economic methodology and the economic problem

fundamental economic problem and activity economic methodology

fundamental economic problem

the problem that in society we have finite resources and unlimited needs and wants so decisions have to be made on how to allocate resources

scarcity

when the amount/volume of a resource is less than the demand for it making it scarce

opportunity cost

the cost of the benefit of the opportunity that wasn’t taken

next best option forgone

purpose of economic activity

to produce goods and services in order to fulfill needs and wants

what are key economic decisions all about

allocating resources

deciding who gets what and when they get it or how much of it they get

deciding what to produce and who produces it

what type of science is economics

a social science

what do social sciences focus on

gaining knowledge and understanding of the world in particular human interaction and relationships

what do natural sciences focus on

facts and evidence and has repeatable experiments where the results will stay constant

this doesn’t work with economics becasue there are too many factors and variables

features off a positive statement

can be verified or falsified

objective

based on facts and evidence

used in natural sciences

characteristics of normative statements

subjective

cannot be verified or falsified

considered and opinion or based on values

value based

how value judgements influence economic decision making

because they are subjective people have different theories on how to best allocate scarce resources

different theories for allocating scarce resources

authoritarianism

utilitarianism

libertarianism

egalitarianism

what are the four factors of production

capital, enterprise, land and labour (CELL)

why is the environment a scarce resource

because goods like coal, oil and gas or minerals are finite resources

pollution leads to clean are becoming a scarce resource

how a PPP curve shows: resource allocation, opportunity cost and trade offs, unemployment of resources, economic growth

resource allocation: shows how many of each good can be produced at each point along the PPF curve

opportunity cost and trade offs: shows how increasing the production of one good (good Y) will lead to a fall in the production of good X

unemployment of resources: if resources are unemployment then the economy will be operating within its PPF curve and not at the frontier

economic growth: if the PPF curve shifts outwards this shows LR economic growth as the productive capacity of the economy has increased