4.1.1 Economic methodology and the Economic Problem

Question 1

What does Economics as a social science mean

Answer 1

It means we can never be sure how people and businesses will respond to the changing circumstances around them

Question 2

What is a positive statement

Answer 2

Objective statements that can be tested

Question 3

What is a normative statement

Answer 3

Are subjective statements

Question 4

What are the 3 Economic agents

What do they wish for

Answer 4

Rational consumers - Wish to maximise satisfaction
Firms- wish to maximise profits
Governments- Wish to improve economic and social welfare of its citizens

Question 5

Define Microeconomics

Answer 5

Is the study of economics at the level of the individual firm, industry or consumer

Question 6

What are most economic decisions influenced by ?

Answer 6

Influenced by value judgements, which vary from person to person, causing debate

Question 7

What is a value judgement

Answer 7

Is a judgement made on opinion

Question 8

Define Equity

Answer 8

A way of considering fairness in the distribution of income and wealth in the outcome of economic activities

Question 9

What are the four factors of production

Answer 9

Land- raw materials and resources available
Labour- people available to work
Capital- tools and machinery used in production
Enterprise- Investing in other production processes to make a profit

Question 10

What are the rewards of the factors of production

Answer 10

Land- rent
Labour- wages
Capital- interest
Enterprise- profit

Question 11

What are scarce resources

Answer 11

Goods and services which are scarce because of the limited availability of the factors of production

Question 12

Define rationing

Answer 12

Is a way of allocating scarce goods and services when market demand outweighs the available supply

Question 13

What are the ways of allocating scarce resources

Answer 13

Market price (main)
Consumer income 
Assessment of need
Education level
Age

Question 14

What are the types of market

Answer 14

Command economies (North Korea)
Mixed economies (UK)
Free market (USA)

Every market is regulated to some extent

Question 15

Define the basic economic problem

Answer 15

Where finite resources are allocated to satisfy needs and wants

Question 16

What does producing on the PPF curve mean

Answer 16

Productively efficient
Lowest possible unit cost
Waste is minimal

Question 17

What does producing below the PPF curve mean

Answer 17

Inefficient use of resources (FOP)

More waste

Question 18

What does producing above the PPF curve mean

Answer 18

Unattainable given resources

Can become attainable

Question 19

What is opportunity cost

Give 4 examples

Answer 19

Measures the cost of a choice made in terms of the next best alternative foregone or sacrificed

Work leisure choices
Government spending priorities
Investing today for consumption tomorrow
Use of scarce farming land

Question 20

What is economic investment and what is it needed for

Answer 20

Adds to the capital stock of the economy

Needed to continue to be productively efficient

Question 21

What are capital goods

Answer 21

Used to make consumer goods and services

Question 22

What are consumer goods

Answer 22

Satisfy are needs and wants directly

Question 23

If the PPF line is straight what does it mean in terms of marginal opportunity cost

Answer 23

Switching resources between capital and consumer goods is constant

Question 24

If the PPF line is concaved what does it mean in terms of marginal opportunity cost

Answer 24

Means changing production between goods is not easily substitutable

Question 25

How does the law of diminishing marginal returns occur

Answer 25

Because not all factor inputs are equally suited to producing items, leading to lower productivity

Question 26

What are the ways of increasing the PPF curve

Answer 26

Q2 Quality - better trained/motivated staff, better capital Quality - More staff, land and capital

Question 27

How can a reduction in the PPF curve occur

Answer 27

Capital depreciates over time. Not able to produce the quality of goods, consumer goods will decrease

Question 28

What is the price mechanism

Answer 28

Market forces of supply and demand determine what is produced and sold at what price. Determines the allocative efficiency

Question 29

What is allocative efficiency

Answer 29

Efficient level of output is the combination of goods and services that best meets the needs and wants of society

Question 30

What are the functions of the market (price mechanism)

Answer 30

``` They allocate resources The signalling function (following demand to generate most profit as possible) The rationing function (when a resource is scarce prices go up as it is rationed) Providing incentives (higher prices give businesses incentives to supply more) ```

Question 31

What is a Production Possibility Frontier curve

Answer 31

A diagram that shows the different production combinations that can be produced given a fixed resource stock

Question 32

What is a free good

Answer 32

Goods with no opportunity cost to producing and consuming them, e.g. air

Question 33

What is imperfect information

Answer 33

Where consumers do not possess all the information required to make fully rational decisions

Question 34

What is asymmetric information

Answer 34

A source of information failure where one economic agent knows more than another , giving them power in a market transaction.

Question 35

What does allocative efficiency allow in terms economic value

Answer 35

Allocative efficiency allows the people who best see economic value and utility in something to pay for it.

Question 36

Define Diminishing marginal return

Answer 36

As individuals consume more units of a good or service , the additional units give smaller increases in total satisfaction.

Question 37

Define supply

Answer 37

Is the quantity of a good or service that a producer is willing and able to supply onto the market at a given price in a given time period

Question 38

What is the basic law of supply and what are the reasonings for it

Answer 38

Is that as the price of a product rises businesses expand supply tl the market Profit motive Productions and costs New entrants coming to the market

Question 39

What is a a supply curve What does it represent

Answer 39

Shows the relationship between market price and how much a firm is willing and able to sell (shows marginal cost curve) Represents minimum price firms would accept to produce quantity of output

Question 40

Define marginal cost

Answer 40

The additional cost of producing one more unit of output

Question 41

What does a supply curve represent

Answer 41

The quantity of goods and services that can be sold in current market conditions . An increase or decrease in the supply curve can change price of output, it can change based on wants of people

Question 42

What is the acronym for factors that can change supply

Answer 42

``` Productivity Indirect taxes (tax to produce) Number of firms in the market Technology Subsidies (money granted by government to keep price low) Weather/natural disaster/war Cost of production ```