Economic Methodology Flashcards
Opportunity Cost
The measurement of the cost of a choice in turn of the next alternative option
The loss of the next best alternative choice when making a decision
How is economics a social science?
It’s considered to be the “scientific study” of the methods used to build theories that explain the behaviour/opinions of the economic agents (individuals, groups, organisations)
What does this “social science” focus on?
It’s concerned with the description and analysis of:
-Production
-Distribution (resources being shared equitably and not equally)
-Consumption of goods and services
4 factors of production
Land
Labour
Capital
Enterprise
What is the economic benefit for land?
It can generate income through rent or agricultural activities (e.g farming, crops)
It provides an area for business operations to commence (therefore possibly contributing to production within the economy)
What is the economic benefit for labour?
-It promotes overall productivity of the economy.
-It can also provide wages/salaries for workers through employment, thus supporting their livelihoods (better living standards)
What is the economic benefit for Capital?
-It can generate income through investments such as interest, dividends or capital gains from shares
-It can also finance business operations and the purchase of assets (leads to technical economies of scale)
What is the economic benefit for enterprise?
-It encourages innovation and creates job opportunities: this contributes to the production of goods and services, which in turn drives/strives for economic growth.
What is scarcity?
When resources are limited, so there’s uncertainty as to who receives resources and how much each receives
What is Rationing?
This is a way of saving resources when they’re scarce;
When demand outstrips supply scarce goods and services have to be fairly allocated.
What are rational consumers’ objectives?
To maximise their utility from their consumption of goods and services in order to maximise their welfare and satisfaction.
What are businesses’ objectives?
-They wish to maximise their profits by serving their goods and services to the right, most appropriate market
-They want to produce their goods and services at the lowest costs possible in order to maximise their profits.
What is the government’s objectives?
-They wish to improve the economic and social welfare of their citizens
-They also bring legislation in order to regulate the economic activity and behaviour between the other 2 economic agents,
all in order to keep everything working together in a harmonious fashion.
What is a free market economy?
Where consumers and firms have the freedom to conduct their businesses freely, without the intervention of government
They can decide what to and how to produce and for whom (as it’s democratic)
What is a command economy?
This is where authorities or the state has full control over what is produced, how it’s produced and for whom
Therefore people need permission from the government in order to conduct their businesses in their own free manner.
What is a mixed economy?
This is a mix of free-market and command economies:
It’s where individuals and firms can make decisions, but there’s still government intervention in order to regulate economic activity between the other 2 economic agents.
What is regulatory capture?
This is a form of corruption- where someone who’s worked in a political sector/entity (I.e the government) goes to work in the commercial sector (into firms).
When regulatory capture occurs, special interests of the private is prioritised over the general public’s interests.
Reasons for wage differences in imperfectly competitive labour markets
1.) Disequilibrium trading (E.g when there’s an excess in supply of labour, especially in low-skilled labour, employers will lower wages as there’d be more applicants than jobs)
2.) Imperfect Market information (Workers lack accurate info on rates of pay; imperfect market info can contribute to occupational immobility of labour, where workers aren’t able to move from one type of job to another)
3.) Workers are being exploited by monopsonies (with a lack of trade union power)
4.) Lack of education - leads to people being less skilled and having lower MRP, causing disparities in society in terms of the wages earned by those with low MRP versus those with higher MRP.
Main characteristics of a pure public good
- Non-excludability (the benefits derived from using a public good cannot be confined solely to those who have paid for it, as it’s meant for everyone, hence the word public) (e.g public roads)
- Non-rivalrous/ non-rival consumption (Each party’s enjoyment of the public good doesn’t diminish another’s enjoyment of it)
- Non-rejectable (The collective supply of the public goods means that it cannot be rejected by anyone) (e.g the sun or rain, the police)
What is elasticity?
It measures the proportionate responsiveness of the second variable to the change in the first variable
What happens if a firm increases their price in an oligopoly?
Then the decrease in the quantity demanded will be proportionally more than the increase in price:
-The other firms will undercut this firm that decided to increase their prices by not changing their prices in order to preserve their market share
Thus their total revenue and market share will decrease.
What happens if a firm decreases their price in an oligopoly?
The quantity demanded will increase but proportionally less than the reduction in price:
-Reducing prices leads to a price war (as other firms are interdependent and they want to keep their market share)
Other firms will follow and also drop their prices, meaning everyone loses out in total revenue and the firm that decided to decrease their prices would not have gained any market share anyways.
How can entrepreneurs improve the market?
-By creating new goods and services through innovation (e.g iPhones & Netflix streaming services)
-Developing new efficient production methods that incumbent firms haven’t come up with because they’re too complacent and naive (in order to minimise waste and environmental impacts)
- Finding a new source of raw materials (can promote sustainability, improve quality and lower prices for consumers)
How else can you label the high power of a trade union?
With the term “high union density”
