1.1- Economic Methodology And The Economic Problem Flashcards
Basic economic problem
There are infinite wants but only limited resources
What are the 4 questions form the basic economic problem
-what to produce
-how
-how much
-for whom
Factor rewards
Incomes that flow to each of the main factors of production when bought into production use
Factor inputs
Land
Labour
Capital
Enterprise
Land as a factor input
Natural resources eg. Forests
Factor reward for land
Gain rent
Labour as a factor input
Human input into production process
Labour as factor reward
Gain wages and saleries
Capital as a factor input
Things used when making other goods and services
Eg. Machinery
Capital factor reward
Gain interest from savings and dividens from shars
Enterprise as factor input
Entrepreneurship
innovation
Enterprise factor reward
Gain profits
Opportunity cost
Benefit lost from the next forgone alternative
Positive statements
-objective statements
-can be tested/ammended by lookig at available evidence
Normative statements
-subjective statements
-carry value judgements about what ought to be
‘should’ rather than justification
-must economic decisions influenced by value judgements
-vary between diff people
Objective agnts
What we assume (when studying economics)
What are the objective agents
-rational consumers
-producers/firms
-government
Rational consumers
We assume that consumers wish to maximise satisfaction/utility by choosing how to spend their limited money
Producers/firms- objective agents
Maximise profits through producing at lower cost
Government objective agents
Improve economic/social welfare of citizens
Capital goods
-used to make consumer goods and services
-eg. Machinery
Free goods
-dont use up any factor inputs when supplied eg. Air
-zero oportunity cost
Consumer goods and services
Satisfy our needs and wants directly
Consumer durables
Products that provide steady flow of satisfaction
Consumer non-durables
Products used up in act of consumption
Consumer services
Eg. Hair cut/ tickets to a show
What do ppfs show
Combination of goods that can be made with a given amount of resources
As move along ppf curve
Opportunity cost increases
Straight ppf curve
Constant opportunity cost
Point under ppf curve
Unemployed resources
Point over ppf curve
Unattainable- not enough resources
Causes of ppf curve shift in
Ppf less
-pandemic
-war
-natural disaster
Causes of ppf curve shift out
-improvements in quantity/quality resources
-more resources available- eg. Untapped
-net migration- from abroad
-net investment from abroad- low tax
-advancements in technology
-improvements in human capital
-education and training
Economic growth
Increase in the pottential level of real output the economy can produce over a period of time
Lras
Productive efficiency
For econ as whole- 0occurs when its impossible to produce more of one good without producing less of another
For a firm- occurs when av total cost of production is minimised
Allocative efficiency
Occurs when the available economic resources are used to produce the combination of g&s that best matches peoples tastes and preferences
Doesnt necessarily = optimum society welfare- depends on distribution of income and wealth and value judgements relating to fairness and justice
Inter-temporal choice
Choice over time
Eg. Whether to leave school get a job or go to uni
Scarcity
Results from the fact that people have unlimited wants but resources limited
Functions of pricee
Signalling
Rationing
Incentivising
Signallying
Prices send a signal about market conditions- eg house prices increase, prices provide info to businesses and consumers
Rationing function of price
Pricies will increase ration scarce resources
Eg energy
Incentivisng fucntion of price
Prices create incentives to change behavoir
High prices will incentivise produceers to increase supply due to higher profits
Low prices will incentivise consumers- eg saes0- whilst hgh prices deincentivise
Allocative function of prices
Changing relatiive praces allocates scarce resources away from markets exhibiting excess supply and into markets where excess demand
Missing market
A situation in which there is no market because the functions of prices have broken down
Subsidy
A payment made by gov or other authorty0- usually to producers for each unit of the subsidised good they produce
Consumers. May be subsidised eg. Bus passes given to children to enable them to travel on buses free or at a reduced price
Indivrect tax
Tax on expendaiture
Vat and excise duty- main types in uk
Supply shifts left
Vat
Value added tax
200% currently
Based on price of product0 advalorem tax
Price higher, higher vat paid
Causes supply curve to diverge- more paid at higher prices
Excise duty
Specific unit tax
Fixed amount
Increase with volume purchase
Eg. 2pounds/bottle of wine, reardless of price of wine
Levied on petrol, tobacco, alcohol in uk
Parallel shift of supply cruve
Tax/unit on diagram
Verticle distance two supply curves at same quantity
Divide into consumer and producer burden
Consumer burden
Amount of tax consumer payys
Diff between two equilibrium points on price-
Paid before- paid after
Producer burden
Amount tax producer pays
Tax/unit - consumer burden
Total amount of tax received by gov
Tax/unit x new quantity
change in producer revenue
Origional revenue- new revenue
Incidence of tax
Varied on elasticity
Inelastic tax burden
Consumer burden greater
Tax revenue more
Less impact for demerit ggoods but greater tax rev
Can be hypothicated- used for helping to educate dangers of smoking
Elastic incidence of tax
Consumer burden when elastic
Less tax erevenue
More ffective for demerit goods
When ped= 0 incidence of tax
Perfectly inelastic
Consuemr pass burden
Demand x price
Upwards line from bottom/demand curve
Ped= infinity incidence of tax
Perfectly elastic
Producer pays all
Dmeand constant
Line horizontal
Pes= infinity
Perfectly elastic
Consumer pay all tax
Horizontal line
Pes=0 incidence of tax
Perfectly inelastic
Supplyl cant change, producer must absorb all taz to stay equilibrium
Tehnical progress
New and better ways of making goods and new techniques for producing more output from scarce resources
Econ growth
The incrrease in the potential level of real outout the econ can produce over a period of tien
Sr growth
Makes use of spare capacity in econ
Inside ppf to on ppf
Productive efficiency
For the economy- when it is impossible to produce more of one good without producing less of another
Firm- av total cost of production is minimised
An economic good is
One which has an opp cost
What can a ppf not illustrate
Consumer demand
The basic econ problem is thaat
Resources have to be allocated between competing uses
The objective of econ activity
Satisfy consumer wants
Rising unemployment is a price worth paying to get inflation down- an example of
A value judgement
The main methodological diff between econ and natural sciences is that economists
Cannot test hyptheses in lab conditions
Value judgements inflluence econ decision making and policy because value judgenents
Are eval processess based on individ standards or priorities
