods are goods which cannot be used to produce other goods, such as clothing.

Question 21

Define productive efficiency

Answer 21

Productive efficiency is concerned with the optimal method of producing goods; producing goods at the lowest cost.

Question 22

Define Allocative efficiency

Answer 22

Allocative efficiency is concerned with the optimal distribution of goods and services.