Economic Methodology and the Economic Problem

• What is a key assumption made by economists?

  Ceteris paribus
• What does ceteris paribus mean?

  Other things are held equal or constant
• Why can't economists conduct scientific experiments like natural sciences?

  They rely on models and real-life scenarios
• What do economists use to build their models?

  Real-life scenarios
• What is the importance of distinguishing between fact and fiction in current affairs?

  To evaluate statements accurately
• What type of statements are positive statements?

  Objective statements
• How can positive statements be tested?

  With factual evidence
• What words should you look for in positive statements?

  'Will', 'is'
• Is the statement "Raising the tax on alcohol will lead to a fall in demand" a positive statement?

  Yes, it can be tested
• Is "Higher temperatures will lead to an increase in the demand for sun cream" a positive statement?

  Yes, it can be tested
• What characterizes normative statements?

  They are based on value judgements
• What words should you look for in normative statements?

  'Should'
• Is "The free market is the best way to allocate resources" a normative statement?

  Yes, it is based on opinion
• Is "The government should increase the tax on alcohol" a normative statement?

  Yes, it suggests an action
• How can value judgements influence economic decision making?

  They lead to different conclusions from statistics
• What can the rate of inflation lead to among economists?

  Different conclusions from the same statistic
• What influences people's views on economic decisions?

  Positive consequences and moral judgements
• What is the role of assumptions in economics?

  They simplify complex economic scenarios
• Why are models important in economics?

  They help analyze real-world situations
• How do positive and normative statements differ?

  Positive statements are objective; normative are subjective
• What is the purpose of economic activity?

  To produce goods and services
• What do resources represent in economic activity?

  Inputs in the form of factors of production
• What decisions do economists face regarding scarce resources?

  What to produce and how much
• Who faces the decision of what to produce?

  The government and private sector
• What must be considered when deciding how much of each good to produce?

  The problem of opportunity cost
• What does the question "How should it be produced?" address?

  Distribution of goods and services produced
• What do firms aim to achieve in production?

  Minimise costs and maximise profits
• What factors do firms consider to decide on production methods?

  Cost and productivity of each factor
• What are the two types of production methods firms may choose between?

  Labour intensive and capital intensive
• Who benefits from the goods and services produced?

  Consumers with purchasing power
• What determines who gets the goods and services produced?

  Willingness and ability to pay
• What are the key questions in economic decision-making?

  1. What is to be produced?
  2. How should it be produced?
  3. Who will benefit from the goods and services?
• What is the basic economic problem?

  Scarcity
• What are the four factors of production?

  Land, labour, capital, and enterprise
• Why do choices have to be made in economics?

  Wants are unlimited and resources are finite
• What is the reward for capital as a factor of production?

  Interest from the investment
• What is the opportunity cost of a choice?

  The value of the next best alternative forgone
• What is the role of an entrepreneur in the production process?

  They take risks, innovate, and use the factors of production
• What is the reward for entrepreneurship?

  Profit
• If you have £1 and choose to buy a packet of crisps instead of a chocolate bar, what is the opportunity cost?

  The chocolate bar