Economic Methodology And The Economic Problem Flashcards
What is ceteris paribus?
• a key assumption is that event occur with ceteris paribus
• this assumption is that other things are being held equal or constant.
What are positive statements?
• they are objective, they can be tested with factual evidence and can be rejected or accepted when tested
• look for words such as “will” “is”
What are normative statements?
• based on value judgements, these are based on opinion
•look for words such as “should”
What are value judgments?
•can influence economic decision making and policy.
• different economics make different judgements from the same statistics
What is the purpose of economic activity?
To produce goods and services Which satisfy consumer needs and wants. This requires using resources (inputs-factors of production) to make outputs (goods and services)
What decisions do economics have to make about how to use scarce resources ? (3)
•what is to be produces?
How much of each good to be produced. Due to the problem of opportunity cost, have to be careful of decisions made.
•how should it be produce?
How will it be distributed. The rewards from each factor of production are considered. Minimise cost and maximise profit. This helps them decide between labour or capital intensive production.
•who will benefit from the goods and services produced?
Consumers who have purchasing power can benefit. Those who are willing and able to pay.
What is opportunity cost?
the value of the next best alternative that must be given up when making a decision.
What are the factors of production? (CELL)
•capital
•enterprise
•land
•labour
What is capital?
• physical- goods which can be used in the production process
Fixed- machines; buildings
Working- finished or semi finished consumer goods
•reward/incentive: interest from the investment
What is capital?
• physical- goods which can be used in the production process
Fixed- machines; buildings
Working- finished or semi finished consumer goods
•reward/incentive: interest from the investment
What is entrepreneurship?
•Managerial ability. The entrepreneur is someone who takes risks, innovates and uses factors of production.
•reward/incentive: profit- an incentive to take risks
What is land?
•natural resources such as oil, coal, wheat, water. It can also be the physical space for capital.
•reward/incentive: rent
What is labour?
•human economy, which is the workforce of the economy
•reward/incentive: wages
How is the environment a scared resource?
•only limited amount of resources. Renewable and non renewable.
What are renewable resources? How can this be kept constant?
•can be replenished. So stock level can be maintained over time. If the resource is consumed faster than it is renewed the stick will decline over time.
•limiting deforestation or imposing fish quotas
• worldwide fund for nature: two planets will be required to meet the global demand by 2050 if this continues
What are non renewable resources? How can this be prevented?
• cannot be renewed such as fossil fuels
• stock level decreases over time as it is consumed
• methods such as recycling, Substitutes such as wind farms can reduce rate of decline.
What is the basic economic problem?
Scarcity:wants are unlimited and resources are finite. Resources have to be used optimally
What is a PPF diagram?
(Production possibility frontiers)
•can show the opportunity cost of using the scarce resource
What do points on the PPF diagram mean?
• on the curve line: most efficient combination of output
• inside the graph: resources are not used to their full productive potential
•outside the graph: not yet attainable with current resources (not enough)
What is law of diminishing return?
The opportunity cost of producing good A increases, in terms of the lost units of good B that could have been produced
How to work out opportunity cost from PPF diagram?
Take away A and B points of x or y axis of the same product.
Potential-how much is sold
How can economic growth and decline be shown on a PPF?
•outward shift from curve with point A to inside curve with point B
•inward shift ^ same but inwards
What is assumed when the fixed curve is drawn?
•fixed amount of resources are used
• constant rate of technology
What causes the PPF curve to shift outwards?
•increase in the quality of quantity of resources so productive potential of economy increase and there is economic growth
How is moving along the curve diffent t to a shift?
•moving along uses the same number and state of resources and shifts production from fewer consumer goods to more capital goods. This incurs a opportunity cost
•shifting curve outwards reduced opportunity cost of producing capital or consumer goods as using either more resources or resources of better quality and more goods are being produced overall
What are capital goods?
Goods which can be used to produce other goods (machinery)
What are consumer good?
Goods which cannot be used to produce other goods (clothing)
What are all points on the boundary are called?
Productively efficient because resources are being used efficiently
What is allocative efficiency Or Pareto efficiency?
Is when no one (product) can be better of without making someone else worse off
How would there be a gain in allocative efficiency?
If more of both goods could be produced, this is because there is an improvement in Welfare
