1 Economic Methodology And The Economic Problem Flashcards
What is ceteris paribus?
The assumption that all other things are equal or constant
What is a positive statement?
Objective and can be tested with factual evidence
Consequently can be rejected or accepted
What is a normative statement?
Based on subjective, value judgements rather than factual evidence
What can value judgements influence or affect?
Economic decision making and policy
What is the purpose of economic activity?
To produce good and services which satisfy consumer needs and wants
What decisions are made about how to use scarce resources?
What is to be produced?
How should it be produced?
Whoo will benefit from the goods and services produced?
What are the factors of production?
CELL
Capital, enterprise, land and labour
What is capital?
Goods which can be used in the production process e.g. Machines, buildings
What is the reward/incentive of capital?
Interest from investment
What is enterprise?
The willingness to take risk to make a profit.
Those who innovate to make a good with other factors of production
What is the reward/incentive of enterprise?
To make a profit
Is an incentive to take risks
What is land?
Natural resources such as oil, coal, wheat and water
What is the reward from land?
Rent
What is labour?
Human capital
The workforce of an economy
What is the reward from labour?
Wages
What is the basic economic problem?
How are unlimited wants satisfied with limited resources
What is opportunity cost?
The cost of a choice of the next best alternative
What is a PPF
A production possibility frontier
What do PPFs show
The productive potential of an economy, usong a combination of two goods or services, when resources are fully and efficiently employed
What do points on the line of a PPF show?
The most efficient combinations of output on the PPF
What is the law of diminishing returns?
The opportunity cost of producing more goods increases, in terms of lost units of another good that could have been produced
What does a point inside the PPF curve mean?
Production is inefficient and resources are not being used to their full potential
Unemployment of economic resources
What does a point outside the PPF mean?
Production is not yet attainable with current resources
How can economic growth be shown on a PPF?
By an outward shift of the curve
How would economic decline be depicted on a PPF?
An inward shift of the curve
What is a capital good?
Goats which can be used to produce other goods such as machinery
What is a consumer good?
Goods which cannot be used to produce other goods such as clothing
What is productive efficiency?
When resources are being used to their productive potential so efficient
What is allocative efficiency?
When no one can be made better off without making someone else worse off
How can I look at it efficiency weekend?
When there is improvements in welfare and more of both goods can be produced
Does the PPF show allocative efficiency?
No as it doesn’t show how goods are distributed in society
