1.1 Economic methodology and the economic problem Flashcards
Definition of economics
The study of how scarce resources are used to satisfy society’s unlimited wants
Why is economics a social science?
It applies scientific method to the study of human behaviour and economic decision making
What is a positive economic statement?
An objective statement that can be tested against facts to be declared either true or false
(‘will’ and ‘is’)
What is a normative economic statement?
A subjective opinion or value judgement, that cannot be tested against facts or declared either true or false
(‘should’)
Why can value judgements influence economic decision making?
They involve moral and political considerations as well as positive analysis
Definition of a need + example
Something that humans require to survive
eg. food, shelter
Definition of a want + example
Something that people feel improves their standard of living or economic welfare, but is not required for survival
eg. new car, TV, watch
Definition of ceteris paribus
All other things being equal
What is the purpose of economic activity?
To produce goods and services which satisfy consumer needs and wants
Definition of economic welfare
The standard of living or general well being of people in society
What leads to increased economic welfare?
Satisfying society’s needs and wants
What are the key economic decisions?
What to produce?
How to produce?
Who is to benefit from the goods and services produced?
What are consumer goods?
Goods that give satisfaction to consumers
What are capital goods?
Goods used to produce other goods
What are economic resources known as?
Factors of production
What are the factors of production?
Land, Labour, Capital, Enterprise
What is capital + example?
Man made physical equipment used to make other goods and services
(eg machinery, computer equipment)
What is enterprise?
Entrepreneurs are individuals who take risks, innovate and combine the other factors of production in order to produce a good/ service
What is land?
All naturally occurring resources such as minerals, the sea, coal and the environment.
Can be divided into renewable and non renewable resources
What is labour?
People involved in production (referred to as human capital)
Why is the environment a scarce resource?
There are only limited amount of resources on the planet.
These are made up of renewable and non renewable resources
Difference between renewable and non renewable resources
Renewable resources can be replenishes, so the stock level of the resources can be maintained over period of time.
Non renewable resources cannot be renewed and are used up more quickly than replaced eg. coal, oil
What is the basic economic problem?
Scarce resources compared with society’s unlimited wants
Definition of opportunity cost
The cost of the next best alternative given up when making a choice/ decision
Example of opportunity cost for a firm
Choosing between hiring extra staff or investing in a new machinery
Example of opportunity cost for the government
Choosing between spending more on the NHS or spending more on education
Definition of a PPC curve?
A diagram that shows the maximum possible output of two goods or services in an economy, assuming resources are fully employed
Explanation of points on a PPC
When economy is on its PPC, its using all of the resources (factors of production) so is productively efficient.
When economy is inside its PPC it is productively inefficient as not all factors of production are being used.
Points outside the PPC are not currently achievable (could be achieved by having more/ better factors of production)
What causes shifts of the PPC curve?
Changes in the quantity and quality (efficiency) of the factors of production
How can a PPC curve show opportunity cost?
An increase in the amount of capital goods produced leads to a loss of output of consumer goods (more are given up)
Definition of economic growth
An increase in the productive capacity of an economy over time
How can a PPC curve show economic growth?
Improvements in any of the factors of production lead to an outward shift of the PPC, meaning there has been an increase in the productive capacity of the economy, so more goods are produced.
What factors cause an outward shift of the PPC? (3)
- technological improvements that lead to increased productivity of capital goods (increased quality).
- discovery of new resources eg. oil, gas (increased quantity)
- improvements in education and training that lead to a more productive workforce (increased quality)
What is the difference between long run and short run growth?
Long run growth is when more of both capital and consumer goods can be produced (PPC shifts outwards).
Short run growth is when existing resources are being made more use of.
How can a PPC curve show economic decline?
Both of less goods can be produced due to fewer resources available, meaning PPC shifts inwards.
What factors cause an inward shift of the PPC? (3)
- natural disasters such as earthquakes or floods, meaning loss of natural resources (land)
- wars (limited/smaller workforce and less resources)
- a recession may lead to permanent loss of productive capacity if business shuts down.
Definition of productive efficiency
When maximum output is produced from the available factors of production and when it is not possible to produce more of one good or service without producing less of another
(any point on PPC)
Definition of allocative efficiency
When an economy’s factors of production are used to produce the combination of goods and services that maximise society’s welfare
