1: economic methodology and the economic problem

Question 1

Why is Economics considered a social science?

Answer 1

It is the study of how humans make decisions when they face scarcity.

Question 2

Positive statement definition

Answer 2

how things ARE
one that can be verified with reference to data or facts (makes no judgement about data)

Question 3

Normative statement definition

Answer 3

how things SHOULD BE
cannot be verified with reference to date/ facts (is a value judgement/ opinion)

Question 4

Value judgements

Answer 4

Often found in normative statements. They are judgements about society that cannot be quantified and tested.

Question 5

How value judgements influence economic decision making and policy.

Answer 5

People’s views concerning the best option are influenced by the positive consequences of different decisions and by moral
and political judgements (it is also dependent on family, society and an individuals goals)

Question 6

Differences in methodology from natural and
other sciences.

Answer 6

Controlled laboratory tests aren’t possible. In real life, economists can’t keep variables constant.
Economists rely on the ceteris paribus assumption. This means ‘everything else remains equal’. Therefore the assumptions when modelling is that everything else is constant.

Question 7

Similarities to natural sciences

Answer 7

Models and theories are used to explain real world evidence.
These models use real life data and can be used to make forecasts about the future.
Statistical analytics can be used to test hypotheses against evidence.

Question 8

What is the purpose of economic activity?

Answer 8

the production of
goods and services to satisfy needs and wants.

Question 9

What are the Factors of Production (FoPs)

Answer 9

(they are economic resources/ inputs used in production of goods and services)
-Land
-Labour
-Enterprise/ Entrepreneurship
-Capital

Question 10

What are the factor rewards of each FoP?

Answer 10

Land- Rent (and profit from rent)
Labour- Wages
Enterprise- Profit
Capital- Interest

Question 11

Land (FoP)

Answer 11

refers to finite and non-finite natural resources used in production including land and any raw materials used from that land

Question 12

Labour (FoP)

Answer 12

refers to effort expended by an individual to bring products/ services to the market

Question 13

Enterprise (FoP)

Answer 13

combines other FoPs and turns it into a product/ service for consumer market (assumes risk for success/ failure)

-entrepreneurial actions (e.g. establishing businesses and taking risks) that individuals take to try and make a profit.

Question 14

Capital (FoP)

Answer 14

man made machinery/ tools/ equipment (human intervention needed) used to generate goods and services within the production process.

Question 15

Investment

Answer 15

Spending by firms on (physical) capital

Question 16

Production

Answer 16

Result of turning inputs into outputs

Question 17

Opportunity cost

Answer 17

the value of the next best alternative
(refers to the trade-offs involved in making decisions to maximise profits)

Question 18

What is the Economic Problem?

Answer 18

involves working out how to allocate limited resources as effectively as possible to satisfy people’s unlimited wants and needs.

Question 19

What does scarcity mean?

Answer 19

choices have to be made about how
scarce resources are allocated between different uses.

Question 20

What are the key economic decisions?

Answer 20

what to produce, how to
produce, and who is to benefit from the goods and services
produced.

Question 21

PPFs- what are they?

Answer 21

diagrams illustrate different features of
the fundamental economic problem, such as: resource
allocation, opportunity cost and trade-offs, unemployment of
economic resources, economic growth.

Question 22

Why all points on the boundary are productively efficient but
not all points on the boundary are allocatively efficient.

Question 23

What is the purpose of economic activity?

Answer 23

to produce goods and services that satisfy consumers wants and needs

Question 24

Human capital

Answer 24

the value human labour brings to the production process.

Question 25

What are the issues with opportunity cost?

Answer 25

-some factors don’t have alternatives/ the alternatives are unknown
-agents may lack info about alternatives
-it is difficult to transfer some factors to another use

Question 26

Who are the main economic agents?

Answer 26

-Consumers
-Producers
-Governments

Question 27

Why is the PPF curved?

Answer 27

-law of diminishing returns:
As you increase units of one resource and keep other factors constant, the marginal benefit from the extra units will eventually start to decline.

Question 28

Why does the PPF shift outward?

Answer 28

If there is economic growth.
This is because the productive capacity of the economy has increased (like an advancement in technology)
But this improvement isn’t necessarily equal across all products. (ex. improvement in technology for cars ≠ improvement in cheese manufacture)

Question 29

PPF and tradeoffs:

Answer 29

Occur when producing on the PPF.
To produce more of one good, you must produce less of another.
(If there are any points underneath the PPF, this means not all economic resources are being deployed)

Question 30

Points on the PPF:

Answer 30

-inside: some of the FoPs are being underemployed
-outside: not currently possible to produce this output (need to expand the economy to be able to achieve this amount of production)
-on boundary: all of the FoPs are being used fully (productively efficient)

Question 31

Efficiency

Answer 31

-refers to a lack of waste
- static efficient (efficiency at a particular point in time)
-can be productive or allocative

Question 32

Productive efficiency

Answer 32

With all available inputs and technology, it is impossible to produce more of one good without decreasing the quantity of another good being produced.
So, every point on the PPF is productively efficient.

Question 33

Allocative Efficiency

Answer 33

Specific point on the curve that maximises societal welfare.

This occurs when a specific combination of goods is efficient for society.
As this is a specific combination of goods, it refers to a point on the PPF, not the entire curve.
So, not every point on the PPF is allocatively efficient.

Question 34

Production Inefficiency

Answer 34

When there is spare capacity within the economy

Question 35

What does the outward shift of the PPF mean in terms of resources:

Answer 35

• there has either been an INCREASE IN THE RESOURCES available
• or the amount of resources remain the same but OUTPUT increases (this can be seen through improvements in FoPs ex. labour or improvements in technology)

Question 36

Reallocation of resources

Answer 36

This occurs when there is a fixed amount of resources, but shifts occur along the PPF

Question 37

What does the slope of the PPF represent?

Answer 37

• opportunity cost

Question 38

Economic Agents

Answer 38

• decide on how to allocate resources.
  ex. producers, consumers and governments

Question 39

Producers

Answer 39

people/firms that produce goods or supply services.
- incentive: profit (maximisation)

Question 40

Consumers

Answer 40

• people/firms who purchase the goods/services.
  incentive: utility (maximisation)

Question 41

Governments

Answer 41

• establishes rules for economies.