Economic Methodology and the Economic Problem Flashcards
What is the key economic assumption?
Ceteris Paribus
What is ceteris paribus?
The assumption that other things are being equal/constant, so nothing else changes
Why are economic models used?
You cannot conduct scientific experiments like in the natural sciences
What are economic models based on?
Real-life scenarios, although assumptions are made
What are positive statements?
Objective statements that can be tested with factual evidence. Once tested, the results can be examined and then rejected or accepted
What are normative statements?
They are subjective statements based on value judgements
Are statistics always interpreted the same way?
No, different economists will make different judgements from the same statistic
What are people’s views concerning the best option influenced by?
The positive consequences of different decisions, as well as by moral and political judgements
What is the purpose of economic activity?
To produce goods and services which satisfy consumer needs and wants
How does economic activity work?
It takes resources (factors of production) to produce outputs (goods and services)
What decisions do economists have to make when considering scarce resources?
- What is to be produced?
- How should it be produced?
- Who will benefit from the goods and services produced?
What are the ideas around how scarce resources should be utilised?
- It is an issue both the government and private sector face as they must balance how much of each good to produce
- Because of opportunity cost they have to be very careful with the decisions they make
What are the ideas around how items should be produced?
- Production must be efficient to maximise profits and minimise costs
- Firms must consider the productivity of each factor of production in order to decide between labour intensive production and capital intensive production
What are the ideas around who will benefit from economic output?
Consumers who have the purchasing power can benefit from goods/services produced
What are the factors of production?
Economic resources, i.e land, labour, capital and enterprise (CELL)
What are the 3 types of capital?
- Physical
- Fixed
- Working
What is physical capital?
Goods that can be used in the production process and get used up
What is fixed capital?
A long term factor of production that is used in producing goods or services
What is working capital?
The difference between a companies current assets and its current liabilities
What is the reward/incentive from the use of capital?
Interest from investments
What is enterprise?
The entrepreneur who takes a risk and creates a business using the other 3 factors of production
What is the reward/incentive from the use of enterprise?
Profit
What is land?
Natural resources, or the physical space for fixed capital
What is the reward/incentive from the use of land?
Rent
What is labour?
Human capital, the workforce of the economy
What is the reward/incentive from the use of labour?
Wages
What are renewable resources?
Resources that can be replenished as fast as, or quicker than, they are currently being used
What are non-renewable resources?
Resources that are being replenished at a slower rate than they are being used, meaning we will eventually run out
How can reduce the rate at which we use non-renewable resources?
Recycling, reusing items, reducing usage, reducing waste or finding substitutes
What is the environment?
A scarce resource comprised of a limited amount of resources (a mix of renewable and non-renewable)
What is the Central Economic Problem?
We have unlimited wants but a finite amount of resources so choices have to be made
What is scarcity?
There is a finite amount of resources that can be used
What is opportunity cost?
The opportunity cost of a choice is the next best opportunity forgone.
What is a Production Possibility Frontier?
A diagram that depicts the maximum productive potential of an economy, using a combination of 2 goods or services, when resources are efficiently employed
What does a PPF curve show?
The opportunity cost of using a scarce resource
What does the law of diminishing returns state?
An increase in one factor generates lower and lower additional returns, assuming that there are no changes in the other factors of production
What is the issue when objects are being produced below a PPF curve?
Resources are not being used to their full productive potential
What is the issue when objects are being produced above a PPF curve?
It is not yet attainable with the current resources
What does an outward shift show?
Economic growth
What does an inward shift show?
A decline in the economy
What assumptions are made when drawing a PPF curve?
- A fixed amount of resources are used
- There is a constant state of technology
What are capital goods?
Goods that are used to produce other goods
What are consumer goods?
Goods that cannot be used to produce other goods
What is allocative efficiency?
No one can be made better off without making someone else worse off
What is Pareto efficiency?
No one can be made better off without making someone else worse off
What is a gain in allocative efficiency?
When there is an improvement in welfare due to more of both goods being produced
What is the difference between PPF and allocative efficiency?
PPF only shows potential output, and allocative efficiency shows how goods are distributed in society
