Economic Methology And The Economic Problem - Micro

Question 1

What do PPF graphs show?

Answer 1

how societies allocate limited resources to provide a combination of goods and services

Question 2

What limited resources do PPFs help us understand the allocation of?

Answer 2

1. Land
2. Labour
3. Capital

Question 3

What do all the points on the boundary have in common?

Answer 3

They are all productively efficient but not allocatively efficient

Question 4

What does each point on a PPF represent?

Answer 4

The quantity of each good being produced

Question 5

What does the slope on a PPF represent?

Answer 5

The opportunity cost of producing one more unit of a good (the steeper the slope, the higher the opportunity cost)

Question 6

What does moving along the PPF show?

Answer 6

The trade off between producing more of one good and less of the other

Question 7

What do points inside the PPF represent?

Answer 7

An inefficient use of resources

Question 8

What can an inefficient use of resources be a result of?

Answer 8

1. Labour shortages
2. Technological limitations

Question 9

How is economic growth measured on a PPF?

Answer 9

By an outward shift

Question 10

How can economic growth occur?

Answer 10

1. An increase in societies resources
2. Technological advancements

Question 11

What is the boundary?

Answer 11

The PPF curve

Question 12

What does being productively efficient mean?

Answer 12

All resources are fully employed
It is impossible to produce more of one good without producing less of the other

Question 13

What is allocative efficiency?

Answer 13

When the combination of goods produced aligns with societies demands

Question 14

When is allocative efficiency achieved?

Answer 14

When the number of goods and services produces meets an economy’s needs by maximising social welfare

Question 15

Why aren’t all boundary points allocatively efficient?

Answer 15

1. Society may prefer different combinations of goods than what the PPD produces at its boundary
2. The PPF assumes a constant opportunity cost but these can change

Question 16

How can an inward shift in the graph be caused?

Answer 16

1. Natural disasters (they destroy resources)
2. War (destroys natural resources)
3. Global warming (rising sea levels and extreme weather destroys resources)
4. Long recession (businesses close, unemployment rises and workers lose skills

Question 17

How can an outward shift in the graph be caused?

Answer 17

1. Improvements in the technology
2. Discovering new resources (more factors of production to use)
3. Better education/ training (higher productivity)
4. Larger working population (more immigration/ increase retirement age)

Question 18

What is an opportunity cost?

Answer 18

The cost of the next best alternative foregone

Question 19

What is an economic good?

Answer 19

A good that has an opportunity cost when consumed (because you’re using scarce resources)

Question 20

What is a free good?

Answer 20

Has no opportunity cost when consumed because it doesn’t use scarce resources

Question 21

What are capital goods?

Answer 21

Goods bought by firms, for firms

Question 22

What is the basic economic problem

Answer 22

• infinite wants but scarce resources
• what to make and how much
• how to make it
• who it goes to

Question 23

What is a positive statement:

Answer 23

A statement which can be proven with facts