Econ Chapter 1

What is economics?

The study of choice and decision making in a world of limited resources.

What type of science is economics?

A social science.

What is a social science?

The branch of science that studies society and the relationships of individuals in a society.

What does economics study?

The economic behaviour of both individuals and groups of people, and the economic relationship between individuals and groups.

What does demand theory address?

Consumer behaviour.

What is the starting point of demand theory?

Observations of how individual consumers react to changes in the prices of the goods/services they buy.

What does demand theory develop observations into?

A hypothesis.

What is a hypothesis?

A tentative description or proposed explanation for something.

What happens after a hypothesis is developed?

A prediction is made.

What happens to the prediction?

It is tested against collected evidence about how individuals behave in a marketplace.

When does a hypothesis become a theory?

When a hypothesis is tested and survives the test.

What is the scientific method based on?

The possibility of falsification or refutation of a hypothesis.

What happens if a hypothesis fails to survive testing?

It can be outright rejected or changed, usually by diluting it.

What are the two possible outcomes when a hypothesis fails testing?

1. Outright rejection of the hypothesis. 2. The hypothesis is changed, usually by diluting it.

Why can economic theories have exceptions?

Humans have political/moral views which can affect economic decisions. Human behaviour can change depending on circumstances.

Why are economic predictions not always certain?

Human behaviour can change depending on circumstances, so economic theories can have exceptions.

Why is economics not a natural science?

Because it does not study natural science.

What is a positive statement?

A statement of fact that can be scientifically tested to see if it is correct or not.

Does a positive statement have to be true?

No.

What happens if a positive statement does not pass the test?

It is falsified.

What is a normative statement?

A statement that includes a value judgement and cannot be refuted just by looking at evidence.

What is normative economics about?

Value judgements and views.

Why can normative statements not be scientifically tested?

People have different views about what is right and wrong.

What do normative statements include?

Ethical/moral judgements.

What words often indicate a normative statement?

Ought, should, better or worse.

What are value judgements?

Judgements involving whether something is desirable or not.

How do value judgements affect economics?

These opinions influence the economic decisions and policies people choose.

Why do economic policy decisions involve winners and losers?

Policy decisions affect different people's interests differently.

Why can't data alone determine whose interests should take priority?

Policy makers should rely on moral and political judgements.

What is the central purpose of economic activity?

The production of goods and services to satisfy people's needs and wants.

What is a need?

Something necessary for human survival.

What is a want?

Something that is desirable.

What does satisfying people's wants and needs mean?

Improving economic welfare.

What is welfare?

Anything that makes a person happier and improves their economic well-being.

What is economic welfare?

The economic well-being of an individual or a group within a society/economy.

What determines how economic decisions are made?

The nature of the economic system within the economy.

What is an economic system?

The set of institutions within a community that decides what to produce, how to produce, and for whom to produce.

What is fundamental and common to all forms of human society?

The problem of scarcity.

What has evolved differently in different societies?

Different economic systems.

What are the two mechanisms by which economic systems are defined?

The market/price mechanism and the command/planning mechanism.

What is a market economy?

An economy in which goods and services are purchased through the price mechanism in a system of markets.

What is a command/planned economy?

An economy in which government officials/planners allocate economic resources to firms and other productive enterprises.

What is a mixed economy?

An economy that contains both a large market sector and a large non-market sector in which the planning mechanism operates.

What are many developed economies like the UK called?

Mixed economies.

What is production?

Converts inputs/factor services into outputs of goods or services.

What is capital/a producer good?

A good which is used in the production of other goods or services.

What are consumer goods?

Goods consumed by individuals or households to satisfy their needs/wants.

Why are economic resources needed?

Increased consumption of material goods is an important part of improving economic welfare.

Why is rationing/economising necessary?

Goods are scarce in relation to demand.

What does production convert?

Inputs into outputs.

What are the eventual outputs of production?

Consumer goods and services that go to make up our standard of living.

What are inputs also used to produce?

Capital goods needed for the eventual production of consumer goods.

What are factors of production?

Inputs into the production process.

What are the four factors of production?

Capital, land, labour and enterprise.

Who are entrepreneurs?

People who address the issues of deciding what to produce, how to produce it, and how much of the other factors of production (including labour) to employ.

What do the costs of employing land, labour and capital, together with the entrepreneur's own service, become?

The firm's cost of production.

What two roles do entrepreneurs have?

They are the financial risk-taker and decision-maker.

What is the financial reward of entrepreneurs?

Profit, which results from successful decision making.

What is entrepreneurial profit?

The profit left over after the cost of employing the other factors of production is deducted from the sales revenue gained from selling the goods and services the entrepreneur decides to produce.

What are environmental resources?

All the natural resources that are used or can be used in an economic system (physical resources and abstract resources).

What two categories can environmental resources be split into?

Renewable and non-renewable.

What further category can non-renewable resources be divided into according to your notes?

Non-renewable and recyclable.

What are renewable resources?

Resources that, with careful management, can be renewed as they are used.

What does the availability of renewable resources depend on?

Human management.

What are non-renewable resources?

Resources that are scarce and run out as they are used.

Can non-renewable resources be regenerated or have their stock increased?

They cannot be regenerated or their stock increased, or their regeneration is too slow.

Which factor of production do environmental resources form part of?

Land.

How do production and consumption activities affect the natural environment?

They affect and often damage the natural environment.

What is the fundamental economic problem?

Scarcity.

What do people have in a world of scarcity?

Limited incomes.

What does having limited income mean?

People face a budget constraint.

Why do people have to make choices?

If goods are scarce and income is limited, a choice or choices have to be made.

What is choice?

Choosing between alternatives when making a decision on how to use scarce resources.

When does a choice arise?

Whenever an economic agent has to choose between 2 or more choices.

What is opportunity cost?

The cost of giving up the next best alternative option.

How is the opportunity cost of a choice measured?

In terms of the alternatives that have to be given up.

What do economists generally assume about people's behaviour?

That people behave rationally.

What is rational behaviour/self-interest?

People try to make decisions to maximise their private benefit.

What do firms also have to make choices about?

What and how to produce.

What does PPF stand for?

Production possibility frontier

Now go back and look at notes for PPF in the book?

Have u done that?

How is economics similar to natural and other sciences?

Economics uses hypotheses, predictions, evidence and testing to develop theories.

How does economics differ from natural sciences?

Economics studies human behaviour and social relationships, which can change depending on circumstances, making predictions less certain.

What influences people's views about the best economic option?

The positive consequences of different decisions and moral and political judgements.

Why is the environment considered a scarce resource?

Environmental resources are limited in relation to the demands placed upon them.

What causes the fundamental economic problem?

Limited resources and unlimited wants.

What is resource allocation?

Deciding how scarce resources are distributed between different uses.