Economic Methodology And The Economic Problem

Question 1

Why is economics considered to be a social science

Answer 1

Looks at the behaviour of humans, either as individuals or as part of organisations, and their use of scarce resources

Question 2

Assumption known as ceteris paribus

Answer 2

‘All other things remaining equal’

Question 3

Positive statements

Answer 3

Objective statements with evidence

Question 4

Normative statements

Answer 4

Subjective statements-opinions

Question 5

Four factors of production

Answer 5

Land, labour, capital and enterprise

Question 6

Land

Answer 6

Includes all the natural resources in and on it

Question 7

Labour

Answer 7

The work done by people who contribute to the production process

Question 8

Capital

Answer 8

Equipment, factories and schools that help to produce goods or services

Question 9

Labour force

Answer 9

The population who are available to do work

Question 10

Enterprise

Answer 10

The entrepreneurs who take risks and create things from the other three factors of production

Question 11

The economic problem

Answer 11

How can the available scarce resources be used to satisfy people’s infinite needs and wants as effectively as possible ?

Question 12

Scarce

Answer 12

Limited amount of

Question 13

Goods

Answer 13

Tangible items

Question 14

Services

Answer 14

Intangible items

Question 15

The economic agents (participants)

Answer 15

Producers, consumers, governments

Question 16

Governments can be thought of as

Answer 16

A government sets the rules that the other participants in the economy have to follow, but also produces and consumes goods and services.

Question 17

Incentive

Answer 17

a thing that motivates or encourages someone to do something

Question 18

Government decisions that effect how resources are allocated

Answer 18

Have to decide how much to intervene in the way producers and consumers act

Question 19

Trade off

Answer 19

When you have to choose between conflicting objectives because you can’t achieve all your objectives at the same time. It involves compromising, and aiming to achieve each of your objective a bit

Question 20

Opportunity cost

Answer 20

The next best alternative that you give up in making that decision

Question 21

What does a PPF (production possibility frontier) show

Answer 21

The options that are available when you consider the production of just two types of goods or services

Question 22

What would cause an outward shift in the PPF

Answer 22

Increased resources, improved technology, improvements to labour

Question 23

What does an outward shift of a PPF show

Answer 23

Economic growth

Question 24

Assumption about the worker in a free market (rational)

Answer 24

Would prefer to have their wages, but less free time

Question 25

Assumption about the employer in a free market (rational)

Answer 25

Would prefer to have less money, and to know that there’s someone there to do some work

Question 26

The way a free market allocates resources are

Answer 26

Based on supply and demand and the price mechanism

Question 27

Free market advantages

Answer 27

Efficiency- only products of the best value will be in demand. Entrepreneurship- rewards for good ideas can make entrepreneurs a lot of money. Choice- the incentives for innovation can lead to an increase in choice for consumers.

Question 28

Free market disadvantages

Answer 28

Inequalities- market economies can lead to huge differences in income. Non- profitable goods may not be made. Monopolies- market dominance can be abused

Question 29

Advantages of Command economies

Answer 29

Maximise welfare- prevent inequality and redistribute income fairly. Low unemployment- try to provide everyone with a job and a salary. Prevent monopolies

Question 30

Disadvantages of command economies

Answer 30

Poor decision making- may make poor and slow decisions about what needs to be produced restricted choice- limited choice in what they can consume. Lack of risk-taking and efficiency.

Question 31

When free markets result in undesirable outcomes

Answer 31

Market failure

Question 32

How do governments often intervene when there’s a market failure

Answer 32

Change the law, offer tax breaks or create some other kind of incentive, or by buying or providing goods or services

Question 33

Mixed economy public and private sectors

Answer 33

Public- the government. Private- businesses that are privately owned

Question 34

The margin

Answer 34

The change in a variable cause by an increase of one unit of another variable

Question 35

What does the traditional economic theory assume about economic agents and their utility

Answer 35

Want to maximise their utility

Question 36

Marginal utility

Answer 36

The benefit gained from consuming one additional unit of a good

Question 37

Total utility

Answer 37

The overall benefit gained from consuming a good

Question 38

The law of diminishing marginal utility

Answer 38

For each additional unit of a good that’s consumed, the marginal utility gained decreases

Question 39

Producers economic objectives

Answer 39

To maximise profits, maximise total sales or the firm’s market share, (some firms) ethical objectives

Question 40

Consumers economic objectives

Answer 40

Maximise their utility, while not spending more than their income.

Question 41

Government economic objectives

Answer 41

Maximise the pubic interest: Economic growth, full employment, equilibrium in the balance of payments, low inflation

Question 42

The key assumptions used in traditional economic theory are:

Answer 42

Economic agents are utility maximisers, economic agents are rational

Question 43

Homo economicus

Answer 43

Rational individual

Question 44

Behavioural economists argue that there are lots of restrictions on people’s ability to make rational decisions

Answer 44

The time available to make a decision is limited, not all information is available, due to vast amounts of data people might not be good at calculating the costs of alternatives.

Question 45

Positive statement

Answer 45

a statement of fact that can be scientifically tested to see if it is correct or incorrect

Question 46

Normative statement

Answer 46

A statement that includes a value judgement and cannot be refuted just by looking at the evidence.

Question 47

Economic welfare

Answer 47

the well-being and prosperity of individuals, households, or society as a whole within an economy

Question 48

Economic system

Answer 48

How and for whom to produce for

Question 49

Key factors that contribute to economic welfare

Answer 49

. Income and Wealth Distribution . Employment opportunities . Access to basic needs . Quality of life . Social stability and security . Economic growth . Environmental sustainability