3.1.1 Economic methodology and the economic problem Flashcards
What is a positive statement?
It is a statement based on facts and data which can be proved to be true or false.
What is a normative statement?
It is a statement based on opinions and theories and cannot be proved true or false.
How do value judgements influence economic decision making and policies?
As judgements are subjective, opinions and beliefs about what is desirable and undesirable can be subjective.
Ceteris paribus
All other things kept constant
Wants
Things that are desirable, such as fashionable clothing.
Economic welfare
The economic wellbeing of an individual, a group within society, or an economy.
How needs and wants can improve economic welfare
When people’s needs and wants are satisfied, economic welfare improves as welfare basically means human happiness.
Production
A process or set of processes, that converts inputs into output of goods
Capital goods
A good which is used in the production of other goods or services - producer good
Consumer good
A good which is consumed by individuals or households to satisfy their needs and wants
Factors of production
Inputs into the production process such as land, labour, capital and enterprise.
The environment as a scarce source
Environmental resources compromise all the natural resources that are used or can be used in an economic system
Abstract resources
An intangible resource
Finite resource
A resource, such as oil, which is scarce and runs out when it is used
The fundamental/ basic economic problem
How best to make decisions about the allocation of resources among competing uses so as to improve and maximise welfare.
Opportunity cost
The cost of giving up the next best alternative
Rational behaviour
When people act in their own self-interest or to maximise their private benefit.
What ensures rational decision making
It assumes the decision maker has full or perfect information about alternatives, it also assumes that it has the time and cognitive ability to evaluate the choice against others
Production possibility frontier
A curve depicting the various combinations of two products that can be produced when all available resources are efficiently employed
Economic growth
The increase in the potential level of real output the economy can produce over a period of time.
Using a PPF to show full employment
When the point is on the production possibility frontier
Using a PPF to show unemployment
Unemployment of labour would be located inside the production possibility frontier, showing unused capacity
Productive efficiency
When it is impossible to produce one more of a good without producing less of another. For a firm it occurs when the average total cost of production is minimised.
Allocative efficiency
Occurs when the available economic resources are used to produce the best combination of goods and services that best matches tastes and preferences.
