The Economic Problem

Question 1

What is a Normative statement?

Answer 1

• A normative statement contains a value judgement which cannot be verified by resort to investigation or research
• They are statements about what should or ought to happen

Question 2

What are the factors of production?

Answer 2

• Land
• Labour
• Capital
• Enterprise/ Entrepreneurship

Question 3

What is land?

Answer 3

Land is the natural resource availed for production

Question 4

What is labour?

Answer 4

Labour is our human input into the production process

Question 5

What is capital?

Answer 5

• Capital means investment in goods that are used to produce other goods in the future
• Fixed capital includes machinery, plants and equipment, new technology, factories and buildings

Question 6

Give an example of physical capital

Answer 6

Drilling equipment used on a North Sea oil rig or the smelting equipment in a steel plant

Question 7

What is entrepreneurship/ enterprise?

Answer 7

• An entrepreneur is an individual who seeks to supply products to a market for a rate of return (i.e. A profit)
• Entrepreneurs will usually invest their own financial capital in a business and take on the risks associated with a business investment

Question 8

What is a free good?

Answer 8

A free good are goods which are not used up in consumption i.e. There is no opportunity cost and the marginal cost of supplying one more unit is close to zero

Question 9

What are the fundamental economic questions?

Answer 9

• What goods and services to produce?
• Does the economy use its resources to build hospitals or new motorways?
• Does the market system supply cosmetic health treatments or iPods?
• How’s best to produce goods and services?
• What’s the best use of scare resources of land, labour and capital?

Question 10

What are the objectives of the consumers?

Answer 10

• Consumers use their limited income to buy that combination of goods and services that yield the highest possible level of satisfaction

Question 11

What are the objectives of the producer?

Answer 11

• Producers use their limited resources to produce goods and services that yield the highest possible level of profits
• In reality many businesses pursue objectives different to pure profit maximisation

Question 12

Explain what scarcity and choice means

Answer 12

• Because of the problem of scarcity choices have to be made on a daily basis at all levels
• Making a choice normally involves a trade off

Question 13

What is the primary sector?

Answer 13

Production involving the extraction of natural resource e.g. Agriculture, forestry, fishing, quarrying and mining

Question 14

What is the secondary sector?

Answer 14

The secondary sector involves the production of goods in the economy, i.e. transforming materials produced by the primary sector e.g. Manufacturing and the construction industry

Question 15

What is the tertiary sector?

Answer 15

The tertiary sector provides services such as banking, finance, insurance, retail, education and travel and tourism

Question 16

What is the quaternary sector?

Answer 16

The quaternary sector is involved with information processing e.g. education, research and development

Question 17

What is a positive statement?

Answer 17

• A positive statement capable or being verified or refuted by resorting to fact or further investigation
• A positive statement can be right or wrong
• The main tools of positive economic statements are reason, logic and empiricism