1.1 Economic methodology and the economic problem

Question 1

Definition of economics

Answer 1

The study of how scarce resources are used to satisfy society’s unlimited wants

Question 2

Why is economics a social science?

Answer 2

It applies scientific method to the study of human behaviour and economic decision making

Question 3

What is a positive economic statement?

Answer 3

An objective statement that can be tested against facts to be declared either true or false

(‘will’ and ‘is’)

Question 4

What is a normative economic statement?

Answer 4

A subjective opinion or value judgement, that cannot be tested against facts or declared either true or false

(‘should’)

Question 5

Why can value judgements influence economic decision making?

Answer 5

They involve moral and political considerations as well as positive analysis

Question 6

Definition of a need + example

Answer 6

Something that humans require to survive

eg. food, shelter

Question 7

Definition of a want + example

Answer 7

Something that people feel improves their standard of living or economic welfare, but is not required for survival

eg. new car, TV, watch

Question 8

Definition of ceteris paribus

Answer 8

All other things being equal

Question 9

What is the purpose of economic activity?

Answer 9

To produce goods and services which satisfy consumer needs and wants

Question 10

Definition of economic welfare

Answer 10

The standard of living or general well being of people in society

Question 11

What leads to increased economic welfare?

Answer 11

Satisfying society’s needs and wants

Question 12

What are the key economic decisions?

Answer 12

What to produce?
How to produce?
Who is to benefit from the goods and services produced?

Question 13

What are consumer goods?

Answer 13

Goods that give satisfaction to consumers

Question 14

What are capital goods?

Answer 14

Goods used to produce other goods

Question 15

What are economic resources known as?

Answer 15

Factors of production

Question 16

What are the factors of production?

Answer 16

Land, Labour, Capital, Enterprise

Question 17

What is capital + example?

Answer 17

Man made physical equipment used to make other goods and services

(eg machinery, computer equipment)

Question 18

What is enterprise?

Answer 18

Entrepreneurs are individuals who take risks, innovate and combine the other factors of production in order to produce a good/ service

Question 19

What is land?

Answer 19

All naturally occurring resources such as minerals, the sea, coal and the environment.

Can be divided into renewable and non renewable resources

Question 20

What is labour?

Answer 20

People involved in production (referred to as human capital)

Question 21

Why is the environment a scarce resource?

Answer 21

There are only limited amount of resources on the planet.

These are made up of renewable and non renewable resources

Question 22

Difference between renewable and non renewable resources

Answer 22

Renewable resources can be replenishes, so the stock level of the resources can be maintained over period of time.

Non renewable resources cannot be renewed and are used up more quickly than replaced eg. coal, oil

Question 23

What is the basic economic problem?

Answer 23

Scarce resources compared with society’s unlimited wants

Question 24

Definition of opportunity cost

Answer 24

The cost of the next best alternative given up when making a choice/ decision

Question 25

Example of opportunity cost for a firm

Answer 25

Choosing between hiring extra staff or investing in a new machinery

Question 26

Example of opportunity cost for the government

Answer 26

Choosing between spending more on the NHS or spending more on education

Question 27

Definition of a PPC curve?

Answer 27

A diagram that shows the maximum possible output of two goods or services in an economy, assuming resources are fully employed

Question 28

Explanation of points on a PPC

Answer 28

When economy is on its PPC, its using all of the resources (factors of production) so is productively efficient. When economy is inside its PPC it is productively inefficient as not all factors of production are being used. Points outside the PPC are not currently achievable (could be achieved by having more/ better factors of production)

Question 29

What causes shifts of the PPC curve?

Answer 29

Changes in the quantity and quality (efficiency) of the factors of production

Question 30

How can a PPC curve show opportunity cost?

Answer 30

An increase in the amount of capital goods produced leads to a loss of output of consumer goods (more are given up)

Question 31

Definition of economic growth

Answer 31

An increase in the productive capacity of an economy over time

Question 32

How can a PPC curve show economic growth?

Answer 32

Improvements in any of the factors of production lead to an outward shift of the PPC, meaning there has been an increase in the productive capacity of the economy, so more goods are produced.

Question 33

What factors cause an outward shift of the PPC? (3)

Answer 33

- technological improvements that lead to increased productivity of capital goods (increased quality). - discovery of new resources eg. oil, gas (increased quantity) - improvements in education and training that lead to a more productive workforce (increased quality)

Question 34

What is the difference between long run and short run growth?

Answer 34

Long run growth is when more of both capital and consumer goods can be produced (PPC shifts outwards). Short run growth is when existing resources are being made more use of.

Question 35

How can a PPC curve show economic decline?

Answer 35

Both of less goods can be produced due to fewer resources available, meaning PPC shifts inwards.

Question 36

What factors cause an inward shift of the PPC? (3)

Answer 36

- natural disasters such as earthquakes or floods, meaning loss of natural resources (land) - wars (limited/smaller workforce and less resources) - a recession may lead to permanent loss of productive capacity if business shuts down.

Question 37

Definition of productive efficiency

Answer 37

When maximum output is produced from the available factors of production and when it is not possible to produce more of one good or service without producing less of another (any point on PPC)

Question 38

Definition of allocative efficiency

Answer 38

When an economy's factors of production are used to produce the combination of goods and services that maximise society's welfare