Economic Methodology and the Economic Problem

Question 1

what are the different types of economic statements ?

Answer 1

Positive
&
Normative

Question 2

what is a positive statement ?

Answer 2

.. objective
.. tested with factual evidence
.. either ‘rejected’ or ‘accepted’
e.g. “raising tax on alcohol will lead to a fall in demand for alcohol and profits for pub landlords will fall.”

Question 3

what is a normative statement ?

Answer 3

– subjective (opinion based)
e.g. “the free market is the best way to allocate resources.”

Question 4

what is the purpose of economic activity ?

Answer 4

to produce goods and services that satisfy consumer wants and needs.

Question 5

how do economists best achieve efficient economic activity ?

Answer 5

in order to do this resources are required.

FACTORS OF PRODCUTION

Question 6

what are the factors of production ?

hint: what is the acronym to remember them ?

Answer 6

the resources used to produce goods and services

Capital
Enterprise
Land
Labour

Question 7

because resources are scarce what questions do economists have to ask themselves in order to efficiently allocate resources ?

Answer 7

WHAT is to be produced ?
. opportunity cost

HOW should it be produced ?
.distribution
.minimize costs, maximize profits

WHO will benefit from the goods & services produced ?

Question 8

what is capital ?

& its cost

Answer 8

goods that can be used for production
e.g. machines

reward - interest

Question 9

what is enterprise ?

& its reward

Answer 9

entrepreneurs who use FOP to make risks, invention and innovation

reward - profit

Question 10

what is land ?

& its cost/reward

Answer 10

natural resources
e.g. oil, coal

reward - rent

Question 11

what is labour ?

& its cost

Answer 11

workforce

reward - wages

Question 12

what are the two types of resources ?

& what are they

Answer 12

finite, will run out

infinite, wont run out

Question 13

what is the basic economic problem ?

Answer 13

infinite wants and needs, finite resources

Question 14

why does the basic economic problem lead to an opportunity cost ?

Answer 14

opportunities are always going to be forgone due to a scarcity of resources.

Question 15

what is an opportunity cost ?

Answer 15

the loss of the next best option forgone in an economic transaction.

e.g. consumer chooses to purchase a new phone, they may be unable to purchase new jeans.

Question 16

what does a PPF curve show/tell us ?

Answer 16

+ an economic model that considers the maximum possible production (output) that a country can generate if it uses all of its factors of production to produce only two goods/services
+ productive potential and capacity of an economy
+ a tradeoff between two goods or services
+ opportunity cost

Question 17

on a PPF where is it productively efficient ?

Answer 17

on the curve (PPF)

Question 18

on a PPF where is it productively inefficient ?

Answer 18

below the curve

Question 19

on a PPF where is production not yet attainable ?

Answer 19

beyond the curve

Question 20

where is there an opportunity cost on the PPF ?

Answer 20

extension or contraction on the curve

Question 21

why causes an outward shift on the PPF ?

Answer 21

economic growth
- increase in quality and quantity

Question 22

why causes an inward shift on the PPF ?

Answer 22

economic decline
- decrease in quality and quantity

Question 23

what is the primary purpose of businesses ?

Answer 23

to produce goods or services that satisfy a need or demand in the market

Question 24

who owns the factors of production in a free market ?

Answer 24

privately owned by household and firms

Question 25

how does the basic economic problem effect consumers ?

Answer 25

In a free market, scarcity has a direct influence on prices

The scarcer a resource or product, the higher the price consumers will pay

Question 26

how does the basic economic problem effect producers ?

Answer 26

scarce resources will find their costs of production are high

Question 27

how does the basic economic problem effect workers ?

Answer 27

Workers may want a more comfortable and safer working environment but their employers may not have the resources to create it

Question 28

how does the basic economic problem effect the government ?

Answer 28

Governments have to decide if they will provide certain goods/services or if they will allow private firms to provide them instead

Their decision influences the allocation of resources in society

Question 29

what are capital goods ?

Answer 29

Capital goods are assets that help a firm or nation to produce output

Question 30

what are consumer goods ?

Answer 30

Consumer goods are end products and have no future productive use