Economic Methodology And The Economic Problem Flashcards
What does the assumption of ceteris paribus mean?
That other things are being held equal so nothing else changes
What is the assumption that nothing else changes called?
ceteris paribus
Why do economists use models?
What do they do with these models?
They can never be 100% sure of anything as economics is a social science
They then build up these models to replicate the real world more
What is a positive statement?
A statement that can be proven and therefore can be tested using factual evidence so it is objective. It can be accepted or rejected as right or wrong unlike normative statements
What type of words will positive statements have?
Will
Is
What is a normative statement?
These are subjective opinions which are made from value judgments. They are based on opinions rather than facts
What sort of words will you see in a normative statement?
Should
Could
Why do value judgements influence economic decision making?
Different economists may make different judgements on the same set of data. So economists need to make value judgements as there is rarely a correct answer
What may influence people’s views?
Their goals. People are more likely to see the best option as something if that option is best for their aim
Morality
Politics
What is the purpose of economic activity?
What does this require?
Therefore what is the job of an economist?
To produce goods and services which satisfy customers needs and wants
This requires using resorces
So the job of the economist is to find the best way to use these limited resorces
What are the main 3 questions in the economic problem?
What should be produced?
How should it be produced?
Who will benefit from it?
Explain the economic problem - What should be produced?
The government and the private sector are making this decision. They also need to decide how much of a good should be produced (usually to maximise profit).
This may be a hard choice due to opportunity costs
Explain the economic problem - How should it be produced?
This is about allocating resources. Economist need to consider the rewards from each factor of production as there are limited resources.
A firms aim is normally to minimise costs and to maximise profit so they want production to be efficient.
The costs of each resource (factor) is and their return. As a result they can decide on weather to use labour or capital intensive production.
Explain the economic problem - Who will benefit?
Economists want to make sure that people will buy the product (most of the time so that profit is made)
What are economic resources?
Factors of production
What are the factors of production?
Land
Labour
Capital
Enterprise
Describe the factor of production - Capital
A physical good which can be used in the production process
Fixed - Machinery
Working - finished or semi-finished consumer good
What is the reward if capital is used effectively?
Interest from an investment
Describe the factor of production - Enterprise
Your managerial ability
You need to do this well to be efficient as this includes allocation of resources
What is the reward if the factor enterprise is used well?
Profit
Describe the factor of production - Land
Natural resources
Land to build factories
What is the reward id the factor land is used well?
Rent from renting out the land
Describe the factor of production - Labour
Human capital
(The workforce)
What is the reward of the factor labour is used efficiently?
Lower wages
What are the two types of resources?
Renewable and non-renewable
Why is the environment a scare resource?
It will eventually run out and there are more laws being passed to help save the environment so it is harder and more expensive to use
Define renewable resource
It can be replenished so the level of stock can be maintained over a period of time
What happens if a resource is being consumed faster than it can be restored?
It will become more expensive meaning profits may decrease
Why are renewable resources important to environmental economists?
They want to help preserve the environment and it is predicted that if global command increases at the same rate as it is now we will need a second planet to keep up with demand by 2050
How can w avoid using non renewable resources?
Use substitutes
Recycle
What is the basic economic problem?
Scarcity
What is the relationship between what people want and out ability to supply it?
Therefore…
Wants are unlimited where supply is limited
Therefore we need to allocate resources as efficiently as possible
Define opportunity cost
The value of the next best alternative that is lost
Give some exaples of an economic agent
Consumers
Producers
Government
What does PPF stand for?
Production Possibility Frontiers
What does a PPF show?
The maximum productive potential of an economy using two goods or services when resources are fully and efficiently applied
What are PPF curves good at showing?
Opportunity cost of using the scarce resources
Growth and decline
Explain
A and B are where there is 100% efficency
E is impossible as you don’t have the resources to get there
C and D are inefficient as you have the capability to produce more. They are not being used at their full productive potential
Define the law of diminishing returns?
This states that the opportunity cost of producing more of product A increases, in terms of the lost units of product B that could have been produced
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How does a PPF show opportunity cost?
You can draw lines to see if you produce x you can produce y. Because the PPF simulates all the resources that is the maximum units of that product that could be produced
What does an outwards shift in a PPF show?
(Shift to the Right)
Economics growth
How is economic decline shown on a PPF?
An inwards shift
(To the left)
What assumptions are made when drawing a PPF?
There are a fixed amount of resources being used
There is a constant state of technology
What may shift a PPF outwards?
Why?
An increase in quantity or quality in resources - this is because the productive potential of the economy increases
Other
What is a capital good
A good that is used to produce other goods
Eg machinery
What is a consumer good?
A good that can’t be used to produce other goods which are normally sold to consumers
Eg clothing
At what point on a PPF is the economy producing at maximum efficiency?
How do we know this?
However…
Anywhere on the curve
We know this because the resources are being produced to their full productive potential so it is efficient
However not all points on that curve are allocatively efficient
Why aren’t all points on the boundary of a PPF allocativley efficient?
More of one good can’t be produced without a decrease in the units of another good being lost
What is Allocative efficiency?
This is when nothing can be made better without making something else worse off
What is another name for allocative efficiency?
Pareto efficiency
Why aren’t PPF curve’ the best way to analysis allocative efficiency?
The PPF only shows potential output
But allocative efficiency is concerned with how goods are distributed in society
