1 - Economic Methodology Flashcards
Economics?
A social science due to looking at the behaviour of humans either as individuals / part of organisations and their use of scarce resources
Methodology used by Economists
- develop theories + create economic models to explain phenomena
- use simplifying assumptions to limit the no. of variables in an investigation
- test theories + models against relevant known facts
- use empirical data to improve + revise their models
SIMILARITIES
from natural and other sciences
- observation of human behaviour
- develop hypothesis from observation
- predictions deducted from hypothesis
- prediction tested against evidence
- hypothesis changed if rejected
DIFFERENCES
from natural and other sciences
- social sciences ‘softer’ than natural
- economics theories - contain no. Of exceptions to original prediction
- critics view it as generalisations
- economists tend to focus on positive economics
Economic statements?
POSITIVE
- objective statements that can be tested by referring to the available evidence with suitable data collected over a period of time
- you’ll be able to tell if it’s T or F
NORMATIVE
- subjective statements which contain a value judgement
- it’s not possible to say whether it’s true or not, you agree/disagree
Needs?
Something necessary for human survival
E.g. food
Factors of production?
CELL
CAPITAL
- equipment that help produce goods/services
ENTERPRISE
- refers to people who take risks and create things from the 3 other factors
LAND
- non-renewable + renewable
LABOUR
- work done by people who contribute to production
Economic agents?
PRODUCERS
- firms/people who make goods/services
CONSUMERS
- firms/people who buy goods/services
GOVERNMENTS
- sets the rules that other participants in the economy have to follow
What do economic agents think about?
3 questions
WHAT TO PRODUCE?
- goods that are profitable
HOW TO PRODUCE IT?
- most efficient way to maximise profits
WHO TO PRODUCE IT FOR?
- willing consumers
Goods and Services?
GOODS
- physical products that are tangible
SERVICES
- intangible products
Wants?
Something desirable but not necessary
E.g. fashionable clothing
Consumption?
Form of economic activity when you consume something
- you’re trying to satisfy a need/want
Trade off?
When you have to choose between conflicting objectives as they’re unachievable at the same time
Production possibility curve
PPC
A diagram that shows the options available when you consider the production of 2 types of goods/sevices
PPC graphs
(Image)
Opportunity cost?
The cost of giving up the next best alternative
- you have to make a choice
Problems with Opportunity Cost
- not all alternatives are known
- some factors don’t have an alternative use
- lack on info on alternatives and their costs
- some factors (land) can be hard to switch to an alternative use
Productive efficiency?
FOR A FIRM
- occurs when the average cost of production is minimised
FOR ECONOMY AS A WHOLE
- occurs when it’s impossible to produce more of one good without producing less of another
Allocative efficiency?
Occurs when the available economic resources are used to produce the combination of goods/services that best matches peoples preferences
Markets + Economies?
A way of allocating resources
- doesn’t have to be a place or exchanging physical objects
Free market?
Allocates resources based on supply and demand and price mechanism
PROs of a Free Market Economy
EFFICIENCY
- as any product can be bought/sold, only those of the best value will be in demand
- so firms have an incentive to try to make goods in the most efficient way
ENTREPRENEURSHIP
- the rewards for good ideas make them money, which encourages risks + innovation
CHOICE
- innovation leads to more choice for consumers
- consumers are not restricted to only buying what the government recommends
CONs of a Free Market Economy
INEQUALITIES
- market economies lead to differences in income
- in a completely free market, those unable to work get no income
MONOPOLIES
- successful businesses can become the only supplier of a product
- market dominance is abused
NON-PROFITABLE GOODS MAY NOT BE MADE
- drugs treating conditions may not sell enough so it won’t be made
Planned economy?
The government decides how resources should be allocated
PROs of a Planned Economy
MAXIMISE WELFARE
- they have more control so they prevent inequality + distribute equally
LOW UNEMPLOYMENT
- they try providing jobs/salaries
PREVENT MONOPOLIES
- market dominance prevented
CONs of a Planned Economy
RESTRICTED CHOICE
- firms make what they’re told to so consumers have to buy those goods/services
POOR DECISION MAKING
- lack of info means they make poor decisions about the production of goods
LACK OF RISKS + EFFICIENCY
- government-owned firms have no incentive to increase efficiency / take risks / innovate as they don’t need to make profit
Mixed economy?
PUBLIC SECTOR
- government
PRIVATE SECTOR
- businesses / individuals
- usually have to break even or make a profit to survive
Behavioural economics?
KEY ASSUMPTIONS IN THE TRADITIONAL THEORY
- economic agents are rational and utility maximisers
BEHAVIOURAL ECONOMISTS challenge it ☝🏽
- they look at social / psychological / emotional factors on decision making to make more realistic predictions about decisions made by individuals
Rationality is used to explain the actions of Economic Agents
- it’s assumed that a rational individual will attempt to maximise their utility, they do this by comparing the costs/benefits of alternatives then choosing the option that maximises their net utility
- acting rationally requires all info needed to correctly choose between alternatives
- in real life, eco. agents have imperfect info, therefore leads them to market failure
- asymmetric info prevents rationality
occurs when 1 party has more info than the other in a transaction
Why consumers DONT act rationally
- limited time to make a decision
- not all info available + the info available may be incorrect
- people are unable to process/evaluate high amounts of data in making a decision
Rational individual?
Assumed to have total self-control and will only act to maximise their utility
Behavioural economists argue that individuals have limits on their self-control
they have ‘bound self-control’
Behavioural economists believe that individuals are influenced by biases which affect their decision making, for example:
RULES OF THUMB
- simple tools that help an individual make a decision
ANCHORING
- means placing too much emphasis on one piece of info
AVAILABILITY BIAS
- judgements made about the probability of events occurring based on how it is easily remembered
SOCIAL NORMS
- individuals behaviour can be influenced by the behaviour of their social group
HABITUAL BEHAVIOUR
- doing the same thing over and over again
Governments can use the behavioural economic theory to help them create policies
Choice architecture
- when an individuals choice is influenced by adapting the way the choice is presented
Done in a number of ways:
DEFAULT OPTIONS
- people use this, so this can be used to encourage individuals to act a certain way
FRAMING
- context in which info is presented can influence a decision
NUDGES
- some alternatives are made easier to choose than others without removing the freedom of choice
RESTRICTED CHOICE
- people’s choices are restricted
MANDATED CHOICES
- people have to make a decision
