Economics 1.1

• 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
• What is a key difference between theories and models?

  Theories can often 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 scientists simplify problems when developing models and theories?

  By making assumptions
• What are theories or models that gain universal acceptance called?

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


  Because other variables are always changing
• How does human behavior affect the classification of economics as a science?

  Human behavior cannot be reduced to scientific law, making economics a social science

  
• What is a positive statement in economics?


  A statement that is objective and can be tested
• 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 that cannot be proven or disproven
• Provide an example of a normative statement.


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

  To back up normative statements
• 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?

  People have finite needs but infinite wants
• How is scarcity a relative concept?

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

  Water in India and China, and 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 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 at a level equal to consumption
• Provide examples of non-renewable resources.

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

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


  The cost of one thing in terms of the next best option that has been given up
• If you go into a shop with £1 and choose a chocolate bar, what is the opportunity cost?

  The bag of crisps that you could not buy
• How do consumers make choices with limited income?

  Based on what gives them the greatest level of satisfaction
• How must producers make decisions regarding their limited resources?

  Based on profit
• How must the government make decisions regarding limited tax revenues?

  Based on what will maximize social welfare
• What does any point on the production possibility frontier (PPF) represent?


  The maximum productive potential of the economy

  
• How can the opportunity cost be illustrated using the PPF?

  By showing the trade-off between producing consumer goods and capital goods

  
• What does producing 60 capital goods imply about consumer goods production?

  It results in a loss of 20 consumer goods, allowing only 60 consumer goods to be produced

  
• 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 production

  
• What does the PPF not indicate about the combinations of goods?

  It does not indicate which combination of goods is best
• What is the opportunity cost of producing 1 consumer good?

  3 capital goods
• What do the purple arrows in the PPF diagram indicate?

  That the economy has grown and can produce more of both goods