Assignment 1: Difference Between Positive and Normative Statements

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  • Topic: Economics, Opportunity cost, Production-possibility frontier
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ECON2318Assignment 1

Lesson 1, 2 & 3

1. Answer the following short questions. Each question is of equal value. (36 Marks)

a) What is the difference between positive and normative statements in economics? Provide an example of each.

Normative statements are subjective, often without a basis in fact or without evidence, the statements involve judgments about what should or ought to happen. Positive economics involves statements about economic reality, which can be supported or rejected based on facts. Positive statements don’t have to be true, but arguable.

A minimum wage hike will increase the demand in lower skill trade would be a positive statement example.

A minimum wage hike is undesirable as it doesn’t help the poor and causes higher inflation would be a normative statement.

b) Scarce resources within an economy can be categorized into 4 groups. State and explain them.

The scarce resources can be grouped into the following 4 categories {Labour, Land, Capital, and Entrepreneurship.}

Labour: Labour is the physical and mental achievements by humans in good and service production.

Land: Land includes natural resources used in the production of goods and services.

Capital/ Human Capital: Equipment and structures along with skills and knowledge people receive from education and job training.
Entrepreneurship: Entrepreneurship is the action/process of combining labour, land, and capital together to produce goods and services.

c) What is economics and why is it useful?

Economics is the study of how people choose to use resources and make decision. Economics is useful because it helps us understand how we make choices in scarcity. Economics also helps understand and how to make choices for planning future activities. It can also help us predict how people will respond to changes

d) Define opportunity cost and provide 3 examples.

Opportunity cost is simply the next best alternative to that action .
Examples:
1. Giving up watching the hockey game, to study more, to gain greater grades. 2. Attending evening training (in order to be a better) instead of going to your favourite night club when your favorite artist would be performing. 3. Choosing to work more to have more money, instead of play. If you work more, you have less play. If you play more then you’ll have less money. However working more, will give you more money to play less.

e) Distinguish between positive and negative incentives. Given an example of each.

Positive incentives are those that increase benefits and decrease cost, it would result in an increase of related activity or behavior. Positive incentives leave you better off if you do what is told.

Example (Positive): a school sets up a program to encourage students to get good greats. For every grade of an “A” a student receives, he or she will get $25. The $25 will encourage students to get an “A” so he or she can have the $25 incentive.

Negative incentive increase cost or reduces benefits. Negative incentives are things you don’t want to get. Increase cost or reduces benefits.

Example (Negative): When your body has an infection, it increases the temperature of your body. So you body is increasing something to decrease something else. In this case, raise temperature of your body to kill bacteria.

f) What are the advantages to specialization when it comes to international trade? How does this relate to the concept of comparable advantage?

Advantages come when one producer produces (Countries in this case) the good that comes at the least cost of production and opportunity to him or her and then trades for those goods that come at a higher production or opportunity to him or her. It frees up resources and time to do or produce other things that we can do better.

If a Country can produce a good or service at a lower opportunity cost than others then this would give...
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