Economic methodology Flashcards
The basic economic problem
How to allocate scarce resources to satisfy unlimited wants
Choices to make as a society
- What to produce
- How to produce
- Whom to produce goods and services for
4 Factors of production
Capital, land, labour and enterprise
Capital
Man made machinery/technology to produce goods and services
Land
Physical/natural resources
Labour
Human workforce to aid the production of making a good or service
Enterprise/ Entreupenship
Brings people together to produce output, spot gaps in the market and risk taking.
Capital is based on?
Loans
Land is based on?
Rent
Enterprise is based on?
Profit
Labour is based on?
Wages
Ideal economic goal
Increase economic welfare =
peoples /happiness/utility/satisfaction
Production possibility curve
A curve which shows the maximum output combination of two goods and services that an economy can produce with all available resources fully employed.
3 things a PPC illustrates
- Opportunity cost
- Maximum output combination of two goods and services 3.Maximum productivity capacity of an economy assuming quality and quantity of resources and technology do not change over period of time.
Point inside PPC
Underproduction/unemployment. Economy is productively inefficient and producing below capacity so not maximising full use of scarce resources.
Point outside PPC
Impossible. Restricted by the curve, do not have that level of scarce resources.
Point on PPC
Productively efficient, maximising full use of scarce resources.
Oppurtunity cost
The next best alternative foregone when making an economic decision.
2 shifters of a PPC
- Quantity of quality of resources (increased immigration= more labour)
- Change or improvement in technology (better machinery= produce more output)
Straight line PPC
Opportunity cost is constant
Concave PPC (curve)
Opportunity cost increases
Convex PPC (parabola)
Opportunity cost decreases
3 main economic systems and example of countries
- Planned or command or communist (North Korea)
- Capitalist or free market (USA)
- Mixed (China or USA)
Planned economy
State ownership/ control of factors of production/ monopoly government
Capitalist
Everyone works in their own self interest/ minimal government interference/ consumer control demand
Mixed
Partly state controlled and partly consumer controlled.
Adam smith
Invisible hand theory in 19th century, markets worked best when buyers and sellers traded among themselves “lassie fair’e” . Let the market run naturally
Market
Buyers and sellers interact among themselves and exchange goods and services
Rising prices in the market
Demand exceeds supply, a shortage exists
Falling prices in the market
Supply exceeds demand, a surplus exists
