Economic Methodology and the Economic Problem

Question 1

Define a positive statement and normative statement

Answer 1

• Positive statements are objective statements in which can be tested with factual evidence to either be accepted or rejected.
• Normative statements are based on value judgements and are subjective/based on opinion rather than fact.

Question 2

Describe the 4 factors of production

Answer 2

• Capital refers to physical machinery/processes that are used as an input into the production process.
• Land refers to physical land space in which fixed capital can be placed or natural resources such as oil and gold.
• Labour refers to human capital, the amount of people willing to work at a given wage rate (workforce)
• Enterprise refers to entrepreneurship, the ability to use factors of production and other scarce resources to produce a good or service.

Question 3

Define the ‘basic economic problem’

Answer 3

The basic economic problem refers to the problem of allocating scare finite resources to an economy of unlimited wants.
-The basic economic problem forces individuals to make choices. Producers must decide what to produce, how to produce and for whom to produce for.

Question 4

Define opportunity cost

Answer 4

• The opportunity cost of a choice/decision refers to the cost of ‘missing out’ on the next best alternative.
• EG) Purchasing a £10 pencil case, the OPP cost of this decision would be potentially purchasing other goods or keeping the money.
• EG) A firm makes a choice to either invest in the training of their employees or expand their international markets. There is an OPP cost of this decision.

Question 5

Factors that may cause a shift in the PPF of an economy

Answer 5

• Increase in resources/FOP available.
• Improvements to the productivity of labour (more output can be produced with the same resources.)
• Increase/improvements to capital and technology lead to greater productivity.
• Natural disasters or negative economic growth can be illustrated using an inward shift of the PPF graph (total possible output with given resources has decreased).

Question 6

Describe the production possibility frontier

Answer 6

• The PPF graph shows the maximum productive capacity/potential of an economy/individual firm by comparing the different possible combinations of goods/services which can be produced with given resources (FOP).
• PPF’s show the opportunity cost of producing different combinations of two goods/service’s.
• All points on the curve are productively efficient, all points within the curve are productively inefficient (resources not being utilised most effiencetly) and points outside of the curve are currently not attainable/impossible using current resources in the economy.