1.1 nature of economics

• What do economists develop to explain how the economy works?

  Models
• How do economists develop models?

  By putting forward a model, gathering evidence, and then accepting, changing, or disregarding the model
• Can the words "theory" and "model" be used interchangeably?

  Yes
• How are theories and models expressed differently?

  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 do economists use the term 'ceteris paribus' in their analysis?

  To indicate that when one variable changes, others remain constant
• What are theories or models that gain universal acceptance called?

  Laws
• Why is it difficult to set up experiments in economics?

  Because economists gather data in the ordinary world where variables are always changing
• What do different conclusions from the same data in economics indicate?

  That economists may interpret data differently
• Why do some argue that economics is not a science?

  Because it studies human behavior, which cannot be reduced to scientific law
• What is a positive statement?

  An objective statement made without value judgments
• How do groups of individuals relate to economic predictions?

  Groups are more predictable than individuals
• How can positive statements be tested?

  They can be proven or disproven
• Give an example of a positive statement.

  Raising taxes will lead to an increase in tax revenue
• What is a normative statement?

  A subjective statement based on opinion
• Why can't normative statements be proven or disproven?

  Because they are based on opinions
• Give an example of a normative statement.

  The free market is the best way to allocate resources
• How do economists use positive statements to support normative statements?

  By backing up normative statements with objective data
• How can value judgments influence economic decision-making?

  Different economists may interpret the same statistic differently
• What is the basic problem of economics?

  The problem of scarcity
• What does scarcity mean in economics?

  Finite needs but infinite wants
• How is scarcity a relative concept?

  Resources are scarce in relation to the demands placed upon them
• Give examples of scarcity.

  Water in India and China, food shortages around the world
• 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 rate 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 in economics?

  Decisions on how to use limited resources
• What is opportunity cost?

  The cost of one thing in terms of the next best option given up
• Give an example of opportunity cost.

  If you buy a chocolate bar, the opportunity cost is the bag of crisps you could not buy
• How do consumers make choices based on opportunity cost?

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

  By choosing what to do with their limited resources based on profit
• How does the government make decisions based on opportunity cost?

  By deciding where to spend limited tax revenues to maximize 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 less productive in capital goods

  
• What does the PPF indicate about the choices of countries?

  It shows that countries have a choice of what to produce

  
• What does any point on the PPF represent?

  The maximum productive potential of the economy