Economic Methodology And The Economic Problem Flashcards
Why is economics considered to be a social science
Looks at the behaviour of humans, either as individuals or as part of organisations, and their use of scarce resources
Assumption known as ceteris paribus
‘All other things remaining equal’
Positive statements
Objective statements with evidence
Normative statements
Subjective statements-opinions
Four factors of production
Land, labour, capital and enterprise
Land
Includes all the natural resources in and on it
Labour
The work done by people who contribute to the production process
Capital
Equipment, factories and schools that help to produce goods or services
Labour force
The population who are available to do work
Enterprise
The entrepreneurs who take risks and create things from the other three factors of production
The economic problem
How can the available scarce resources be used to satisfy people’s infinite needs and wants as effectively as possible ?
Scarce
Limited amount of
Goods
Tangible items
Services
Intangible items
The economic agents (participants)
Producers, consumers, governments
Governments can be thought of as
A government sets the rules that the other participants in the economy have to follow, but also produces and consumes goods and services.
Incentive
a thing that motivates or encourages someone to do something
Government decisions that effect how resources are allocated
Have to decide how much to intervene in the way producers and consumers act
Trade off
When you have to choose between conflicting objectives because you can’t achieve all your objectives at the same time. It involves compromising, and aiming to achieve each of your objective a bit
Opportunity cost
The next best alternative that you give up in making that decision
What does a PPF (production possibility frontier) show
The options that are available when you consider the production of just two types of goods or services
What would cause an outward shift in the PPF
Increased resources, improved technology, improvements to labour
What does an outward shift of a PPF show
Economic growth
Assumption about the worker in a free market (rational)
Would prefer to have their wages, but less free time
Assumption about the employer in a free market (rational)
Would prefer to have less money, and to know that there’s someone there to do some work
The way a free market allocates resources are
Based on supply and demand and the price mechanism
Free market advantages
Efficiency- only products of the best value will be in demand. Entrepreneurship- rewards for good ideas can make entrepreneurs a lot of money. Choice- the incentives for innovation can lead to an increase in choice for consumers.
Free market disadvantages
Inequalities- market economies can lead to huge differences in income. Non- profitable goods may not be made. Monopolies- market dominance can be abused
Advantages of Command economies
Maximise welfare- prevent inequality and redistribute income fairly. Low unemployment- try to provide everyone with a job and a salary. Prevent monopolies
Disadvantages of command economies
Poor decision making- may make poor and slow decisions about what needs to be produced restricted choice- limited choice in what they can consume. Lack of risk-taking and efficiency.
When free markets result in undesirable outcomes
Market failure
How do governments often intervene when there’s a market failure
Change the law, offer tax breaks or create some other kind of incentive, or by buying or providing goods or services
Mixed economy public and private sectors
Public- the government. Private- businesses that are privately owned
The margin
The change in a variable cause by an increase of one unit of another variable
What does the traditional economic theory assume about economic agents and their utility
Want to maximise their utility
Marginal utility
The benefit gained from consuming one additional unit of a good
Total utility
The overall benefit gained from consuming a good
The law of diminishing marginal utility
For each additional unit of a good that’s consumed, the marginal utility gained decreases
Producers economic objectives
To maximise profits, maximise total sales or the firm’s market share, (some firms) ethical objectives
Consumers economic objectives
Maximise their utility, while not spending more than their income.
Government economic objectives
Maximise the pubic interest: Economic growth, full employment, equilibrium in the balance of payments, low inflation
The key assumptions used in traditional economic theory are:
Economic agents are utility maximisers, economic agents are rational
Homo economicus
Rational individual
Behavioural economists argue that there are lots of restrictions on people’s ability to make rational decisions
The time available to make a decision is limited, not all information is available, due to vast amounts of data people might not be good at calculating the costs of alternatives.
Positive statement
a statement of fact that can be scientifically tested to see if it is correct or incorrect
Normative statement
A statement that includes a value judgement and cannot be refuted just by looking at the evidence.
Economic welfare
the well-being and prosperity of individuals, households, or society as a whole within an economy
Economic system
How and for whom to produce for
Key factors that contribute to economic welfare
. Income and Wealth Distribution
. Employment opportunities
. Access to basic needs
. Quality of life
. Social stability and security
. Economic growth
. Environmental sustainability
