Economic Methodology And The Economic Problem

Question 1

What is a positive statement?

Answer 1

An objective statement that can be tested, the results examined and the statement rejected or accepted

Question 2

What is a normative statement?

Answer 2

A value judgement based on opinion rather than factual evidence

Question 3

What is the fundamental economic problem?

Answer 3

Wants / needs are infinite but resources required to satisfy them are scarce

Question 4

What is the purpose of economic activity?

Answer 4

Producing goods and services which satisfy consumer needs and wants

Question 5

Who decides what to be produced?

Answer 5

The government

The private sector

Question 6

How are goods and services produced?

Answer 6

Inputs in the form of the factors of production
Produce output (goods and services)

Question 7

What do firms aim to do?

Answer 7

Minimise cost

Maximise profit

Question 8

What are the four factors of production?

Answer 8

Land
Labour
Capital
Enterprise

Question 9

Describe capital in the factors of production?

Answer 9

A good which can be used in production process

Question 10

Describe land in the factors of production?

Answer 10

Natural resources such as oil coal water

Can also be the physical space for fixed capital

Question 11

Describe labour in the factors of production?

Answer 11

Human capital which is the workforce of the economy

Question 12

What is the incentive for labour?

Answer 12

Wages

Question 13

Describe entrepreneurship in the factors of production?

Answer 13

The entrepreneur is someone who takes risks, innovates, and uses the factors of production

Question 14

Incentive of entrepreneurship?

Answer 14

Profit - an incentive to take risks

Question 15

What does a PPF curve illustrate?

Answer 15

The total possible output of two goods or services that can be produced from a given level of factors of production

Question 16

Why does the PPF curve cube outwards?

Answer 16

Specialisation of factors of production

LAW OF DIMINISHING RETURNS

Question 17

A point within the PPF curve shows what?

Answer 17

An inefficient allocation of scarce resources

Question 18

Describe long run economic growth?

Answer 18

Increased total productive capacity

Question 19

Describe short run economic growth?

Answer 19

Makes use of spare capacity

Takes up slack in the economy

Question 20

What does the PPF curve assume?

Answer 20

Ceteris Paribus

• a fixed amount of resources are used
• constant state of technology

Question 21

What is demand?

Answer 21

The number of units consumers are willing and able to pay at any given price

Question 22

What does price do to a demand curve?

Answer 22

Causes a movement along the existing demand curve

Question 23

What is the mnemonic to remember determinants of demand?

Answer 23

PIRATES

POPULATION
INCOME
RELATED GOODS
ADVERTISING
TASTES
EXPECTATIONS
SEASONS

Question 24

Describe how population can cause a shift in demand?

Answer 24

Larger population = higher the demand

Question 25

Describe how income can cause a shift in demand?

Answer 25

More disposable income Demand increased - they can afford more goods

Question 26

Describe how related goods can cause a shift in demand?

Answer 26

Substitutes : price of a substitute falls, demand for the original good falls Complement : price of a complement falls, demand for the original good increased

Question 27

Describe how advertising can cause a shift in demand?

Answer 27

Increased consumer loyalty and increased demand

Question 28

Describe how tasted and fashions can cause a shift in demand?

Answer 28

The demand for a good may change if consumer tastes change

Question 29

Describe how expectations can cause a shift in demand?

Answer 29

(Future price changes) If consumers expect prices to rise Demand is likely to increase in the present

Question 30

Describe how seasons can cause a shift in demand?

Answer 30

Demand changes according to the season Eg. Icecream

Question 31

What does the law of diminishing marginal utility state?

Answer 31

For an extra unit of the good is consumed, the marginal utility falls

Question 32

In a free market, what do market prices do?

Answer 32

Provide incentives for consumers about how much to purchase Reflect the relative scarcity of the product Communicate information to producers about how much to supply

Question 33

In a market, how does the economy use scarce resources efficiently?

Answer 33

Through price

Question 34

Define supply?

Answer 34

Quantity of a good or service which forms are willing and able to produce at any given price

Question 35

Why does the supply curve slope upwards? (rise in price rise in supply)

Answer 35

It is more profitable for firms to supply the good New firms enter the market because it seems profitable Firms cost increases (larger outputs) so price increases to cover the cost

Question 36

What is the mnemonic for the determinants of supply?

Answer 36

PINT - SWC ``` PRODUCTIVITY INDIRECT TAXTES NUMBER OF FIRMS SUBSIDIES WEATHER COSTS OF PRODUCTION ```

Question 37

How does productivity shift supply?

Answer 37

Higher productivity caused an OUTWARD shift because average firm costs fall

Question 38

How do indirect taxes shift supply?

Answer 38

Inward shift in supply | Higher costs

Question 39

How does technology shift supply?

Answer 39

More advanced technology causes an OUTWARD shift of supply

Question 40

How do subsidies shift supply?

Answer 40

Subsidies cause an outward shift in supply

Question 41

How does weather shift supply?

Answer 41

Favourable conditions increase supply

Question 42

How do costs of production shift supply?

Answer 42

If costs fall | Firms can afford to supply more

Question 43

What are the three functions of prices?

Answer 43

Rationing function for demand Incentive to supply Signalling

Question 44

Explain the rationing function of prices?

Answer 44

Prices will rise As goods become more scarce Ensuring only those who are most willing and able to pay in order to gain the benefit of consumption

Question 45

Explain the incentive function of prices?

Answer 45

High prices give firms motive | to increase production as higher prices will often results in increased profitability

Question 46

Explain the function of signalling in prices?

Answer 46

Prices provide information to consumers about the likely quality of a good or service High prices provide a signal about the likely profitability of a market

Question 47

What does the PPF illustrate?

Answer 47

Total possible output of two goods and services that can be produced from a given level of the factors of production

Question 48

when is an economy productively efficient?

Answer 48

only one more good can be produced by producing less of another

Question 49

what is the fundamental economic problem?

Answer 49

what how whom goods and services should be produced

Question 50

characteristic of a free good?

Answer 50

no opportunity cost to supply

Question 51

what is the purpose of economic activity?

Answer 51

the production of goods and services to satisfy needs and wants

Question 52

what does the demand curve show

Answer 52

relationship between price and quantity demanded