Economic Methodology

Question 1

Opportunity Cost

Answer 1

The measurement of the cost of a choice in turn of the next alternative option
The loss of the next best alternative choice when making a decision

Question 2

How is economics a social science?

Answer 2

It’s considered to be the “scientific study” of the methods used to build theories that explain the behaviour/opinions of the economic agents (individuals, groups, organisations)

Question 3

What does this “social science” focus on?

Answer 3

It’s concerned with the description and analysis of:
-Production
-Distribution (resources being shared equitably and not equally)
-Consumption of goods and services

Question 4

4 factors of production

Answer 4

Land
Labour
Capital
Enterprise

Question 5

What is the economic benefit for land?

Answer 5

It can generate income through rent or agricultural activities (e.g farming, crops)

Question 6

What is the economic benefit for labour?

Answer 6

-It promotes overall productivity of the economy.
-It can also provide wages/salaries for workers through employment, thus supporting their livelihoods (better living standards)

Question 7

What is the economic benefit for Capital?

Answer 7

-It can generate income through investments such as interest, dividends or capital gains from shares
-It can also finance business operations and the purchase of assets (leads to technical economies of scale)

Question 8

What is the economic benefit for enterprise?

Answer 8

-It encourages innovation and creates job opportunities: this contributes to the production of goods and services, which in turn drives/strives for economic growth.

Question 9

What is scarcity?

Answer 9

When resources are limited, so there’s uncertainty as to who receives resources and how much each receives

Question 10

What is Rationing?

Answer 10

This is a way of saving resources when they’re scarce;

When demand outstrips supply scarce goods and services have to be fairly allocated.

Question 11

What are rational consumers’ objectives?

Answer 11

To maximise their utility from their consumption of goods and services in order to maximise their welfare and satisfaction.

Question 12

What are businesses’ objectives?

Answer 12

-They wish to maximise their profits by serving their goods and services to the right, most appropriate market

-They want to produce their goods and services at the lowest costs possible in order to maximise their profits.

Question 13

What is the government’s objectives?

Answer 13

-They wish to improve the economic and social welfare of their citizens

-They also bring legislation in order to regulate the economic activity and behaviour between the economic agents,

all in order to keep everything working together in a harmonious fashion.

Question 14

What is a free market economy?

Answer 14

Where consumers and firms have the freedom to conduct their businesses freely, without the intervention of government

They can decide what to and how to produce and for whom (as it’s democratic)

Question 15

What is a command economy?

Answer 15

This is where authorities or the state has full control over what is produced and how it’s produced and for whom

Therefore people need permission from the government in order to conduct their businesses in their own free manner.

Question 16

What is a mixed economy?

Answer 16

This is a mix of free-market and command economies:
It’s where individuals and firms can make decisions, but there’s still government intervention in order to regulate economic activity between the other 2 economic agents.

Question 17

What is regulatory capture?

Answer 17

This is a form of corruption- where someone who’s worked in a political sector/entity (I.e the government) goes to work in the commercial sector (into firms).

When regulatory capture occurs, special interests of the private is prioritised over the general public’s interests.

Question 18

Reasons for wage differences in imperfectly competitive labour markets

Answer 18

1.) Disequilibrium trading (Market conditions always changing)

2.) Imperfect Market information (Workers lack accurate info on rates of pay; imperfect market info can contribute to occupational immobility of labour, where workers aren’t able to move from one type of job to another)

3.) Workers are being exploited by monopsonies

4.) Lack of education - leads to people being less skilled and having lower MRP, causing disparities in society in terms of the wages earned by those with low MRP versus those with higher MRP.

Question 19

Main characteristics of a pure public good

Answer 19

1. Non-excludability (the benefits derived from using a public good cannot be confined solely to those who have paid for it, as it’s meant for everyone, hence the word public) (e.g public roads)
2. Non-rivalrous/ non-rival consumption (Each party’s enjoyment of the public good doesn’t diminish another’s enjoyment of it)
3. Non-reject-able (The collective supply of the public goods means that it cannot be rejected by anyone) (e.g the sun or rain, the police)

Question 20

What is elasticity?

Answer 20

It measures the proportionate responsiveness of the second variable to the change in the first variable

Question 21

What happens if a firm increases their price in an oligopoly?

Answer 21

Then the decrease in the quantity demanded will be proportionally more than the increase in price:

-The other firms will undercut this firm that decided to increase their prices by not changing their prices in order to preserve their market share

Thus their total revenue and market share will decrease.

Question 22

What happens if a firm decreases their price in an oligopoly?

Answer 22

The quantity demanded will increase but proportionally less than the reduction in price:

-Reducing prices leads to a price war (as other firms are interdependent and they want to keep their market share)

Other firms will follow and also drop their prices, meaning everyone loses out in total revenue and the firm that decided to decrease their prices would not have gained any market share anyways.

Question 23

How can entrepreneurs improve the market?

Answer 23

-By creating new goods and services through innovation

-Developing new efficient production methods that incumbent firms haven’t come up with because they’re too complacent and naive (in order to minimise waste and environmental impacts)

• Finding a new source of raw materials (can promote sustainability, improve quality and lower costs for consumers)

Question 24

How else can you label the high power of a trade union?

Answer 24

With the term “high union density”

Question 25

Examples of monopolies in real life

Answer 25

• BBC for public service broadcasting
• Royal Mail for postal services
• Network rail for railway infrastructure

Question 26

Examples of oligopolies

Answer 26

The supermarket sector (e.g Tesco, Sainsbury’s, Asda, Morrisons, Lidl, Aldi)

The banks (e.g Barclays, HSBC, Lloyds, NatWest)

Water sector (including Thames water as the market leader)

Question 27

Examples of cartels in real life

Answer 27

-OPEC (organisation of petroleum exporting countries) - these countries produce oil with the aim of controlling global oil prices by having price-setting power

-De Beers dominated the diamond market through marketing and pricing strategies

Question 28

What are considered high barriers to entry?

Answer 28

-High start-up costs (sunk costs which cannot be recovered, I,e the initial investment)

• Strong brand loyalty

-Legal restrictions

Question 29

Which market structures have high barriers to entry?

Answer 29

Monopolies and oligopolies

Question 30

Which market structures have low barriers to entry?

Answer 30

Perfect competition, Monopolistically competitive markets, and Contestable markets

Question 31

Examples of Contestable markets

Answer 31

-Airline industry (new airlines can enter with existing/incumbent carriers)

-Online retail sector (where new e-commerce businesses can easily establish themselves)

Question 32

What is price discrimination?

Answer 32

When a firm charges different prices to different groups of consumers for identical good/service for no differences in costs of production

Question 33

What are the 3 conditions necessary for a firm to price discriminate?

Answer 33

-Must be a price maker (need monopoly power)

-Need information to separate the market into different price elasticities of demand (e.g identify those with price inelastic demand to set higher prices, and identify those with price elastic demand to charge lower prices - can do this through collecting information on consumers online through cookies in order to segment us)

-Prevent market leakage: reselling of products which involves buying from where the price is lower and selling where the price is higher