Chapter 1

Question 1

what is a positive statement?

Answer 1

a valued judgement that can be tested.

Question 2

What is a normative statement?


Answer 2

a valued judgement that cant be tested.

Question 3

Opportunity cost definition?

Answer 3

The benefit forgone when choosing the next best alternative.

Question 4

What is utility?


Answer 4

The satisfaction, happiness or pleasure gained from consuming a good or service.

Question 5

When maximising welfare in society think about (3 things):


Answer 5

What to produce
How to produce
Who to produce for

Question 6

Name the 4 Factors of production and examples?

Answer 6

1) Land - all natural resources (gold and oil etc)
2) Labour - quantity and quality of workforce (skill level and qualifications)
3) Capital - Stock of man-made goods used to make other goods and services (offices, roads, railway tracks)
4) Enterprise - managers who allocate other 3 FOPs (chairman, chief executive)

Question 7

What is the basic economic problem?

Answer 7

Mans wants are infinite but our resources are finite so we need to best allocate scarce resources in a way that best maximises welfare in a society.

Question 8

How can we satisfy basic economic problem?

Answer 8

An economy must use all its resources as idle land, labour and capital wont produce as much goods and services.

Question 9

Unused resources cause?

Answer 9

fewer goods and services to be produced leading to less goods and services being consumed leading to fall in welfare of society.

Question 10

What is productive efficiency?

Answer 10

An economy using all its resources in the most efficient way possible.

Question 11

What is the allocative efficiency?

Answer 11

When resources are allocated to produce goods and services in a way that best reflects current desires of society.

Question 12

On a concave shaped PPF diagram why does opportunity cost rise/fall?

Answer 12

Because the most recently reallocated resources are more or less productive than the previously reallocated resources.

Question 13

What does a concave shape PPF line imply?


Answer 13

imperfect factor substitution.

Question 14

On a straight line PPF diagram why is the opportunity cost constant?

Answer 14

Because any further reallocated resources are just as productive as the previously reallocated resources.

Question 15

What does a straight line PPF diagram imply?


Answer 15

Implies perfect factor substitution.

Question 16

What is the output gap?

Answer 16

the difference between the actual output and the maximum potential output.

Question 17

What does the output gap show?

Answer 17

the misallocation of resources.

Question 18

If the output is on the PPF line what does that mean?

Answer 18

the economy is productively efficient.

Question 19

If the output is within the PPF line what does that show?

Answer 19

Economy is productively inefficient.

Question 20

If output above the PPF line what does that mean?

Answer 20

output is impossible and unobtainable considering current quantity and quality of resources.

Question 21

What is actual economic growth?

Answer 21

When the new actual output is higher than the previous actual output.

Question 21

What things can increase actual output? (4)

Answer 21

fall in unemployment, less land laying idle, less capital laying idle and better management of resources.

Question 22

What is potential economic growth?

Answer 22

When the new maximum potential output of an economy is higher than the previous maximum potential output.

Question 23

2 ways potential economic growth can happen?

Answer 23

improvement in quality or increase in quantity of 4 factors of production.

Question 24

Some examples of things that can increase potential economic growth? (5)

Answer 24

1) Mass immigration 2) increase in retirement age 3) more factories/offices built 4) improvement in health of workers 5) technological breakthroughs

Question 25

things that can cause a decrease in actual economic growth?

Answer 25

unemployment rising, more capital laying idle, more land laying idle, poor management of resources.

Question 26

Things that could cause potential economic output to decrease? (6)

Answer 26

1) hurricane 2) earthquake 3) war 4) pandemic 5) lowering of retirement age 6) emigration

Question 27

2 things that could cause both actual output and maximum potential output to increase?

Answer 27

1) technological breakthrough 2) an increase in number of working age adults (assuming some of them find work).

Question 28

What does pivot shift out PPF diagram show? (pg 16)

Answer 28

Shows potential economic growth in only 1 type of production.

Question 29

Reason and example why potential economic growth might only apply in 1 type of production and not both?

Answer 29

A technological breakthrough that can only be applied to a certain type of production for example a technological breakthrough in the production of flats being scaffolding meaning it would only increase output of production of buildings.

Question 30

What does the last diagram on page 16 show?

Answer 30

Shows potential economic growth but actual economic output staying the same.

Question 31

What could cause potential economic growth but actual economic output to stay same?

Answer 31

1) Sudden immigration so number of working age adults increases but immigrants haven't actually found work. 2) A technological breakthrough that hasn't been applied to the production process yet.

Question 32

What does normal dotted line show on PPF diagram? (pg17)

Answer 32

Future PPF (if country heavily invests in capital goods)

Question 33

What does circle dotted line show on PPF diagram? (pg17)

Answer 33

Future PPF (if country only allocates a small amount of resources towards capital goods)

Question 34

Some examples of capital goods?

Answer 34

Factories,tractors,machinery,roads etc.

Question 35

Some examples of consumer goods?

Answer 35

Tvs, playstations etc.

Question 36

What happens if a country's resources are mostly allocated towards consumer goods? (Output, pg17)

Answer 36

At first current welfare is currently high. However, only a few resources are allocated towards producing capital goods. So in the long run, it will only cause a small outshift of the ppf. The ability to produce consumer goods will only rise by a smaller amount in future n welfare will learn be marginally higher currently.(small amount).

Question 37

What happens if a country's resources are mostly allocated towards capital goods?

Answer 37

At first as few consumer goods are produced current welfare will be relatively low. But when capital goods are finally produced and cme into use it will cause a large outward shift in the ppf. In the long-run these xtra capital resources will allow country to produce way more consumer goods significantly boostin future welfare.

Question 38

What does pareto efficiency mean?

Answer 38

All resources fully utilised.