1.1 Economic Methodology and The Economic Problem Flashcards
What are social sciences?
- How humans interact
- Tests are dynamic
What are natural sciences?
- e.g Maths, Biology
- Natural events
- Objective (facts)
- Tests are static
What does ceteris paribus mean?
‘all other factors remain the same or unchanged’
What is a positive statement?
- Objective, factually based
- Can be tested to see if true
“unemployment rate is at 8%”
What is a normative statement?
- Subjective, opinion
- Difficult to test
- Require value judgements
“increasing income tax is unfair”
What is a value judgement?
a statement put forward by an individual that are difficult to test
What is economic activity?
the production of goods and services to satisfy the needs and wants of society
this improves economic welfare
What is economic welfare?
the benefit gained by individuals, firms and society in the production of goods and services
individuals = benefit gained from products
firms = profit
Who are economic agents?
the individuals and firms that partake in economic activity
What is a free market economy?
when firms decide what goods and services to produce with limited intervention from the government
What are the economic decisions?
- What to produce? - economic incentives provide economic agents with information.
- How to produce? - firms combine factors of production in order to produce goods
- Whom to produce for? - according to demand and supply
What is a controlled economy?
when governments tell firms what to produce
e.g North Korea
What are the factors of production?
the resources used by firms to produce goods and services
1. Land –> Rent
2. Labour –> Wages
3. Capital –> Interest
4. Enterprise –> Profit
Land
natural resources that come from the earth
used up in the production of goods and services
e.g Beef in the production of a burger in a takeaway
Labour & Human Capital
includes all of the workforce in an economy
Human capital = value of a worker e.g income, education level etc.
Capital
has a number of meanings. e.g money
1. Factors of production –> man-made aids e.g machinery
2. Capital goods –> stream of income in the future rather than being consumed today
Enterprise
entrepreneur takes land, labour, capital and organises them in order to produce products for profit
1. Takes risks therefore creates wealth and employment in economy
2. is then rewarded with profits
What is the economic problem?
society has unlimited wants, however there aren’t enough resources available to supply all these wants. creates problem of scarcity.
infinite wants, finite resources
What is an opportunity cost?
the benefit lost of the next best alternative when making a decision
e.g Pepsi or Fanta? If I buy pepsi, opportunity cost is the fanta
What is a trade-off?
the product you didn’t buy because you got the better alternative
What is a Production possibility curve? (PPC)
it can be used to show different combinations of output for 2 products
e.g. as output of good x increases that of good y decreases, vice versa
What is an investment good?
those that produce a stream of income in the future
e.g machinery
What is a consumption good?
those that produce a stream of income today
e.g. car for personal use
What is economic growth?
economic growth can be caused by an increase in factor inputs. causes PPC to shift outwards.
What does it mean when something is Productively efficient?
when all the resources are being used up.
anywhere along the PPC
What does it mean when something is Allocative efficient?
takes into account the desires of consumers and occurs when social welfare is maximised.
only one point on the PPC
