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micro economics > economic methodology and the economic problem > Flashcards

economic methodology and the economic problem Flashcards

1
Q

what assumptions do economists make

A

events occur with ceteris paribus

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2
Q

ceteris paribus

A

all other things being held constant

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3
Q

differences between economics and natural sciences

A

economists cannot conduct scientific experiments so they build models based on assumptions and real-life examples

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4
Q

positive statement

A

they are objective and can be tested with factual evidence so can be rejected or accepted

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5
Q

normative statement

A

they are based on value judgements so are subjective and based on opinion rather than factual evidence

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6
Q

what can influence economic decision making and policy

A
  • value judgements
  • short-term outcomes
  • moral judgements
  • political judgements
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7
Q

value judgments

A

statement that are subjective and based on opinion rather than factual evidence

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8
Q

what is the purpose of economic activity

A

to produce goods and services which satisfy consumer needs and wants

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9
Q

what decisions do economists have to make about how to use scare resources

A
  • what is to be produced?
  • how should it be produced?
  • who will benefit from the goods and services produced?
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10
Q

who faces the decision what is to be produced

A

the government and private sector

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11
Q

what has to be considered when answering what is to be produced

A

how much of each good is to be produced - they have to be careful about this due to the problem of opportunity cost

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12
Q

what is considered when answering the question how should it be produced

A

how the goods and services produced will be distributed and the rewards from each factor of production

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13
Q

what do firms aim to do

A

minimise costs and maximise profits - so production needs to be efficient

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14
Q

how do firms become as efficient as possible

A

consider how much each factor of production costs and how productive it is - this will help them decide between labour intensive production and capital intensive production

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15
Q

who will benefit from the goods and services produced

A

consumers who have purchasing power

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16
Q

who will get the good or service

A

those who are willing and able to pay the price charged

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17
Q

what are economic resources

A

the factors of production

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18
Q

what are the factors of production

A

CELL
capital, enterprise, land, labour

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19
Q

what is capital

A

physical: goods which can be used in the production process

fixed: machines and buildings

working: finished or semi-finished consumer goods

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20
Q

reward/incentive for capital

A

interest from the investment

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21
Q

what is entrepreneurship

A

an entrepreneur is someone who takes risks, innovates and used the factors of production

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22
Q

reward/incentive for entrepreneurship

A

profit and wanting to take risks

23
Q

what is land

A

natural resources - eg) oil, coal, wheat, water

physical space for fixed capital

24
Q

reward/incentive for land

A

rent

25
Q

what is labour

A

human capital - the workforce of the economy

26
Q

reward/incentive for labour

A

wages

27
Q

what is the environment in terms of resources

A

environment is a scare resource - limited amount of resources available on the planet

28
Q

renewable resource

A
  • they are sustainable - however resources are currently being consumer faster than the planet can replace them
  • they can be replenished so the stock level of the resources can be maintained over a period of time
    eg) oxygen, solar power
29
Q

what is assumed about renewable resources

A

that the rate of consumption of the resource is less than the rate of replenishment - if the resource is consumed faster than it is renewed the stock of the resource will decline over time

30
Q

non-renewable resources

A
  • they cannot be renewed
    eg) fossil fuels - coal, oil, natural gas
  • the stock level decrease over times as it is consumed
31
Q

how to reduce the rate of decline of non-renwable resources

A

recycling or finding substitutes eg) wind farms

32
Q

what is the basic economic problem

A
  • scarcity - wants are unlimited and resources are limited
  • so choices have to be made to use and distribute resources optimally
33
Q

opportunity cost

A

an opportunity cost of a choice is the value of the next best alternative forgone

34
Q

who is opportunity cost important to

A

economic agents - consumers, producers and governments

35
Q

production possibility frontiers (PPFs)

A

they depict the maximum productive potential of an economy when resources are fully and efficiently employed using a combination of two goods or services

36
Q

what can a PPF curve show

A
  • the opportunity cost of using the scare resources
  • economic growth or decline
37
Q

the law of diminishing returns

A

the opportunity cost of producing more of product A increases, in terms of the lost units of product B that could have been produced

38
Q

trade-off

A

when you have to choose between conflicting objectives because you can’t achieve all you objectives at the same time. it involves compromising and aiming to achieve each of your objectives a bit

39
Q

what is an original curve on a PPF assuming

A
  • a fixed amount of resources are used
  • there is a constant state of technology
40
Q

what shifts a PPF curve outwards

A

an increase in the quality or quantity of resources, so productive potential of the economy increases, and there is economic growth

41
Q

how can an outwards shift in a PPF curve be achieved

A

with the use of supply side polices

42
Q

what happens when a PPF curve is shifted outwards

A

it either uses more resources or resources of a greater quality which reduces the opportunity cost of producing either product A or product B since more goods can be produced overall

43
Q

what happens when moving along a PPF curve

A

it uses the same number and state of resources and shifts production from less of product A and more of product B which incurs an opportunity cost

44
Q

what are capital goods

A

goods which can be used to produce other goods
eg) machinery

45
Q

what are consumer goods

A

goods which cannot be used to produce other goods
eg) clothing

46
Q

what are all points on the boundary of a PPF curve

A

they are productively efficient - because resources are being used to their productive potential

47
Q

what is allocative efficiency / pareto efficiency

A

when no one can be made better off without making someone else worse off

48
Q

what would happen if more of both goods could be produced on a PPF curve
eg) outwards shift of a PPF curve

A

there would be a gain in allocative efficiency - because there is an improvement in welfare

49
Q

difference between PPF and allocative efficiency

A
  • PPF only shows potential output
  • allocative efficiency is concerned with how goods are distributed in society
50
Q

say what each letter is

A

A and B: are the most efficient combinations of output
B: more of product X is being produced which incurs an opportunity cost of producing more of product Y
C and D: production is inefficient, and resources are not used to their full productive potential (there is the unemployment of economic resources)
E: production is not yet attainable with the current resources

51
Q

1) what is the opportunity cost of producing at point A

2) what is the opportunity cost of producing at point B

A

1) 90 - 40 = 50 units of product X

2) 100 - 50 = 50 units of product Y

52
Q

on a PPF curve where does a point have to lie for production to be attainable

A

under and on a PPF - production outside of the PPF is not obtainable

53
Q

1) what does a shift from point A to B mean

2) what does a shift from point B to A mean

A

1) outwards shift - economic growth

2) inwards shift - decline in the economy

micro economics (2 decks)

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