3.1.1 Economic methodology and the economic problem Flashcards
Why is economics a social science?
It looks at the behavior of humans, either as individuals or as part of organization’s e.g. firms or governments and their use of scarce resources.
What similarities do economists have to natural and other sciences?
(1) Develop theories and create economic models - predictions
(2) simplifying assumptions to limit number of variables
(3) test theories and models against relevant facts
What differences do economists have to natural and other sciences?
(1) Can’t conduct controlled laboratory experiments where only one variable is changed at a time e.g. consumer income can’t be kept constant
(2) Ceteris Paribus - ‘all things remain equal’ - solves the problem of the existence of multiple variables in an economy (only 2 factors at once)
What is the difference between positive and normative statements?
Positive statements - Objective - can be tested with factual evidence and be rejected or accepted
Normative statements - subjective - contain a value judgement, opinions
They can influence decision making and gov policy
What is the central purpose of economic activity?
Increasing economic welfare by combining the factors of production to create goods and services to satisfy consumer wants and needs.
What are the key economic decisions?
How resources are allocated:
(1) What to produce - profit
(2) How to produce it - efficient to maximize profits
(3) Who is to benefit from goods and services produced - consumers who are willing to pay for those goods
What are the economists classification of economic resources?
Factors of production:
(1) Capital - equipment, has to be made first
(2) Enterprise - willingness to take a risk to make a profit - use other FOP
(3) Land - Natural resources
(4) Labour - Work done by people - have different levels of human capital.
What is the basic economic problem?
How can the available scarce (limited) resources be used to satisfy people’s infinite (unlimited) wants and needs as effectively as possible?
Scarcity: choices have to be made about how scarce resources are allocated between different uses. Choices have an opportunity cost.
Give 3 different types of economic agents
(1) Producers - make goods/services
(2) consumers - buy goods/services
(3) Governments - set rules for other participants to follow.
What do PPF diagrams illustrate?
Shows the options available (maximum possible output) when you consider the production of just two types of goods and services with given factors of production.
Production possibility diagrams illustrate different features of the fundamental economic problem, such as: 1 resource allocation, 2 opportunity cost, 3 trade offs, 4 unemployment of economic resources and 5 economic growth.
What is a trade off?
When you have to choose between conflicting objectives because you can’t achieve all your objectives at the same time. Compromise
What is the difference between productively efficient and allocatively efficient?
Both lie on the curve and resources are fixed - movement along the PPF to show reallocation of resources
All points on the curve are productively efficient as all resources are being used as effectively as possible to produce maximum output.
Not all points on the curve are allocatively efficient as not all points show production of goods that people want or need.
What is productive inefficiency?
Lies inside the PPF - not using current levels of output to the maximum.
What is an opportunity cost?
Involves a trade off - the next best alternative given up - cost of the choice made.
It is used to ensure a more efficient allocation of resources.
What are the problems with opportunity cost?
(1) Not all alternatives are known
(2) Some factors don’t have alternatives
(3) Lack of information on alternatives and their costs
(4) Some factors can be hard to switch to an alternative
