Economic Methodology And The Economic Problem Flashcards
Why is economics considered to be a social science?
As it looks at the behaviour of humans and their use of scarce resources
What does ceteris paribus stand for
All other things remain equal
What are the 2 kind of economic statements?
Positive
Or
Normative
What is a positive statement? And give an example
Objective statements that can be tested by referring to the available evidence.
“A reduction in income will increase the amount of people shopping in pound shops”
What is a normative statement? And give an example
Subjective statements which contain a value judgement (opinions)
“The use of fossil fuels should be taxed more highly that the use of renewable fuels”
What are the 4 factors of production?
Land
Labour
Capital
Enterprise
What are the 3 fundamental questions?
1) What to produce?
2) How to produce it?
3) Who to produce it for?
What do PPFs show
The maximum possible output
The options that are available when you consider the production of just 2 types of goods or services
If a point is situated on the PPF what does it show and what does it not show?
Shows the maximum possible output
But it may not be allocatively efficient because it might not reflect the production of goods that people want or need
What is an opportunity cost
The next best thing that you’re forced to give up
The next best alternative that you give up in making that decision
What shifts the PPF
Economic growth (increase in number of workers)
What method could you use to allocate scarce resources
Markets
What do mixed economies combine?
Free markets and government intervention
Pros of a free market
Efficiency
Entrepreneurship
Choice
Cons of a free market economy
Inequalities
Non-profitable goods may not be made
Monopolies
Pros of a command economy
Maximise welfare
Low unemployment
Prevent monopolies
Cons of a command economy
Poor decision making
Restricted choice
Lack of risk-taking and efficiency
What type of economy has a public sector and a private sector?
A mixed economy
(Private sector = businesses that are privately owned)
(Public sector = government)
What are economic agents assumed to be
Utility maximisers
What is the different between marginal utility and total utility
Marginal utility is the benefit gained from consuming one additional unit of a good. Whereas total utility is the overall benefit gained from consuming a good
State the law of diminishing returns
For each additional unit of a good that’s consumed, the marginal utility gained decreases
Where will a rational consumer choose to consume until
Marginal utility = price
What are the economic objectives for producers?
Vary
1) maximise profits
2) maximise the firms market share
3) maximise sales
4) ethical objectives
What are the economic objectives of consumers
Maximise their utility
What are the economic objectives of the government?
Economic growth Full employment Equilibrium in the balance of payments Low inflation Improved living standards
What are the key assumptions used in traditional economic theory
Economic agents are utility maximisers
Economic agents are rational
What do behavioural economists challenge?
The traditional economic theory assumptions because they’re not realistic
Why do consumers not act rationally
There are a lot of restrictions on people’s ability to make rational decisions:
- the time available to make a decision is limited
- not all the information is available, and the info that’s available may not be correct
- people might not be able to process and evaluate the vast amounts of data
Case study :- Cases of obesity in British people have been increasing steadily for 25 years
The explosion in obesity rates in developing countries can lead to a move away from manual labour to more office-based work
