Economics Methodology and the Economics Problem

Question 1

What is Microeconomics?

Answer 1

Microeconomics concerns individual markets and smaller divisions within the economy.

Question 2

What is Macroeconomics?

Answer 2

Macroeconomics concerns the economy as a whole through aggregate variables, and the interconnections between economies.

Question 3

What is a positive statement?

Answer 3

Positive statements are statements of fact. They can be scientifically tested to determine whether they are true or false.

Question 4

What are normative statements?

Answer 4

Normative statements are statements which include a value judgement or opinion. They cannot be scientifically tested to determine whether they are true or false.

Question 5

What is a need?

Answer 5

A need is a good or service that is necessary for human survival. For example, food, water, clothing, shelter, healthcare.

Question 6

What is a want?

Answer 6

A want is something that is desirable but not necessary. For example, fashionable clothing, music, books, chocolate, WiFi.

Question 7

What is meant by economics?

Answer 7

Economics is a social science and is the study of how people make choices about what to produce, how to produce and for whom to produce, in a world where resources are scarce.

Question 8

What does economics involve?

Answer 8

Economics involves using scientific methodology - making testable predictions which evolve into hypotheses that can either be accepted or rejected .

Question 9

What happens to an accepted hypothesis?

Answer 9

Accepted hypotheses become economic theories which are fundamental to analysing chains of events that can take place.

Question 10

What is the fundamental economic problem?

Answer 10

The fundamental economic problem is the problem of how to best make decisions about the allocation of scarce resources among competing uses, given people’s unlimited wants, so as to improve and maximise economic welfare and utility.

Question 11

What is production?

Answer 11

Production is the process or set of processes by which inputs (factors of production/ factor inputs) are transformed into outputs (goods and services)

Question 12

What are the four factors of production?

Answer 12

-Land: natural physical resources that can be used to scale up production.
-Labour: human contributions to the production process.
-Capital: man-made aids to production
-Enterprise: the willingness to take risks, innovate and organise the other inputs to produce goods and services.

Question 13

Give examples of each of the factors of production and the factor payment.

Answer 13

-Land: wood, gold / rent
-Labour: bakers teachers / wages
-Capital: loans, laptops, machinery / interest
-Enterprise: Alan Sugar, Jeff Bezos / profit

Question 14

How does the concept of scarcity link to incomes?

Answer 14

People have limited incomes and so households face a budget constraint.

Question 15

What is opportunity cost?

Answer 15

Opportunity cost is the cost of giving up the next best alternative foregone.

Question 16

How is the concept of opportunity cost illustrated in economics?

Answer 16

The concept of opportunity cost is illustrated using a production possibility frontier.

Question 17

What is a PPF?

Answer 17

A production possibility frontier is a curve which depicts the various combinations of two goods that can be produced when all available resources are fully and efficiently employed.

Question 18

What are points on the PPF considered to be?

Answer 18

Points on the PPF are considered to be productively efficient outcomes.

Question 19

What are points which lie within the PPF considered to be?

Answer 19

Points which lie within the PPF are considered to be productively inefficient outcomes.

Question 20

What are points which lie beyond the PPF considered to be?

Answer 20

Points which lie beyond the PPF are considered to be a currently unattainable outcome.

Question 21

What is productive efficiency?

Answer 21

Productive efficiency is a situation where it is impossible to produce more of one good without producing less of another; output is maximised from all available inputs.

Question 22

What is allocative efficiency?

Answer 22

Allocative efficiency is a situation where available resources are used to produce a combination of goods and services that best match people’s tastes and preferences.

Question 23

Do PPF’s illustrate productive and allocative efficiency?

Answer 23

PPF’s illustrate only productive efficiency, not allocative efficiency.

Question 24

Why is a PPF typically concave to the origin?

Answer 24

The PPF is concave because of the law of diminishing returns which is the principle that the output of one good diminishes as more resources are allocated to its production, and at an increasing opportunity cost in terms of the other good.

Question 25

What causes the PPF to shift outwards?

Answer 25

-higher productivity/ efficiency of factor inputs: this increases the output per unit of input used in production.
-better management of factor inputs: improved management reduces waste and improves quality.
-increased stock of capital and labour supply: from inward labour migration / capital investment
-innovation and invention of new products and resources: improved production process helps boost efficiency.
-discovery / extraction of new natural resources: discovery of commercially viable land inputs drives extraction.

Question 26

What are capital goods?

Answer 26

Capital goods are goods which are used in the production of other goods and services.

Question 27

What are consumer goods?

Answer 27

Consumer goods are goods which are consumed by individuals to satisfy their needs and wants.

Question 28

What causes a PPF to shift inwards?

Answer 28

-Damaging effects of natural disasters such as droughts, tsunamis, earthquakes and severe floods.
-Destruction / loss of factor inputs caused by civil war and other forms of conflict that last for many years.
-Large scale net outward labour migration eg due to economic depression that leads to a brain drain of skilled workers.
-A trend decline in the productivity of inputs perhaps caused by a persistent recession which causes net investment to be negative.

Question 29

What is a social science?

Answer 29

A social science is the branch of science that studies society and the relationships of individuals within a society.