Economic methodology and the economic problem (micro)

Question 1

economics as a social science

Answer 1

Economics is a social science which is the study of society and relationships between people. We study many different aspects of human behaviour within and between markets, organisations and countries.

Question 2

Positive statement

Answer 2

Objective statements that can be tested or rejected by referring to the available evidence. Positive economics deals with objective explanation. For example: “A rise in consumer incomes will lead to a rise in the demand for new cars.” Or “A fall in the exchange rate will lead to an increase in exports overseas.”

Question 3

Normative statement

Answer 3

Normative statements express an opinion about what ought to be. They are subjective statements - i.e. they carry value judgments. For example, the level of duty on petrol is unfair and unfairly penalizes motorists.

Question 4

economic activity

Answer 4

An economic activity is a process that, based on inputs, leads to the manufacture of a good or the provision of a service.

Question 5

Three questions

Answer 5

what to produce?
how to produce?
who is to benefit?

Question 6

Factors of production

Answer 6

The inputs required to produce goods and services;
- Labour = Human capital, the value human labour brings to the production process.
- Capital = The equipment used to generate goods and services within the production process.
- Land = Finite and non-finite resources found on the planet.
- Enterprise = The entrepreneurial actions that individuals take to try and make a profit.

Question 7

opportunity cost

Answer 7

The cost of a decision as measured by the benefits foregone of the next best alternative.
Issues:
- not all factors have alternatives.
- Some alternatives are unknown.
- Agents may lack information on alternatives.
- It can be difficult to switch some factors to another use.

Question 8

production possibility frontier

Answer 8

a curve showing the maximum combinations of goods and services that can be produced in a set period of time given available resources.
Explains the constraints experienced by society.

Question 9

capital good

Answer 9

a good, such as a machine, used to produce other goods, including consumer goods

Question 10

consumer good

Answer 10

a good used by consumers to meet their needs or wants

Question 11

Scarcity means we all have to make choices

Answer 11

Because of scarcity, choices have to be made by consumers, businesses and governments. For example, over six million people travel into London each day and they make choices about when to travel, whether to use the bus, the tube, to walk or cycle – or whether to work from home. Millions of decisions are being taken, many of them are habitual – but somehow on most days, people get to work on time and they get home too!

Question 12

scarcity

Answer 12

Scarcity is the concept that resources are only available in limited supply, whereas society’s demand for those resources is unlimited.

Question 13

productive efficiency

Answer 13

The output of productive efficiency occurs when a business in a given market or industry reaches the lowest point of its average cost curve implying an efficient use of scarce resources and a high level of factor productivity.

Question 14

allocative efficiency

Answer 14

Allocative efficiency is reached when no one can be made better off without making someone else worse off. This is known as Pareto efficiency / optimality

Question 15

ppf

Answer 15

When producing goods, opportunity cost is what is given up when you take resources from one product to produce another. The maximum amount that can be produced is illustrated by a curve on a graph.
The production possibility frontier (PPF) is above the curve, illustrating impossible scenarios given the available resources.
The PPF demonstrates that the production of one commodity may increase only if the production of the other commodity decreases.
The PPF is a decision-making tool for managers deciding on the optimum product mix for the company.

Question 16

Value Judgement

Answer 16

Often found in normative statements they are judgements about society and cannot be quantified and tested.

Question 17

Basic economic problem

Answer 17

There are not enough resources on earth to satisfy humans’ unlimited wants and needs. The basic economic problem involves working out how to allocate limited resources as effectively as possible and satisfy people’s unlimited wants and needs.