Economics methodology and the economic problem - Key Terms

Question 1

Positive statement

Answer 1

A statement of fact that can be scientifically tested to see if it is correct or incorrect.

Question 2

Normative statement

Answer 2

A statement that includes a value judgement and cannot be refuted just by looking at the evidence.

Words such as ought, should, better and worse often provide clues that a statement is normative.

Question 3

Need

Answer 3

Something that is necessary for human survival, such as food, clothing, warmth or shelter.

Question 4

Want

Answer 4

Something that is desirable, such as fashionable clothing, but is not necessary for human survival.

Question 5

Economic welfare

Answer 5

The economic well-being of an individual, a group within society, or an economy.

Question 6

Production

Answer 6

A process, or set of processes, that converts inputs into output of goods.

Question 7

Capital good

Answer 7

A good which is used in the production of other goods or services. Also known as a producer good.

Question 8

Consumer good

Answer 8

A good which is consumed by individuals or households to satisfy their needs or wants.

Question 9

Factors of production

Answer 9

Inputs into the production process, such as land, labour, capital and enterprise.

Question 10

Finite resource

Answer 10

A resource, such as oil, which is scarce and runs out as it is used. Also known as a non-renewable resource.

Question 11

Renewable resource

Answer 11

A resource, such as timber, that with careful management can be renewed as it is used.

Question 12

Fundamental economic problem

Answer 12

How best to make decisions about the allocation of scare resources among competing uses so as to improve and maximise human happiness and welfare.

Question 13

Scarcity

Answer 13

Results from the fact that people have unlimted wants but resources to meet these wants are limited.

In essence, people would like to consume more goods and services than the economy is able to produce with its limited resources.

Question 14

Opportunity cost

Answer 14

The cost of giving up the next best alternative.

Question 15

Production possibility frontier

Answer 15

A curve depicting the various combinations of two products that can be produced when all the available resources are fully and efficiently employed.

Question 16

Economic growth

Answer 16

The increase in the potential level of real output the economy can produce over a period of time.

Question 17

Full employment

Answer 17

When all who are able and willing to work are employed.

Question 18

Unemployment

Answer 18

When not all of those who are able and willing to work are employed.

Question 19

Choice

Answer 19

Choosing between alternatives when making a decision on how to use scare resources.

Question 20

Resource allocation

Answer 20

The process through which the available factors of production are assigned to produce different goods and services.

Question 21

Production efficiency

Answer 21

For the economy as a whole occurs when it is impossible to produce more of one good without producing less of another.

For a firm it occurs when the average total cost of production is minimised.

Question 22

Allocative efficiency

Answer 22

Occurs when the available economics resources are used to produce the combination of goods and services that best matches people’s tastes and preferences.

Question 23

Value judgement

Answer 23

Whether something is desirable or not.

Question 24

Factors that shift the whole PPB curve to the right are:

Answer 24

Investment in new technology.
New resources such as minerals.
Increased supply of labour through increases in population and migration.
Improvements in human capital through education and training.
Better management of resources via division of labour and specialisation.
Changed attitudes encouraging entrepreneurialism.