Definitions of the nature of economics

Question 1

Economic model

Answer 1

these seek to derive verifiable implications about economic behaviour

Question 2

Social science

Answer 2

concerned with society and the relationships among individuals within society

Question 3

Positive statements

Answer 3

positive statements are value-free, objective and testable

Question 4

Normative statements

Answer 4

normative statements are subjective, non-testable, value judgements

Question 5

Scarcity

Answer 5

scarcity results from finite resources being unable to produce enough to fulfil infinite wants

Question 6

Opportunity cost

Answer 6

This is the next best alternative which is foregone whenever an economic decision is made

Question 7

Renewable resources

Answer 7

Resources that are replenished by natural processes at a rate comparable or faster than its rate of consumption by humans or other uses

Question 8

Land

Answer 8

Natural resources: that is any free gift of nature e.g. coal reserves or fish in the sea. Its reward is rent

Question 9

Labour

Answer 9

The mental or physical effort of humans in the production processes for which they are paid. Its reward is wages

Question 10

Capital

Answer 10

Producer goods that only indirectly satisfy wants e.g. machinery and factories. Its reward is interest

Question 11

Consumer goods

Answer 11

Goods that directly satisfy wants

Question 12

Enterprise

Answer 12

Organises and controls the other factors and takes the risks in the production processes. Its reward is rent

Question 13

Production possibility frontier

Answer 13

A curve showing the maximum possible alternative combinations of two goods eg capital and consumer goods that an economy can produce using all the available factors of production efficiently. Moving from one point on the curve to another indicates the opportunity cost of increasing one items production in terms of the units of the other forgone

Question 14

Productive efficiency

Answer 14

Producing the greatest value output of the least value inputs. For a firm it means producing at the lowest average total cost ATC

Question 15

Allocative efficiency

Answer 15

Producing the correct bundle of goods to maximise welfare, For a firm it means producing where price = marginal cost

Question 16

Division of labour

Answer 16

The separation of tasks in the production process and their allocation to different groups of workers.

Question 17

Diminishing Marginal Returns DMR

Answer 17

The idea that as successive units of a variable factor are added to a fixed factor that each extra unit of the variable factor adds less output than the one before it

Question 18

Short run

Answer 18

The time period in which at least one factor of production is fixed

Question 19

Long run

Answer 19

The time period in which all factors are variable

Question 20

Market economy

Answer 20

An economy based on competition, the private ownership of factors, little government intervention and where the price mechanism determine the allocation of scarce resources through the market forces of supply and demand,

Question 21

Command/control economy

Answer 21

A type of economic system where the resources are state owned and their allocation and use is determined by the centralized decisions of a planning authority e.g. North Korea

Question 22

Mixed economy

Answer 22

An economic system which is a combination of market and command economic systems where market forces control the allocation of some resources, but also government’s intervene in the allocation to try correct market failures.

Question 23

Transition economy

Answer 23

This is an economy which is changing from a planned economy to a free market. This economic change (letting market forces set prices, lowering trade barriers, and moving from public to private ownership of resources) often leads to initial high inflation and may lead to increased inequality of incomes and wealth.

Question 24

Competitive markets

Answer 24

Characterised by large numbers of buyers and sellers, freedom to enter the exit the market and a homogenous product

Question 25

Why is it harder to do experiments in economics than pure science

Answer 25

Because you cannot control all the variables as it is based upon human actions and so is uncontrallable

Question 26

The underlying assumptions of ratioanl econonomic decision making is that

Answer 26

Consumers aim to maximise utility (sometimes dont due to information failures of costs)

Firms aim to maximisee profits (and so their utility)

Question 27

What is profit

Answer 27

Revenue minus costs

Question 28

Ceteris paribus

Answer 28

All things equal