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
an opinion-based statement
Hypothesis
a proposed explanation for a phenomenon
Scientific method
a method which subjects theories or models, and hypotheses to falsification 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)
The Production Possibility Curve (PPC) is an economic model that considers the maximum possible production (output) that a country can generate if it uses all of its factors of production to produce only two goods/services
The use of PPC to depict the maximum productive potential of an economy
The curve demonstrates the possible combinations of the maximum output this economy can produce using all of its resources (factors of production)
At A, its resources are used to produce only consumer goods (300)
At B, its resources are used to produce only capital goods (200)
Points C and D both represent full (efficient) use of an economy’s resources as these points fall on the curve. At C, 150 capital goods and 120 consumer goods are produced
The use of PPC to depict opportunity cost
To produce one more unit of capital goods, this economy must give up production of some units of consumer goods (limited resources)
If this economy moves from point C (120, 150) to D (225, 100), the opportunity cost of producing an additional 105 units of consumer goods is 50 capital goods
A movement in the PPC occurs when there is any change in the allocation of existing resources within an economy such as the movement from point C to D
Productively efficient
when an economy, firm, or industry produces goods and services at the lowest possible cost, using all available resources efficiently. This means there is no waste, and it is impossible to produce more of one good without reducing the output of another.
Lowest Average Cost (AC) – Production is at the minimum point of the Average Cost (AC) curve.
Full Use of Resources – No resources (land, labor, capital) are wasted.
Maximized Output – Goods and services are produced using the most efficient production methods.
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)
As the output of one good increases, the resources needed to produce it become scarcer, causing the opportunity cost of additional units to increase
Market mechanism
the process through which changes in prices allocate resources
Privatisation
the transfer of publicly owned assets to the private sector
Outsourcing
outsourced services that are provided by the government being contracted to private sector bidders
Deregulation
the removal of rules which restrict economic action
Public ownership
ownership of industries, firms, and other assets by the government
Regulation
rules 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
Changes in Production Possibilities
Economic growth occurs when there is an increase in the productive potential of an economy
This is demonstrated by an outward shift of the entire curve. More consumer goods and more capital goods can now be produced using all of the available resources
This shift is caused by an increase in the quality or quantity of the available factors of production
Economic decline occurs when there is any impact on an economy that reduces the quantity or quality of the available factors of production
One example of how this may happen is to consider how the Japanese tsunami of 2011 devastated the production possibilities of Japan for many years. It shifted their PPC inward, resulting in economic decline
