Economic Methodology And The Economic Problem Flashcards
Why economic is a social science?
Economics is a social science because it studies human behavior, specifically how individuals, businesses, and governments allocate scarce resources to satisfy needs and wants. It uses scientific methods—such as data analysis, modeling, and empirical research—to understand and predict economic activities. However, unlike natural sciences, economics deals with complex human interactions, making its outcomes influenced by social, political, and psychological factors.
What similarities in methodology from natural and other science?
- Use of Empirical Evidence – Like natural sciences, economics collects and analyzes data to test hypotheses.
- Mathematical Models – Both use mathematical models to describe relationships (e.g., physics uses equations for motion, while economics models supply and demand).
- Theories and Hypothesis Testing – Economics formulates theories (e.g., rational choice theory) and tests them against real-world data, similar to how physics or chemistry develops and tests laws.
- Predictions and Experiments – Economists use models to predict future outcomes, similar to how meteorologists forecast weather. In some cases, they conduct experiments, such as in behavioral economics.
What differences in methodology from natural and other science?
- Controlled Experiments – Unlike natural sciences, economics often lacks controlled laboratory experiments due to ethical and practical constraints. Instead, it relies on historical data and natural experiments.
- Complex Human Behavior – Economic models must account for unpredictable human behavior, which is influenced by emotions, culture, and irrationality—factors less present in natural sciences.
- Ceteris Paribus Assumption – Economics often assumes “all else equal” to isolate variables, whereas natural sciences can often control variables more precisely.
- Normative vs. Positive Analysis – Economics includes normative statements (value judgments about what should happen), whereas natural sciences focus mainly on objective, testable facts.
What is difference between positive and normative statements?
- Positive statements are objective and fact-based. They describe the world as it is and can be tested or proven true or false using evidence.
Example: “An increase in interest rates reduces consumer spending.” (This can be tested with economic data.) - Normative statements are subjective and opinion-based. They express value judgments about what ought to be and cannot be definitively proven.
Example: “The government should increase the minimum wage to reduce inequality.” (This is based on opinion and cannot be purely tested as right or wrong.)
In short, positive economics focuses on facts and cause-effect relationships, while normative economics involves opinions and policy recommendations.
How value judgments influence economic decision making?
- Resource Allocation – Decisions on whether to prioritize economic growth, income redistribution, or environmental sustainability depend on value judgments.
• Example: A government that values social welfare may increase public spending on healthcare and education, while another focused on free markets may prefer lower taxes and privatization.- Equity vs. Efficiency Trade-offs – Some policies may promote fairness but reduce efficiency, or vice versa.
• Example: A progressive tax system (higher taxes for the rich) is based on a value judgment about fairness, even if it may discourage investment. - Market Regulation – Governments intervene in markets based on ethical concerns, such as regulating monopolies or banning harmful goods.
• Example: Banning child labor is a value-driven decision that prioritizes human rights over pure economic output. - Macroeconomic Policies – Central banks and governments decide whether to prioritize inflation control, employment, or growth based on their economic philosophy.
• Example: Some policymakers focus on reducing inflation, even if it leads to short-term unemployment, while others prioritize job creation..
- Equity vs. Efficiency Trade-offs – Some policies may promote fairness but reduce efficiency, or vice versa.
How Value Judgments Shape Economic Policy?
- Different political ideologies (e.g., free-market capitalism vs. socialism) lead to different economic policies.
- Cultural and ethical beliefs influence policies on wages, welfare, and environmental regulations.
- Public opinion and social movements (e.g., climate change activism) pressure governments to adopt specific economic policies
What does “People’s views concerning the best option are influenced by the positive consequences of different decisions and by moral and political judgements.”means?
- Positive consequences refer to measurable effects, such as economic growth, job creation, or higher incomes. People may support a policy if it leads to beneficial outcomes.
Example: If lowering taxes boosts business investment and job creation, some may see it as the best option based on economic evidence. - Moral and political judgments reflect personal values, ethical beliefs, and ideological preferences. People’s choices are shaped by what they believe is fair or just.
Example: Some may oppose tax cuts for the rich, even if they boost investment, because they believe in wealth redistribution.
In short, decision-making is influenced by both facts (what works best) and values (what is right or fair).
What is the nature of economic activity?
The central purpose of economic activity is the production of
goods and services to satisfy needs and wants.
Economic activity refers to the production, distribution, and consumption of goods and services to satisfy human wants and needs. It involves decisions made by individuals, businesses, and governments on how to allocate scarce resources efficiently.
- Scarcity – Resources (land, labor, and capital) are limited compared to unlimited human wants.
- Choice – Because of scarcity, individuals and societies must make choices about how to allocate resources.
- Opportunity Cost – Choosing one option means sacrificing the next best alternative.
What is the purpose of economic activity?
The fundamental purpose of economic activity is to improve human well-being by satisfying needs and wants. This can be achieved through:
- Producing goods and services to fulfill consumer demand.
- Generating income and employment to improve living standards.
- Maximizing efficiency in resource use to minimize waste.
- Enhancing economic growth and development to improve quality of life.
The key economic decisions are: what to produce, how to
produce and who is to benefit from the goods and services
produced.
What are factors of production? Give an example f a scarce resources
The economists’ classification of economic resources into land,
labour, capital and enterprise, which are the factors of
production.
The environment is a scarce resource.
What id fundamental economic problem?
The fundamental economic problem is scarcity and that it
results from limited resources and unlimited wants.
Scarcity means that choices have to be made about how
scarce resources are allocated between different uses.
Choices have an opportunity cost
What is production possibility diagram?
Production possibility diagrams illustrate different features of
the fundamental economic problem.
For example: resource allocation, opportunity cost and trade-offs, unemployment of economic resources, economic growth.
Explain why all points on the boundary are productively efficient but not all points on the boundary are allocatively efficient?
In short, only the one that aligns with societal needs and preferences is allocatively efficient.
All points on the Production Possibility Frontier (PPF) represent productive efficiency because, at these points, an economy is using all its available resources efficiently. This means:
- No resources are wasted.
- It is impossible to produce more of one good without reducing the production of another (due to scarcity).
However, not all points on the PPF are allocatively efficient because allocative efficiency depends on consumer preferences and societal needs, not just efficient resource use. A point on the PPF is allocatively efficient only if it reflects the optimal distribution of resources that maximizes society’s welfare.
- Different points on the PPF represent different combinations of two goods.
- Some combinations may not align with what society values the most.
- The “best” point depends on demand, market conditions, and social priorities.
