Test Revision: Nature Of Economics
Examples of Positive and Normative Statements
Positive Statements – can be tested by evidence, backed up by objective explanations
• A fall in incomes will lead to a rise in demand for own-label supermarket foods
• If the government raises the tax on beer, this will lead to a fall in profits of the brewers.
• The rising price of crude oil on world markets will lead to an increase in cycling to work
• A reduction in income tax will improve the incentives of the unemployed to find work.
• A rise in average temperatures will increase the demand for sun screen products.
• Higher interest rates will reduce house prices
• Cut-price alcohol has increased the demand for alcohol among teenagers
• A car scrappage scheme will lead to fall in the price of second hand cars
Normative Statements – value judgements, subjective statements, opinions rather than facts
Pollution is the most serious economic problem
Unemployment is more harmful than inflation
The congestion charge for drivers of petrol-guzzling cars should increase to £25
The government should increase the minimum wage to £7 per hour to reduce poverty.
The government is right to introduce a ban on smoking in public places.
The retirement age should be raised to 70 to combat the effects of our ageing population.
Resources are best allocated by allowing the market mechanism to work freely
The government should enforce minimum prices for beers and lagers sold in supermarkets and off-
licences in a bid to control alcohol consumption
Ceteris Paribus = All other things remaining the same – used when testing on the economic effect
brought by one of the determinants
We assume that economic agents make rational decisions:
Consumers maximise their benefits/ satisfaction with a limited budget/ minimum ‘opportunity cost’
Firms maximise profits in reward for taking risks (response to appropriate incentives)
Workers maximise wages/salaries in reward for their skills, qualifications, experience
Governments maximise social welfares
Aim of economy: Allocate the scarce resources in the most effective way
Functions of economy: Decide what goods/services, how to produce, who gets them
Productive efficiency=firm is using all its resources fully to produce goods/services at minimum
wage cost (ie. Cost per unit of output is at its lowest)
Allocative efficiency= firm produces quantity of goods and services consumers want at a price they
are prepared to pay, resources are distributed so that no consumers are made better/worse off
Dynamic efficiency= resources are allocated efficiently over time
Economic problem: Resources are scarce while wants of society are infinite.
Economic goods- made with scarce factors- have opportunity cost
Free goods- factors of production are not scarce- no opportunity cost- eg. Breathing air
Factors of Production:
Land – all natural resources (eg. Coal, land itself) – non-renewable (if used up aren’t available to
future generations eg. Coal); renewable (can be replaced in a generation eg. Woodland) –
sustainable (survives over time when being used up for economic purposes)
Labour – all human resources (quantity, quality, productivity) – human capital
Capital – machinery, man made aid to production, infrastructure (eg. Road, computers)
Enterprise – individual/group take other factors, organise them to produce goods & services
Consumer goods (immediate use) ; Capital goods (input to create other goods)
Production Possibility Frontier – Maximum productivity potential (i.e maximum combination of
goods/ services that can be produced) – assumed that all factors of production are working at
maximum efficiency and all of them are working – All points on PPF are productively and
allocatively efficient – Optimal Allocation of Resources
Examples of Positive and Normative Statements
Positive Statements – can be tested by evidence, backed up by objective explanations
• A fall in incomes will lead to a rise in demand for own-label supermarket foods
• If the government raises the tax on beer, this will lead to a fall in profits of the brewers.
• The rising price of crude oil on world markets will lead to an increase in cycling to work
• A reduction in income tax will improve the incentives of the unemployed to find work.
• A rise in average temperatures will increase the demand for sun screen products.
• Higher interest rates will reduce house prices
• Cut-price alcohol has increased the demand for alcohol among teenagers
• A car scrappage scheme will lead to fall in the price of second hand cars
Normative Statements – value judgements, subjective statements, opinions rather than facts
Pollution is the most serious economic problem
Unemployment is more harmful than inflation
The congestion charge for drivers of petrol-guzzling cars should increase to £25
The government should increase the minimum wage to £7 per hour to reduce poverty.
The government is right to introduce a ban on smoking in public places.
The retirement age should be raised to 70 to combat the effects of our ageing population.
Resources are best allocated by allowing the market mechanism to work freely
The government should enforce minimum prices for beers and lagers sold in supermarkets and off-
licences in a bid to control alcohol consumption
Ceteris Paribus = All other things remaining the same – used when testing on the economic effect
brought by one of the determinants
We assume that economic agents make rational decisions:
Consumers maximise their benefits/ satisfaction with a limited budget/ minimum ‘opportunity cost’
Firms maximise profits in reward for taking risks (response to appropriate incentives)
Workers maximise wages/salaries in reward for their skills, qualifications, experience
Governments maximise social welfares
Aim of economy: Allocate the scarce resources in the most effective way
Functions of economy: Decide what goods/services, how to produce, who gets them
Productive efficiency=firm is using all its resources fully to produce goods/services at minimum
wage cost (ie. Cost per unit of output is at its lowest)
Allocative efficiency= firm produces quantity of goods and services consumers want at a price they
are prepared to pay, resources are distributed so that no consumers are made better/worse off
Dynamic efficiency= resources are allocated efficiently over time
Economic problem: Resources are scarce while wants of society are infinite.
Economic goods- made with scarce factors- have opportunity cost
Free goods- factors of production are not scarce- no opportunity cost- eg. Breathing air
Factors of Production:
Land – all natural resources (eg. Coal, land itself) – non-renewable (if used up aren’t available to
future generations eg. Coal); renewable (can be replaced in a generation eg. Woodland) –
sustainable (survives over time when being used up for economic purposes)
Labour – all human resources (quantity, quality, productivity) – human capital
Capital – machinery, man made aid to production, infrastructure (eg. Road, computers)
Enterprise – individual/group take other factors, organise them to produce goods & services
Consumer goods (immediate use) ; Capital goods (input to create other goods)
Production Possibility Frontier – Maximum productivity potential (i.e maximum combination of
goods/ services that can be produced) – assumed that all factors of production are working at
maximum efficiency and all of them are working – All points on PPF are productively and
allocatively efficient – Optimal Allocation of Resources
