Economic methodology and the economic problem

Question 1

Explain why economics is a social science

Answer 1

A social science is one that studies human behavior. Economics studies how they manage their resources.

Question 2

What is the differences/similarities between economics and natural sciences?

Answer 2

Like other sciences, we construct theories, hypotheses and models and test with experiments. Unlike other sciences, there isn’t always a concrete answer due to the complexities of humans.

We also have to simplify things to gain usable models. (e.g. one of the most common simplifications is that humans are selfish and rational individuals)

Question 3

What is meant by a value judgement and how do they influence economic decision making.

Answer 3

An evaluative statement of how good or bad you think an idea or action is. Different economists may make different judgements from the same statistic. All government decisions are influenced by value judgements.

Question 4

Describe what is meant by a positive statement

Answer 4

Those that can be tested against evidence. However, this doesn’t mean the statement is always true. (e.g. - Unemployment in the UK has risen in the past year.) Positive statements should be value judgement free.

Question 5

Describe what is meant by a normative statement.

Answer 5

Those that are subjective or carry judgement. (e.g. - the govt always has the best interests of the public at heart.)

Question 6

What is the central purpose of economic activity?

Answer 6

The production of goods and services to satisfy the needs and wants of society.

Question 7

What is meant by ceteris paribus?

Answer 7

All other things remaining equal - ‘If the price of milk falls, ceteris paribus, the quantity demanded of milk will increase’.

Question 8

What is the basic economic problem?

Answer 8

Infinite needs and wants but finite resources (scarcity) so choices have to be made.

Question 9

What are the 3 key economic decisions?

Answer 9

What to produce, how to produce and who is to benefit from the goods and services produced.

Question 10

What are the 4 factors of production? (cause scarcity) (resources used to produce goods)

Answer 10

CELL - Capital (stock of goods used to produce other goods)
Enterprise (skills/abilities people have in order to bring together factors of production to produce goods and make a business successful)
Land (the natural resources used in production)
Labour (the workforce including their skills and abilities).

Question 11

What is opportunity cost?

Answer 11

The value of the next best alternative foregone.

Question 12

What does a production possibility frontier/curve show?

Answer 12

The maximum amount of any 2 different goods that can be produced in an economy.

Question 13

What if a point is inside the curve of the PPF?

Answer 13

There is an inefficient allocation of resources as more of the goods could be produced without expanding capacity.

Question 14

What if a point is outside the curve of the PPF?

Answer 14

This is impossible.

Question 15

What if a point is on the curve of the PPF?

Answer 15

This means production is efficient. We couldn’t produce more of one good without producing less of another.

Question 16

How is the decision of where on the PPF to produce made?

Answer 16

It is down to societies preference - what will satisfy the most needs and wants?

Question 17

What is productive efficiency?

Answer 17

Maximum output is produced from the available resources. The firm/economy is producing at the lowest possible average cost so we can’t produce more of one good without producing less of another.

Question 18

What is allocative efficiency?

Answer 18

Resources are allocated in the combination which best matches the tastes and preferences of society.

Question 19

What do we know about efficiency if production is on the curve of a PPF?

Answer 19

It is productively efficient, but we don’t know if it is allocatively efficient.

Question 20

What happens to the PPF if the quality or quantity if one of the factors of production increases?

Answer 20

shifts right

Question 21

What happens to the PPF for 2 goods if the FOP used to produce good X increase in quantity/quality?

Answer 21

The curve will start from the same place for good Y but will shift right for good X (gradient of curve decreases/flattens/shifts right at X)

Question 22

What will happen to the PPF if already existing but unemployed FOP production begin to be used.

Answer 22

Production moves from inside the curve to on the curve.

Question 23

Why are some PPF’s curved and what is the impact on opportunity cost?

Answer 23

Resources can’t be produced equally well for all points on the PPF so opportunity cost will change depending on where on the point production is occurring. (see examples)

Question 24

Give an example of a curved PPF.

Answer 24

Production of machines and crops by workers (solely people) and there are 3 types of workers:
Farmers great at producing crops bad at producing machinery.
Technicians: Great at making machines but bad at growing crops.
Workers: Average at producing both goods.

Question 25

What would be the characteristics of a PPF where the same resources are used to produce both goods at equal efficiency?

Answer 25

The PPF would be a straight line and opportunity cost would be constant. (see examples)

Question 26

What happens to opportunity cost the closer you get to just producing one good on a PPF?

Answer 26

As the gradient of the curve steepens (as the FOP can’t be used at maximum efficiency) , the opportunity cost will increase.