1.1 Economic methodology and the economic problem Flashcards
Why is economics a social science
because you look at the behaviours of individuals or groups and predict their behaviour in certain scenarios
economic methodology
scarce resources are allocated to competing users in society, in order to satisfy their wants/needs
scarce resource
the resource is limited, so cannot be given to everybody.
positive economic statement
statements that can be proven to be true or false using facts
normative economic statements
subjective opinions which cannot be proven (value judgement) e.g what caused inflation
what is a value judgement
where different economists can make different judgements from the same statistic. e.g the rate of inflation
need
something u need to survive
want
improves standard of living or economic welfare (general wellbeing of society)
what are the factors of production
land
labour
capital
enterprise
capital
man made equipment to make other goods or services e.g a factory
enterprise
using all other 3 factors of production to produce a good or service
land
naturally occurring resource
labour
people involved in production
the basic economic problem
scarcity suggests that we have limited resources in our economy, but society wants unlimited resources therefore we need to decide on how to allocate these resources
opportunity cost
cost of the next best alternative foregone (given up)
economic good
a good that has an opportunity cost when consumed because it uses scarce resources e.g. buying a car that metal could have been used for something else.
free good
A good has no opportunity cost as it doesn’t use scarce resources. e.g. sunlight or air
what is the production possibility curve
a diagram which shows the maximum combinations of 2 goods which can be made in an economy. Assuming all factors are fully employed and used efficiently (enterprise land labour capital) it assumes the most that can be made.
what does the PPF assume?
it assumes that better use of the factors of production moves the points closer to the edge. (where factors are fully employed and efficient) however does not shift the curve out, only economic growth causes the PPF to shift out.
Draw a PPF diagram
How the PPF moves outwards
improvements of technology - more efficiently and produce more
Discovering new resources - oil and gas
better education/training - faster task completion etc
bigger working population - more workers etc
what does it mean to say PPF moves inwards ?
It means that the productive capacity decreases due to a less optimised production capability.
How the PPF moves inwards
Natural disasters - destroys resources
War - “
Global warming - rising sea levels + extreme weather
Long recession - businesses close, workers lose skills = less productive capacity.
How the PPF shows opportunity cost
producing the amount at point A1 means you can only produce the amount of B1. point A
if you reduce the amount made of A so A2 then it increases the amount of capital goods that can be made B2.
the opportunity cost is by making more of B (b2) you lose out on A1 - A2
allocative efficiency
all factors of production are used to maximise societies welfare.
productive efficiency
when maximum output is made from available factors of production and you cant make more of a good without making less of another, meaning you can move along the ppf line (more or less consumer/capital goods)
