economic methodology Flashcards
purpose of economic activity
the production of goods + services that satisfy our needs + wants
economic activity improves economic welfare (standard of living + well being of society)
what’s a want
things that are desired but not essential to survival
what’s a need
things required that are essential to maintain survival e.g. food, shelter
what are the factors of production?
- resources used by firms to produce goods + services
- known as economic resources as they earn reward for their use in form of rent, wages, interest + profit
LABOUR, LAND, CAPITAL, ENTERPRISE
what is labour + land?
LABOUR
- all of the workforce in an economy
- value of worker= it’s human capital (better human capital= more firms will want to employ you etc due to better skills, education etc)
- reward= wages
LAND
- all natural resources that come from earth + are used in production + physical land space
- reward= rent
what is capital + enterprise?
CAPITAL
- man-made aids that are used in production process e.g. tools, factories, machinery etc
- reward= interest from investment
ENTERPRISE
- entrepreneurs take land, labour + capital and organises them to produce products that’ll be profitable
- reward= profit
- entrepreneurs take risks to create wealth + employment for economy
what is a capital good?
- capital good= brings income rather than being consumed e.g. taxi vs car for leisure purposes
what can we say about the environment?
- it is a scarce resource
much of what we use is non-renewable so need to be used in a sustainable manner
market mechanism used to price resources obtained from the environment
what are 3 questions asked when producing goods + services?
WHAT to produce?
- economic incentives provide economic agents with info required to tell them what goods + services to produce
HOW to produce?
- firms combined factors of production to produce a good/service
WHO to produce it?
- in free market economy they produce according to supply + demand
what’s a free market economy?
- where firms decide what to produce, has no government intervention
what is the economic problem?
SCARCITY because we have limited resources (finite) + unlimited wants (infinite)
what has to be made due to scarcity?
CHOICES has to be made on how resources are allocated
but choices have an opportunity cost
what is an opportunity cost?
- the benefit lost of the next best alternative when making a choice
- there’s always competing alternatives when making a choice –> alternatives= ‘trade offs’
- opportunity costs for all decisions made by economic agents
usefulness of concept opportunity cost?
- can be applied to empirical case studies –> WHAT, HOW, WHOM a product should be produced
HOW to use scarce resources e.g. govt spending - useful in diagrammatic analysis
- evaluative- requires judgement based off prior analysis + application
positive economic statement
- objective statements that can be tested, amended or rejected by referring to available evidence
e.g. facts can be declared true or false
–> FACT
normative economic statement
- subjective statements i.e. carry a value judgement
- it’s an opinion not a fact that can be tested by looking at available evidence
- more likely to say ‘should’
- normally used by economic policies
- often concern views about what individuals firms + govts should do based off ethical, moral or political standpoint
production possibility diagrams- what are they
- can be used to show different combinations of outputs for two products e.g. good x and good y given the resources available
- as output of good x increases, that of good y decreases (vice versa)
- PPC illustrates problem of choosing how to use scarce resources when producing goods + services –> there’s an opportunity cost in deciding what combinations of good x and good y to produce
production possibility diagrams- trade off
- occurs when economic agent substitutes production of one good/service for another –> can be seen my movement along PPC away from production of one product towards another
investment goods vs consumption goods
investment goods- those that produce a stream of income in the future
consumption goods- those that produce a stream of income today
what happens if your producing along the PPC curve?
- producing anywhere along PPC curve shows full use of resources –> all factors of production are being used as efficiently as possible, no unemployment of economic resources
what happens if your producing below/within the PPC curve?
- shows under-use of resources= inefficient
- not used full productive potential
BUT if decided to use resources efficiently it would shift production closer to curve
can you produce above PPC curve?
NO- unobtainable as not enough resources to produce this level of output e.g. may need more land, labour etc
what causes a shift in PPC?
- outward shift= economic growth
e.g. increase in factors of production (labour) due to immigration= increase productive capacity= outward shift as more can be produced - inward shift= economic decline
e.g. recession/global warming etc
difference between shift + moving along the PPC curve?
- moving along= uses same number of state resources + has an opportunity cost
production possibility diagrams- productive efficiency
- occurs when producing on the PPC
- maximum output is produced from available factors of production –> as not possible to reach point outside curve/produce more of one good without producing less of another
production possibility diagrams- allocative efficiency
- allocative efficiency occurs when social welfares maximised
–> takes into account consumers desires - will be shown on point on curve where more consumer goods are being produced than capital goods
