1.1 nature of economics

• What does any point on the PPF curve represent?

  The maximum productive potential of the economy
• What do economists develop to explain how the economy works?


  Models
• What is the process of developing an economic model?


  Put forward a model, gather evidence, and then accept, change, or disregard the model
• Can the words "theory" and "model" be used interchangeably in economics?



  Yes
• How do theories and models differ in terms of expression?


  Theories can be expressed in words, while models are expressed in mathematical terms
• What is the purpose of theories and modeling in economics?


  To explain why something is as it is
• Why must assumptions be made in economic models?


  Because there are too many variables that can change
• What does the term 'ceteris paribus' mean?

  All other things remaining equal
• How would a change in income affect demand, ceteris paribus?

  demand will shift
• What is a law in the context of scientific theories or models?


  A theory or model that gains universal acceptance
• Why must assumptions be made in economic models?


  Because there are too many variables that can change
• Why is it difficult to set up experiments in economics?


  Because other variables are always changing in the everyday world
• What do some people argue about economics as a science?


  That it is not a science because it studies human behavior
• How do groups of individuals relate to economic predictions?


  Groups are much more predictable than individuals
• What is a positive statement in economics?


  An objective statement made without value judgments
• How can positive statements be expressed?


  In the form of a hypothesis that can be analysed and evaluated
• Is the statement "Raising taxes will lead to an increase in tax revenue" a positive or normative statement?



  Positive statement
• What characterizes a normative statement?


  It is subjective and based on opinion
• "The free market is the best way to allocate resources"

  normative statement
• How do economists use positive statements in relation to normative statements?



  To back up normative statements
• What is the basic problem of economics?


  The problem of scarcity
• How do finite needs and infinite wants relate to scarcity?



  People have finite needs but infinite wants, leading to scarcity
• How do economies try to solve the basic economic problem?


  By determining what to produce, how to produce it, and for whom production should take place
• What is a renewable resource?


  A resource that can be replenished or replaced at a level equal to consumption
• Give examples of renewable resources.


  Oxygen, solar power, and fish
• What is a non-renewable resource?


  A resource that cannot be readily replaced by natural means
• Give examples of non-renewable resources.


  Fossil fuels such as coal, oil, and gas
• What leads to opportunity cost?

  The limited amount of resources allied to unlimited wants
• What is opportunity cost?

  The cost of the next best alternative forgone
• How do consumers make choices based on opportunity cost?


  They choose what gives them the greatest level of satisfaction
• How do producers make decisions based on opportunity cost?


  They base their decisions on profit
• How does the government make decisions based on opportunity cost?


  By deciding where to spend limited tax revenues to maximise social welfare
• What does the production possibility frontier (PPF) show?


  The maximum possible combinations of capital and consumer goods that the economy can produce
• Why is the PPF typically drawn as a curve?

  
Because the first resources switched from capital to consumer goods are not adding much to capital goods but are more productive in consumer goods production
• What is the basic economic problem?

  The basic economic problem is scarcity: infinite wants but finite resources.
• What are the four factors of production?

  Land, Labour, Capital, Enterprise
• What is the purpose of economic models?

  To simplify reality in order to explain and predict economic behavior.
• What are the main types of economic agents?

  Households, Firms, and Governments.
• What are the key assumptions of rational decision-making?

  Economic agents aim to maximize utility (consumers) or profit (firms).
• What does a point inside the PPF represent?

  Inefficient use of resources.