Economic Methodology & Problem Flashcards
Positive statements are:
Positive statements are objective. They can be tested with factual evidence, and can
consequently be rejected or accepted. Look for words such as ‘will’, ‘is’.
Normative statements are:
Normative statements are based on value judgements. These are subjective and
based on opinion rather than factual evidence. Look for words such as ‘should’, and if the statement is suggesting one action is more credible than another.
Purpose of economic activity is?
The purpose of economic activity is to produce goods and services which satisfy consumer needs and wants.
Economists have to make decisions about how to use scarce resources: What is to be produced?
The government and private sector is faced with this decision. They also have to consider how much of each good is to be produced. Due to the problem of opportunity cost, they have to be careful about the decisions made.
Economists have to make decisions about how to use scarce resources: How should it be produced?
This considers how the goods and services produced will be distributed. The rewards from each factor of production are considered. Firms aim to minimise costs and maximise profits, so production needs to be efficient.
They will 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.
Economists have to make decisions about how to use scarce resources: Who will benefit from the goods and services produced?
Consumers who have purchasing power can benefit from the goods and services produced. Those who are willing and able to pay the price charged for a good or service will get the good or service.
Factors of production:
CELL
C - capital
E - enterprise
L - land
L - labour
Factor: Capital - description & incentive
Physical: goods which can be used in the production process
Fixed: Machines; buildings
Working: finished or semi-finished consumer goods
Incentive - interest from the investment
Factor: enterprise - description & incentive
Managerial ability. The entrepreneur is someone who takes risks, innovates, and uses the factors of production.
Resources are drawn together into the production process.
Incentive - profit from risks
Factor: land - description & incentive
Natural resources such as oil, coal, wheat, water. It can also be the physical space for fixed capital.
Incentive - rent
Factor: labour - description & incentive
Human capital, which is the workforce of the economy.
Incentive - wages
Basic economic problem?
Wants are unlimited and resources are finite, so choices have to be made. Resources have to be used and distributed
optimally.
Opportunity cost?
The opportunity cost of a choice is the value of the next best alternative forgone.
PPC Curve shows?
Production possibility curves (PPC) depict the maximum productive potential of an economy, using a combination of two goods or services, when resources are fully and efficiently employed.
PPC showing opportunity cost:
PPF curves can show the opportunity cost of using the scarce resources. Producing at B, so more yoghurt than cheese is produced, incurs an opportunity cost of producing more cheese.
Producing at areas C & D is ……. Why… there is a what?
Producing at C or D is inefficient, and resources are not used to their full productive potential. There is the potential to use these resources more efficiently, which would shift production closer to the curve. In other words, there is the
unemployment of economic resources.
What would shift PPC curve outwards & what does it show?
An increase in the quality or quantity shifts the PPC curve outwards, so productive potential of economy increases & there is economic growth.
How can a shift outwards of PPC be achieved - i.e what policies?
With the use of supply side policies
Capital goods are?
Goods which can be used to produce other goods, such as machinery
Consumer goods are?
Goods which cannot be used to produce other goods, such as clothing
Why are all points on the PPC curve productively efficient?
Because resources are being used to their productive potential, so it is efficient.
Why aren’t all points on the PPC curve allocatively efficient?
As more of one good cannot be produced without reducing the amount of another product available.
If both of more goods could be produced, there would be a gain in allocative efficiency since this is an improvement in welfare.
