Economic Methodology and the Economic Problem Flashcards
What is a Positive economic statement?
Positive economic statements are objective statements that can be tested against facts to be declared either true or false
- They do not necessarily have to be true
What is a Normative economic statement?
Normative economic statements are subjective opinions or value judgements, that cannot be tested against facts and declared either true or false
What is economic welfare?
Economic welfare refers to the standard of living or general wellbeing of people in society
What are the factors of production?
Factors of production are a country’s productive economic resources, divided into capital, enterprise, land and labour
Tip: Don’t confuse ‘capital’ for ‘money’ in economics. Money is classed as financial capital.
What are the 4 factors of production usually identified?
- Capital: Man-made physical equipment used to make other goods and services (includes machinery and computer equipment).
- Enterprise: Entrepreneurs are individuals who take a business risk in combining the other three factors of production in order to produce a good or service.
- Land: All naturally occurring resources such as minerals and fertile land. These can be further divided into renewable and non-renewable resources.
- Labour: People involves in production, sometimes referred to as human capital.
What is the basic economic problem?
The basic economic problem is that there are scarce economic resources compared with society’s unlimited wants
What is the difference between consumer and capital goods?
Consumer goods - Those that give satisfaction to consumers such as pizza
Capital goods - Those used to produce other goods, including machinery and IT equipment
What are two extreme forms of economic system?
- The free market/capitalist economy: Decisions are made solely by the interactions of consumers and firms, with no government intervention.
- The command/centrally planned economy: Decisions are made solely by the planning department of governments.
What is opportunity cost?
Opportunity cost is the cost of the next best alternative that you give up when you have to make a choice regarding how to allocate scarce resources
What is the difference between economic goods and free goods?
- Economic goods: Goods that have an opportunity cost in consumption because they use up scarce economic resources (these include most consumer goods).
- Free goods: Goods that are unlimited in supply and availability and don’t have an opportunity cost in consumption because they do not use up scarce economic resources (such as sunlight or air), and thus the opportunity cost of consuming is zero.
What is a production possibility curve (PPC)?
A production possibilities curve is a diagram which shows the maximum possible output combinations of two goods in an economy, assuming full employment of efficient resources.
What are factors that cause an outward shift of the production possibility curve?
- Technological improvements that lead to increased productivity of capital equipment
- Discovery of new resources e.g. oil and gas
- Improvements in education and training that lead to a more productive workforce
- Changes that lead to an increase in working population, e.g. increases in immigration or a raised retirement age
What are factors that cause an inward shift of the production possibility curve?
- Disasters such as earthquakes or floods that devastate productive resources
- Wars
- Global warming/climate change, which may lead to a loss of farmland, rising sea levels and more extreme weather
- A prolonged recession, which may lead to permanent loss of productive capacity if businesses close down and/or workers lose skills
What is economic growth?
Economic growth is an increase in the productive capacity of an economy over time
What is productive efficiency?
Productive efficiency is when maximum output is produced from the available factors of production and when it is not possible to produce more of one good or service without producing less of another
