Chapter 1 - 4

Question 1

The scientific method

Answer 1

• postulates a theory
• gathers evidence to support or refute the theory
• accepts, modifies or refutes the theory

Question 2

Simplification

Answer 2

• economic theories + models are unrealistic

- however it must be so if it is to be useful

Question 3

What is ceteris paribus?

Answer 3

• all other things being equal

eg. only change one factor such as price + keep income or price of other goods constant

Question 4

What is a positive statement

Answer 4

• can be proven to be true or false (can be supported or refuted by evidence)
  eg. the service sector will grow by 30% in size over the next 5 years

Question 5

What is a normative statement?

Answer 5

• valued judgement (opinion)
• statements that can’t be supported or refuted
  eg. the gov should increase the state pension

Question 6

Why do economists collect data? (2)

Answer 6

➜ scientific method requires that theories be tested
-used to gather data to support or refute hypothesis
➜ provide support for particular policies
- unable to make policy recommendations without data
➜ difficult to collect data

Question 7

What measures inflation?

Answer 7

➜ Consumer Price Index (CPI)

Question 8

What measures employment + unemployment?

Answer 8

➜ Labour Force Survey

Question 9

What is the CPI and Labour Force Survey based on?

Answer 9

➜ surveys: only reliable if there is accurate sampling + measuring and rarely as accurate as a complete count

Question 10

Nominal values

Answer 10

➜ values unadjusted for inflation

- expressed at current prices

Question 11

Real values

Answer 11

➜ values adjusted for inflation

• constant prices
• use a base period

Question 12

What is the basic economic problem?

Answer 12

➜ finite/scarce resources and infinite wants

Question 13

What are economic goods?

Answer 13

➜ resources which are scarce

Question 14

What are free goods?

Answer 14

➜ resources which are not scarce

- eg. air

Question 15

What is scarcity?

Answer 15

➜ limited amounts of land, oil, good, water + other resources

Question 16

What is economics?

Answer 16

➜ study of allocating scarce resources

Question 17

What is opportunity cost?

Answer 17

➜ the benefit lost from the next best alternative

-eg. for producer, the opp cost of buying a machine might be the wage of 4 workers for 3 years

Question 18

What is the advantage of free goods?

Answer 18

➜ no opportunity cost

- no resources need to be sacrificed when someone breathes the air or swims in the sea

Question 19

What are the 3 parts of the economic problem?

Answer 19

➜ What is to be produced?
➜ How is production to be organised?
➜ For whom is production to take place?

Question 20

What are the factors of production?

Answer 20

➜ Land
➜ Labour
➜ Capital
➜ Enterprise

Question 21

Land

Answer 21

➜ not just land but natural resources, the sea, rainwater, natural forest

Question 22

Non-renewable resources

Answer 22

➜ coal, gold, copper (land)

➜ once used will never be replaced

Question 23

Renewable resources

Answer 23

➜ used + replaced

➜ fish stocks, forests, water

Question 24

Sustainable resources

Answer 24

➜ can be exploited economically
➜ will not diminish/ run out
➜ eg. a forest can be if it survives over time despite economic activities like farming

Question 25

Non-sustainable resources

Answer 25

➜ diminishing resources over time due to economic exploitation eg. oil is a non-sustainable resource as it is not replaceable

Question 26

Labour

Answer 26

➜ workforce of an economy eg. doctors, vicars, ministers - each worker has a unique set of inherent characteristics incl. intelligence + product of education and training

Question 27

What is human capital?

Answer 27

➜ value of a worker | - education + training will increase the value of that human capital, enabling the worker to be more productive

Question 28

Capital

Answer 28

➜ manufactured stock of tools, machines, factories, offices, roads and other resources which is used in production of goods and services ➜ 2 types: working capital and fixed capital

Question 29

Working capital

Answer 29

➜ stocks of raw material, semi-manufactured + finished good waiting to be sold ➜ stocks circulate through the production process till they are finally sold

Question 30

Fixed capital

Answer 30

➜ stock of factories + offices, plant and machinery ➜ it will not be transformed into a final product as working capital will ➜ used to transform working capital into finished products

Question 31

Enterprise

Answer 31

➜ seeking out profitable opportunities for production + taking risks in attempting to exploit these ➜ individuals organise production, take risks

Question 32

Rewards to factors of production

Answer 32

➜ receive payments when they allow other economic agents to use them for a period of time eg. reward for labour is wage - rent/profit

Question 33

The problem of scarcity

Answer 33

➜ resources are scarce + only a finite amount produced

Question 34

PPF

Answer 34

➜ production possibility frontier ➜ shows the different combo of economics goods which an economy is able to produce if all the resources in the economy are fully + efficiently employed ➜ there's an opportunity cost

Question 35

Economic growth

Answer 35

➜ curve shifts right -> shift outwards of the PPF for an increase in productive potential ➜ quantity of resources available for production ⇡ eg. new factories + more workers ➜ increase in the quality of resources - education makes workers more productive, technical progress allows machines and production processes to produce more with the same amount of resources

Question 36

Economic decline

Answer 36

➜ PPF shift inwards - war - high levels of unemployment

Question 37

Capital goods

Answer 37

➜ goods that are used in the production of other goods | ➜ factories, offices, roads, machines and equipment

Question 38

Productive efficiency

Answer 38

➜ curve which shows the max potential level of output of 1 good given a level of output for all other goods in the economy ➜ production takes place at lowest cost - given set of resources produces the max number of goods ➜ all points on the PPF are productively efficient

Question 39

Allocatively efficient

Answer 39

➜ social welfare is optimised

Question 40

Consumer goods

Answer 40

➜ goods + services that are used by people to satisfy their needs and wants ➜ eg. food, holidays