Economic methodology and the economic problem Flashcards
What is the economic problem?
Infinite wants but limited and scarce resources - choices have to be made.
What is a positive statement?
Objective - statements that can be tested.
What is a normative statement?
Subjective - an opinion - cannot be tested.
What decisions need to be made to solve the economic problem?
- What to produce
- How to produce it
- For whom to produce it for
What is opportunity cost?
The cost of the next best alternative forgone when a choice is made.
What is a PPF?
Production possibly frontier - maximum possible production of 2 goods/services with given factors of production.
How does the PPF work? - for example, tablets and laptops.
As firms move more towards heavy specialisation in tablets, it means that their FoP are more suitable towards laptop production lower down on the PPF.
What is the opportunity cost of producing more tablets?
The laptops that have been forgone.
What is productive efficiency, on a PPF?
Any point on the curve is productively efficient - points inside the curve are productively inefficient - points outside the curve are unattainable
What is pareto efficiency?
No-one can be made better off, without making somebody else worse off - any point on the PPF is pareto efficiency.
What is allocative efficiency?
When there is an optimal distribution of goods and services, taking into account consumer’s preferences. When the price = marginal costs of production
What are the factors of production (FoP)?
- Capital
- Enterprise
- Land
- Labour
