Economic Methodology and the Economic Problem Flashcards
What is scarcity?
The concept that resources are limited in supply so that choices have to be made about their use.
What is Opportunity Cost?
The benefit lost from the next best alternative forgone.
What are Free Goods?
Goods which are unlimited in supply and therefore have no opportunity cost.
What are economic goods?
Goods which are limited in supply and therefore have an opportunity cost
The Basic Economic Problem
The choice that has to be made about how resource are allocated because needs and wants are unlimited whilst the resources to meet those needs and wants are limited
Needs
The minimum which is neccesary for survival- food, water, warmth, clothing and shelter.
Wants
Those resources we want but do not need to survive
Factors of Production
The inputs to the production process- land, labour, capital (machinery) and enterprise.
Positive Economic Statements
A statement of economic fact that can be tested right or wrong by the evidence.
Normative Economic Statements
An economic statement that contains a value judgement about what ought to to be (an opinion)
What does a PPF (Production Possibility Frontier) show?
The combinations of two or more goods and services that can be produced using all available factor resources efficiently.
What is Productive Efficiency?
- Producing output at the lowest possible average cost of production
- Maximising output from the available input (all points on the line do this)
What is Allocative Efficiency?
- when resources are being allocated to produce the goods and services that consumers want.
Why is the PPF curve drawn concave?
Because not all resources are equally suited to all uses.
- As resources are transferred from one good to another the most suitable resources will be transferred first. Once the most suitable resources have been transferred the second good will require resources less suited, so it requires more resources so curves as it continues to increase.
see sheet.
What would happen to the curves if there was an increase in all factor inputs?
A parallel shift outwards
What would happen to a the curves if there was an improvement in technology or an increase in productivity of on good/service?
A skewed shift leading to an increase in the output of one good
How can a country’s PPF shift inwards?
- a deep economic recession leading to: closed businesses, loss of capital, unemployed workers who leave the labour market permanently
- Over-exploitation of scarce renewable resources e.g. over-fishing
-External shocks which destroy factor resources e.g. natural disasters and wars.
What can cause the PPF curve to shift outwards?
There is an increase in the total stock of factor productions available
AN industry or economy achieves a rise in factor efficiency (productivity)
Advances in technology
What does an outward shift on the PPF curve signify?
An expansion in a countries productive potential i.e. long run economic growth.
What is the central purpose of economic activity?
The satisfaction of needs and wants.
How do governments want to maximise the welfare of its citizens?
By maximising the return on each £ of taxpayer money
How do customers want to maximise their welfare?
By maximising the return on each £ spent
How do firms want to maximise their welfare?
By maximising the return on each £ invested in the business e.g. profit
How do workers want to maximise their welfare?
By maximise the return on each hour of labour provided e.g. wages
What does economics study?
The economic behaviour of both individuals and groups of people, and the economic relationships between individuals and groups.
What does social science study?
Society and the relationships of individuals within a society.
How is the development of economic theory is the same as natural theory?
They follow the same process: Oberservation-> hypothesis-> predictions-> testing->further testing or a new hypothesis-> conclusion
Why is economics seen as a ‘softer science’ than the ‘harder’ natural science’ ?
Economic theory allows many exceptions- if the theory works most of the time it is considered correct. Natural theory is set in stone.
