Ch.1 Economic Methodology And The Economic Problem

Question 1

What is economics?

Answer 1

The study of how the worlds scarce resources are allocated to competing uses to satisfy societies wants.

Question 2

What is a positive statement?

Answer 2

An objective statement that can be tested against the facts to be declared either true or false.

Question 3

What is a normative statement?

Answer 3

A subjective opinion, or value judgement, that cannot be declared either true or false.

These often concern views about what individuals, firms or governments should do, based upon people’s ethical, moral or political standpoints.

Question 4

What is a need?

Answer 4

Something which humans need to survive, such as food, shelter, warmth…

Question 5

What is a want?

Answer 5

Something which people feel improves their standard of living but is not required for survival.

Question 6

What is economic welfare?

Answer 6

The standard of living or general wellbeing of people in society.

Question 7

What are the factors of production?

Answer 7

The factors of production are a country’s productive economic resources, divided into capital, enterprise, land and labour.

Question 8

What is capital?

Answer 8

Man made physical equipment used to make other goods and services. This includes machinery and computer equipment.

Question 9

What is enterprise?

Answer 9

Entrepreneurs are individuals who take a business risk in combining the other three factors of production in order to produce a good or service.

Question 10

What is land?

Answer 10

All naturally occurring resources such as minerals, the sea, fertile land and the environment. These can be further divided into renewable and non renewable resources.

Question 11

What is Labour?

Answer 11

People involved in production, sometimes referred to as human capital.

Question 12

What is the basic economic problem?

Answer 12

There are scarce economic resources and unlimited wants from society.

Question 13

What are the three fundamental economic questions?

Answer 13

1. What to produce and in what quantities? Goods can be divided into capital goods and consumer goods. Capital goods are those used to produce other goods, consumer goods are those that give satisfaction to the consumer.)
2. How should goods and services be produced? The basic production decision is between labour intensive methods (where there is a high amount of human capital) and capital intensive methods (where there are high amounts of machinery and other forms of capital).
3. To whom should goods and services be allocated? This choice affects the degree of equity and equality in society. Decisions on who in society gets what is down to the economic system.

Question 14

What are the two extreme forms of the economic system?

Answer 14

The free market or capitalist economy. Decisions are made solely by the interactions of consumers and firms, which no government intervention.

The command or centrally planned economy. Decisions are made solely by the planning department of governments.

Question 15

What is opportunity cost?

Answer 15

The cost of the next best alternative that you give up when you have to make a choice. It means that when someone chooses one use, they must forgo the next best alternative use.

Question 16

What is an economic good?

Answer 16

Those that use up scarce economic resources in their production. These include most consumer goods. When consuming these goods there is an opportunity cost as it uses up scarce resources.

Question 17

What are free goods?

Answer 17

Free goods are unlimited in their supply and availability, such as sunlight or air, and thus the opportunity cost of consuming them is zero.

Question 18

What is a production possibility curve?

Answer 18

A diagram which shows the maximum possible output combinations of two goods in an economy, assuming full employment of efficient resources. Any point inside of the curve is producing inefficiently with unused resources.

Question 19

What factors cause an outward shift on the production possibility frontier (diagram)?

Answer 19

Technological advancements that lead to increased productivity of capital equipment.

Discovery of new resources.

Improvements in enduction and training that lead to a more productive workforce.

Changes that lead to an increase in the working population.

Question 20

What factors cause an inward shift on the production possibility frontier (diagram)?

Answer 20

Disasters such as earthquakes or floods that devastate the productive resources.

Wars.

Global war,king/climate change, which may lead to the loss of farmland, rising sea levels and more extreme weather.

A prolonged recession, which may lead to the permanent loss of productive capacity if businesses close down and/or workers lose their skills.

Question 21

How is opportunity cost involved with production possibility diagrams?

Answer 21

On the Y axis is consumer goods and on the X axis is capital goods. If there is an increase in the amount of capital goods it means that the amount of consumer goods is going to decrease.

Question 22

What is economic growth?

Answer 22

An increase in the productive capacity of an economy over time.

Question 23

How does a production possibility diagram show economic growth?

Answer 23

Any point directly on the production possibility curve shows that all factors of production are fully employed and there are no inefficiencies.

If the production possibility curve shifts outwards due to one of the factors (such as an improvement in technology) it means that there has been an increase in the productive capacity of the economy. With a new production possibility curve that is further out that the original it means that production at that stage is now possible, leading to an increase potential output of both capital goods and consumer goods.

Question 24

What are the two main types of economic efficiency?

Answer 24

Productive efficiency

Allocative efficiency

Question 25

What is productive efficiency?

Answer 25

When maximum output is produced from the available factors of production and when it is not possible to produce more of one good or service without producing less of another.

Question 26

What is allocative efficiency?

Answer 26

When an economy’s factors of production are used to produce the combination of goods and services that maximises society’s welfare.