Economic Methodology/The Economic Problem

Question 1

Profit =

Answer 1

Total revenue - total costs

Question 2

Common economics assumption

Answer 2

‘Ceteris’ paribus’: meaning ‘all else being equal’(e.g. the assumption rational businesses are seeking to make a profit), which helps us examine the likely impact of one particular change to an economic variable

Question 3

Economics definition

Answer 3

Economics studies the choices people take under the conditions of scarcity and uncertainty

Question 4

Three types of economy

Answer 4

1. Free Market Economy
2. Command Economy
3. Mixed Economy

Question 5

Free market economy examples

Answer 5

UK, America, EU, Japan

Question 6

Free market economy

Answer 6

Individual consumers/businesses/markets are free to make their own individual decisions with their money and property, without consulting anyone(what to produce, how to produce what they’re producing and for who ).
Driven by the profit motive, the private sector dominates

Question 7

Command economy examples

Answer 7

China, Russia, Cuba, North Korea

Question 8

Command economy

Answer 8

Where the government/authorities make all the decisions(what to produce, how to produce it and for whom).

Question 9

Factors of production

Answer 9

Capital - wealth in the form of money/other assets owned by a person/organisation(for equipment)
Land
Labour
Enterprise - the person with the ideas and money to start a successful business

Question 10

Microeconomics

Answer 10

The study of economics at the level of the individual firm, industry or consumer/household e.g. how individual businesses respond to changing economic factors, or how consumers decide what to buy

Question 11

Economic problem

Answer 11

What to produce!
How to produce?
On what basis is the output distributed/allocated?

Question 12

Interventionists

Answer 12

Economists believing the government/authority should play a crucial role in the decision making and allocating resources within society(the government should take care for you in a country freely).
Either directly or through imposing regulations on market(which interventionists do) to enable them to allocate resources more ‘fairly’ or in a way which does not damage society.

Question 13

Example of free marketers

Answer 13

Conservatives(leave decisions to the market)

Question 14

Examples of interventionists

Answer 14

The Labour government

Question 15

Opportunity cost

Answer 15

The cost of a choice made in terms of the next best alternative foregone or sacrificed

Question 16

Capital goods

Answer 16

Goods we use to make consumer goods and services(e.g. van, computer - equipment we use in factories/businesses)

Question 17

Consumer goods

Answer 17

Goods we buy to satisfy our needs and wants

Question 18

Rationing-

Answer 18

A market mechanism of allocating scarce goods and services when market demand out-weighs the available supply

Question 19

Different ways of rationing scarce resources

Answer 19

By Market Price
By Consumer Income
By Assessment of Need
By Household Postcode(people are disadvantaged at where they live as a result of their postcode)
By Education Level
By Age
By Gender
By Nationality

Question 20

Opportunity cost(investing today for consumption today)

Answer 20

The opportunity cost of an economy investing resources in new capital goods is the production of consumer goods given up for today.

Question 21

Pension

Answer 21

Putting a little amount of money from your working wages into your pension scheme, to ensure money to live on when you retire

Question 22

Consumer durables

Answer 22

Products providing a steady flow of satisfaction/utility over their working life

Question 23

Consumer non-durables

Answer 23

Products used up in the act of consumption e.g. grocery foods

Question 24

Consumer goods(sub divisions)

Answer 24

1) Consumer durables
2) Consumer non-durables
3) Consumer services

Question 25

What is a straight line production possibility frontier?

Answer 25

An indication of perfect factor substitutability of resources

Question 26

What happens if the production possibility frontier is a straight line?

Answer 26

The marginal opportunity cost of switching resources between consumer and capital goods is constant

Question 27

How do businesses respond to consumers’ changing desires?

Answer 27

Businesses realise consumers prefer capital goods to consumer goods, so reallocate resources to produce more capital goods

Question 28

Outward shift in the Production Possibility Frontier

Answer 28

Increases in production technology, more factor resources/inputs(e.g. more workers) can cause the PPF to shift outwards, trade between countries(for nations to consume beyond their own PPF- for gains in economic welfare) and producing more goods with the same resources(improvement in welfare and allocative efficiency) leading to an increase in a country’s potential output, so more capital goods can be produced for each level of output of consumer goods

Question 29

Main function of a PPF

Answer 29

A PPF shows alternative combinations of two goods or services attainable when all resources are fully and efficiently employed

Question 30

What happens as we normally move down along the PPF?

Answer 30

As more resources are allocated towards Good Y, the extra output gets smaller. This is explained by the law of diminishing marginal returns, which occurs as not all factor inputs are equally suited to producing items, leading to lower productivity,

Question 31

Advantages of entrepreneurial businesses

Answer 31

Know how to get people to invest money, to maximise their own profit

Question 32

What happens with diminishing returns/marginal utility?

Answer 32

The marginal(extra) output of good Y diminishes as more factor resources are allocated to it, so each extra unit of consumption gives less satisfaction and utility.