1.1 Economic methodology and the economic problem Flashcards
Scarcity
Limited quantities of resources to meet unlimited wants
Fundamental economic problem
how best to make decisions about the allocation of scarce resources among competing uses so as to improve and maximise human happiness and welfare
Value judgement
Subjective statement of opinion
Hypothesis
a proposed explanation for a phenomenon
Economic theory (model)
used to show the essential characteristics of complicated economic conditions in order to analyse them and predict the result of changes in variables. These are hypotheses which are capable of being proved wrong by empirical evidence.
Scientific method
a method which subjects theories or models, and hypotheses to falsification by empirical evidence
Law
a theory or model which has been verified by empirical evidence
Positive statement
A statement of fact that can be scientifically tested to see if it is correct or incorrect
Normative statement
a statement that includes a value judgement and cannot be refuted just by looking at the evidence
Production
converting inputs or factors of production into outputs
Factors of production
Inputs into the productive process, such as land, labour, capital, and enterprise
Land
natural resources used as a factor or production. the reward given for the use of this is rent
Labour
human input used as a factor of production. the reward given for the use of this is wages
Capital
manufactured resources used as a factor of production. the reward given for this is interest
Enterprise
the seeking out of profitable opportunities for production and risk taken to achieve these as a factor of production. the reward given for the use of this is profit.
Good
something that is consumed to satisfy wants and provides utility
Utility
the satisfaction or economic welfare an individual gains from consuming a good
Choice
Choosing between alternatives when making a decision on how to use scarce resources
Opportunity cost
the cost of giving up the next best alternative
Trade-off
a sacrifice made when making choices
Production Possibility Frontier (PPF)
a curve depicting the various combinations of two products (or types of products) that can be produced when all the available resources are fully and efficiently employed
Consumer goods
goods which are used by consumers to satisfy their wants and needs
Capital goods
manufactured goods used to produce other goods and services
Productively efficient
a situation where it would not be possible to produce any more of one good without sacrificing production of another good (given a fixed quantity of FofP and technology)
Substitutable
capable of being used as a replacement
Constant opportunity cost
as production of one kind of good increases, the opportunity cost of producing each unit stays the same (shown by a downwards linear PPF)
Increasing opportunity cost
as production of one kind of good increases, the opportunity cost of producing each unit increases (shown by a curved PPF)
Law of increasing opportunity cost
As the output of one good increases, the resources needed to produce it become scarcer, causing the opportunity cost of additional units to increase
Planned/command economy
government planning allocates resources to resolve the fundamental economic problem
Characteristics of planned economies (2)
- necessary but unprofitable goods produced
- all people have access to necessities
Mixed economy
both government planning and the market mechanism allocate resources to address the fundamental economic problem
Free market economy
the market mechanism allocates resources to resolve the fundamental economic problem
Characteristics of a free market economy (3)
- necessary but unprofitable goods not produced
- unemployed people suffer from a lack of goods
- poor people lack basic necessities
Market mechanism
the process through which changes in prices allocate resources
Privatisation
the transfer of publicly owned assets to the private sector
Contractualisation
services that are provided by the government being contracted to private sector bidders
Marketisation
the provision of goods and services shifting from the non-market sector to the market sector
Deregulation
the removal of rules which restrict economic action
Public ownership
ownership of industries, firms, and other assets by the government
Regulation
imposition of rules, controls, and constraints, which restrict freedom of economic action in the market place
Private sector
the part of the economy which is owned by individuals, companies, and charities
Public sector
the part of the economy where production is organised by the state or government
