Economic methodology and the economic problem

Question 1

What is the Economic problem?

Answer 1

The economic problem involves decisions about how to make the best use of limited resources when not all wants/needs can be fully satisfied.

Question 2

What is a positive statement?

Answer 2

Statements that describe or explain a phenomenon or relationship in the world. They are based on factual observations or evidence and can be tested and verified through empirical analysis. Positive statements are objective and do not involve value judgments or personal opinions.

Question 3

What is a normative statement?

Answer 3

Statements that involve value judgments or express personal opinions about what ought to be or what should be. They are not based on factual observations or evidence and cannot be tested or verified through empirical analysis. Normative statements often involve subjective evaluations of what is considered good, bad, right, or wrong.

Question 4

What is the problem of scarcity?

Answer 4

The demand for a good or service is greater than the availability of the good or service

Question 5

What is opportunity cost?

Answer 5

Opportunity cost is the value of the next best alternative foregone when a choice is made. It represents the true cost of a decision in terms of forgone opportunities.

Question 6

What could cause a outward shift of a countries production possibility frontier?

Answer 6

• Investment in capital i.e. plant and machinery and new technology
• Inward migration of younger, skilled workers
• Discovery of new natural resources
• Improved education, training and healthcare to lift labour productivity
• Innovations that increase output per unit and reduce resource wastage

Question 7

What does a PPF show?

Answer 7

A production possibility frontier (PPF) shows the maximum possible output combinations of two goods or services an economy can achieve when all resources are fully and efficiently employed.

Question 8

What does a straight PPF show?

Answer 8

That the marginal cost of switching resources between consumer and capital goods is constant

Question 9

What could cause an inward shift of a countries PPF?

Answer 9

• Damaging effects of natural disasters e.g. drought or an earthquake
• Destruction/loss of factor imputs caused by civil war or any extended period of conflict
• Large scale net ouward labour migration
• A trend decline in the productivity of imputs perhaps caused by a persistent recession which may cause net investment to be negative