Economics Methodology

Question 1

What are assumptions in economics?

Answer 1

Assumptions are initial conditions made before a micro or macroeconomic analysis is made.

Question 2

What is the ceteris paribus assumption?

Answer 2

All other influencing factors are held constant.

Question 3

What are positive statements?

Answer 3

Positive statements are objective statements that can be tested, amended or rejected by referring to the evidence.

Question 4

What are normative statements?

Answer 4

Normative statements are subjective statements, they are generally judgement’s and opinions

Question 5

What are the four economic resources?

Answer 5

Land
Labour
Capital
Enterprise

Question 6

What are capital goods?

Answer 6

Goods that are used to make consumer goods and services.

Question 7

What are capital inputs?

Answer 7

Capital inputs include plant and machinery, hardware, software, new factories and other buildings.

Question 8

What are free goods?

Answer 8

A free good has zero opportunity cost in its supply

Question 9

What are non-renewable resources?

Answer 9

Non-renewable resources are finite in supply, the rate of extraction of finite resources depends on the current market price.

Question 10

What are renewable resources?

Answer 10

Renewables are replaceable if the rate of extraction is less than the natural rate at which a resource renews.

E.g. Solar Energy, Tidal Power, Oxygen

Question 11

What is opportunity cost?

Answer 11

Opportunity cost measures the cost of a choice expressed in terms of the next best alternative foregone.
E.g.
The opportunity cost of deciding not to work an extra ten hours a week is the lost wages given up.

Question 12

What is Rationing?

Answer 12

Rationing is one way of allocating scarce goods and services when market demand exceeds available supply.

Question 13

How can you ration scarce resources?

Answer 13

By Market price
By Consumer income
Education
Age

Question 14

What does a PPF show?

Answer 14

The maximum potential output combinations of two goods an economy can achieve when all its resources are fully and efficiently employed.

Question 15

What is the law of diminishing marginal returns?

Answer 15

States an increasing number of new employees causes the marginal product of another employee to be smaller than the marginal product of the previous employee at some point.

Question 16

What is the opportunity cost in a straight line PPF?

Answer 16

A straight line PPF has a constant marginal opportunity cost when switching between consumer and capital goods.

Question 17

What is Allocative efficiency?

Answer 17

Is at an output level where the price equals the Marginal Cost (MC) of production

Question 18

What is productive efficiency?

Answer 18

Production efficiency is an economic level at which the economy can no longer produce additional amounts of good without lowering the production level of another product.

Question 19

What can cause an inward shift of a country’s PPF?

Answer 19

Natural disasters
War, (Destruction of factor inputs)
Outward labour migration
Trend decline in productivity

Question 20

What can cause an outward shift in PPF?

Answer 20

Higher productivity
Improved management (Less wastage)
Increase in labour supply
Innovation of new products or production processes
Discovery of new natural resources

Question 21

What is resource depletion?

Answer 21

This is a decline in the stock of resources available, for example arising in long run from the effects of de-population, climate change and low rates of investment.

Question 22

What is resource depreciation?

Answer 22

When the productivity of resources diminishes with age and also with frequent usage.