1.1- economic methodology and the economic problem

what is the economic problem

people have needs and wants that exceed resources that are available

what is economics the study of

study of choice and how humans allocate these scarce resources

what is the central purpose of economic activity

to produce goods and services to satisfy people’s needs and wants

what is economic welfare

the well-being or quality of life of an individual, group or economy

what economic systems exist

command economy, mixed economy and market economy

what is production

the process by which various inputs are transformed into outputs

what are inputs

the factors of production

what are outputs

economic goods such as products and services

factors of production

land, labour, capital and enterprise

summarise land as a factor of production

all natural and environmental resources with the economic reward of rent

summarise labour as a factor of production

people available to work for firms in the production of economic goods, the economic reward is wages

summarise capital as a factor of production

capital is the stock of assets that are used in production with economic reward of interest

summarise enterprise as a factor of production

process of coordinating and organising three other factors of productions in the production process with economic reward of profit

what is an opportunity cost

the next best alternative that is given up

opportunity cost calculation

opportunity cost = option given up - option chosen

what does the ppf show

• the opportunity cost in economic decisions

• the quantity of output that an economy can produce when its resources are fully utilised

linear ppf analysis

• shows there is a constant opportunity costs because equal factors of production can be substituted

concave ppf analysis

• shows an increasing opportunity cost because the factors of production produce two different goods in different quantities

• higher on ppf- greater resources allocated to production of good x are given up to produce a samller proportion of good y

  

ppf analysis

• points outside ppf indicates a unnatainable amount because resources are insufficient

• points on ppf indicate most efficient use of resources

• points inside ppf show that not all resources are being fully used, economically inefficient

how to achieve outward shift on ppf

increase in factor resources, productivity, an improvement in technology, trade between countries

what does producing more of two goods in a ppf represent

with the same resources it represents an improvement in welfare and a gain in allocative efficiency

causes of inward shift of ppf

decreases in the quantity and quality of factor inputs e.g war, outward emigration, fall in investment

short run economic growth on a PPF (Explain)

• there is spare capacity in the economy following a recession

• economy recovers, unemployment falls, indicating an increase in the use of resources

• could increase to a point on the PPF, indicating full capacity

• An outward shift within the PPF indicates an increase in the demand-side of the economy

long run economic growth on a PPF (Explain)

• shown by an outward shift of the PPF

• indicates a more efficient use of resources, by increasing the quantity/quality of the factors of production

• shift of PPF improves the supply-side of an economy

what is productive efficiency

occurs where the use of available resources is maximised and is seen on any point on the ppf curve

what is allocative efficiency

occurs when the mix of outputs benefits society most. It occurs on the PPF but not always at all points as it is the optimal mix of outputs

what is pareto efficiency

same as allocative efficiency, there is an optimal distribution of goods and services taking into account consumer preferences