Economic Methodology & The Economic Problem

Question 1

What is microeconomics?

Answer 1

Looks at the little bits of the economy, the individual consumers, firms, markets and their behaviour.

Question 2

Basic explanation of price and demand relationship:

Answer 2

When price goes up, demand usually goes down however a product must have an alternative for demand to decrease

Question 3

Positive statements definition

Answer 3

They are objective statements that can be tested and evaluated based on empirical evidence. They have a cause and effect and are often used in economic predictions

Question 4

Positive statement example:

Answer 4

“An increase in the Uk minimum wage will lead to higher unemployment among low skilled workers”

Question 5

Normative statement definition:

Answer 5

They are subjective statements, they carry one or more value judgments about what is going to happen, they involve personal beliefs and cannot be tested through empirical evidence alone.

Question 6

Normative statement example:

Answer 6

“The government should increase funding for state education to improve overall social welfare”

Question 7

What is the economic problem?

Answer 7

Human wants are unlimited however resources are scarce, economics aims to solve that problem

Question 8

What is economics?

Answer 8

How society manages its scarce resources / how it chooses to allocate its resources among competing demands to best satisfy human wants.

Question 9

What are resources in an economy known as?

Answer 9

Factors of production

Question 10

Name the 4 factors of production:

Answer 10

1) land
2) labour
3) capital
4) entrepreneurs

Question 11

What is land (fop)?

Answer 11

Gifts of nature, not created by human effort (gold, coal, oil)

Question 12

What is capital (fop)?

Answer 12

Tools, equipment and factories used to produce goods and services (the ability to make things)

Question 13

What is labour (fop)?

Answer 13

People with all the efforts, abilities and skills (quantity and quality)

Question 14

What is entrepreneurs (fop)?

Answer 14

People who take risks in search of profits, they start new businesses or bring new products to market

Question 15

Why is labour necessary (fop)?

Answer 15

Countries need a good quantity of people and quality to produce to become successful in the markets.

Question 16

Why is land necessary (fop)?

Answer 16

Provides businesses with the ability to create markets and industries

Question 17

Definition of specialisation?

Answer 17

The concentration by a workers, firms region or whole economy on a narrow range of goods + services.

Question 18

When does specialisation occur?

Answer 18

When workers are assigned specific tasks within a production process

Question 19

Name advantages of specialisation:

Answer 19

• lower money required to train and make workers skilled
• increase in standard of living
• demand increases
• increase in the volume of goods & services
• fall in prices
• more choice in the economy

Question 20

Disadvantages of specialisation:

Answer 20

• if there is no demand or demand falls it would effect a whole economy/ market
• political factors
• a country may run out of its finite resources like oil, coal
• if there’s no trade, there’s no money therefore no sales
• deindustrialisation (loss of manufacturing)
• boring for workers
• bad weather could spoil a crop
• change in consumer preferences and tastes

Question 21

Definition of opportunity cost?

Answer 21

The cost of any choice measured in terms of the next best alternative sacrificed. It represents the benefits that could’ve been gained from choosing an alternative course of action but were given up in favour of the chosen option.

Question 22

Name an example of opportunity cost:

Answer 22

If you have £10,000 to invent in either savings or stock market.
The OC is if you chose to save its the money that could’ve been made from the stock investment.

Question 23

Definition of a PPF diagram?

Answer 23

A graphical representation that illustrates the maximum output of two goods that an economy can produce given its available resources. It’s used to illustrate scarcity, trade offs and opportunity costs.

Question 24

Opportunity cost calculation

Answer 24

Loss of one output / gained output of the other