E - 1) The economic problem and economic methodology Flashcards
What is the purpose of economic activity?
To produce goods and services to meet our needs and wants
What are needs?
Things you must have to survive
What are wants?
Things you desire but are not essential
What is the basic economic problem?
There are infinite wants yet finite resources. Resources are scarce in relation to wants
What choices need to be made about the allocation of resources?
- What to produce?
- How to produce?
- For whom to produce for?
What are the factors of production?
- Land - natural, physical resources
- Labour - human input
- Capital - man-made resources, e.g. machinery
- Enterprise - the ability and willingness to organise, coordinate and take risks in the production process
What are the rewards for of the factors of production?
- Land: rent
- Labour: wages
- Capital: interest
- Enterprise: profit
What is the difference between microeconomics and macroeconomics?
- Microeconomics studies the behaviour of individuals and firms in the market
- Macroeconomics considers the economy as a whole
What do rational economic agents aim to maximise?
- Consumers: total utility
- Workers: wages and benefits from work
- Producers: profit
- Government: social welfare
What is opportunity cost?
The value of the next best alternative forgone when a choice is made
What are positive statements with an example?
They describe the world as it is, without making any value judgments. They are based on objective facts and they can be proven or disproven
Example: a rise in minimum wage decreases employment
What are normative statements with an example?
They express an opinion about what ought to be. They are subjective statements that carry value judgments
Example: the government should increase spending on healthcare
What are production possibility frontiers (PPFs)?
Diagrams that shows the maximum possible output combinations of two goods or services an economy can achieve when all resources are fully an efficiently employed
What do PPF diagrams look like?
- Capital goods on the y-axis and consumer goods on the x-axis
- Curved due to the law of diminishing returns - the marginal extra output of consumer goods diminishes as more factor resources are allocated to it
- Any point on the curve is productively efficient - all resources are fully employed
- Any point inside the curve is productively inefficient - some resources are unemployed
- Any point outside the curve is unnatianable - cannot be produced with current resources and state of technology
What is movement along the PPF curve?
The opportunity cost of producing more of one good which forgoes production of the other (a trade-off). The higher the change in production, the higher the opportunity cost
