4.1.1 Economic Methodology and the economic problem Flashcards
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
Need
something that is necessary for human survival, such as food, clothing, warmth or shelter
Want
something that is desirable such as fashionable clothing, but is not necessary for human survival
Economic Welfare
the economic well-being of an individual, a group within society, or an economy
Production
a process, or set of processes, that converts inputs into outputs of goods
Capital Good
a good which is used in the production of other goods or services. Also known as a producer good
Consumer Good
a good which is consumed by individuals or households to satisfy their needs or wants
Factors of Production
inputs into the production process, such as land, labour, capital and enterprise
Finite Resource
a resource, such as oil, which is scarce and runs out as it is used. Also known as a non-renewable resource
Renewable Resource
a resource, such as timber, that with careful management can be renewed as it is used
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
Key economic decisions
What to produce, how to produce and who is to benefit from the goods and services produced
Scarcity
results from the fact that people have unlimited wants but resources to meet these wants are limited. In essence, people would like to consume more goods and services than the economy is able to produce with its limited resources
Opportunity Cost
the cost of giving up the next best alternative
Production Possibility Frontier (PPF)
shows the maximum possible output combinations of two goods or services an economy can achieve when all resources are fully and efficiently employed
Economic growth
the increase in the potential level of real output the economy can produce over a period of time
Full Employment
when all who are able and willing to work are employed
Unemployment
when not all those who are able and willing to work are employed
Choice
choosing between alternatives when making a decision on how to use scarce resources
Resource Allocation
the process through which the available factors of production are assigned to produce different goods and services
allocative efficiency
occurs when the available economic resources are used to produce the combination of goods and services that best matches people’s tastes and preferences
consumer sovereignty
through exercising their spending power, consumers collectively determine what is produced in a market.
economic problem
limited resources, unlimited wants.
labour productivity
output per worker.
producer sovereignty
producers or firms in a market determine what is produced and what prices are charged.
productive efficiency for the economy
Occurs when it’s possible to produce more of one good without producing less of the other
productivity
output per unit of input.
outward shifts of the ppf
- technological advancements
- discovery of new resources
- increased education and training
- increase size of the labour force
inward shifts of the ppf
- natural disasters
- wars
- global warming
- climate change
- prolonged recession
Why is economics a social science?
It looks at the behaviour of humans, either as individuals or part of an organisation and their use of scarce resources.
Axis labels PPF
Capital goods
Consumer goods
Land
all natural resources used to produce goods and services
Labour
Is human input into the production process
Capital
Investment in goods that are used to produce other goods in the future includes machinery etc
Entrepreneurship/ Enterprise
An individual who seeks to supply products to a market for a profit
What’s the reward of land ?
Rent
What’s the reward of labour ?
Wages
What’s the reward of capital ?
Interest
What’s the reward of enterprise ?
Profit
Long-run economic growth on a ppf
Is shown by the outward movement of the frontier on a PPF curve
Short-run economic growth
When there is movement from a position of productive inefficiency inside the curve to a point of productive efficiency on the curve
What does any point under the PPF curve represent ?
Under employment of economic resources including labour
Law of diminishing returns
A point when the level of profits or benefits gained is less than the amount of money or energy invested
When does productive efficiency occur for a firm ?
When the average total cost of production is minimised
