Unit 1:Economic Methodology & the Economic Problem

What is economics classified as in terms of science?

A social science

How is economics similar to natural and other sciences?

-Uses models

-Tests hypotheses

-Uses empirical data

What is empirical data?

Information gathered through observation

How is economics different from natural and other sciences?

-Deals with human behaviour

-Cannot test theories in controlled environments

-Results are not always predictable

What is microeconomics primarily concerned with?

Microeconomics studies how to best solve the basic economic problem of allocating scarce resources given unlimited wants.

What is a positive statement in economics?

A positive statement is one that can be tested and validated, or refuted, by evidence

What is a normative statement in economics?

A normative statement is based on value judgements and cannot be tested

How do value judgements influence economic decision-making?

People’s opinions about the best decision are influenced by predicted outcomes and their own values

How do moral and political judgements influence economic policy?

Moral and political judgements affect which economic outcomes are considered desirable.

What is the central purpose of economic activity?

The central purpose is to produce goods and services to satisfy needs and wants

What is the fundamental economic problem?

The fundamental economic problem is scarcity due to limited resources and unlimited wants

What is the relationship between scarcity and choice?

Scarcity forces us to make choices about how to allocate limited resources among competing wants

Why does scarcity lead to choice?

Scarcity means not all wants can be fulfilled, so choices must be made regarding resource use and allocation

What is the relationship between unlimited wants and scarce resources?

Unlimited wants exceed the available scarce resources, creating the basic economic problem.

What does minimising the use of scarce resources mean for businesses?

Minimising the use of scarce resources is a key factor for businesses to survive in a market economy.

Why do difficult choices need to be made in economics?

Difficult choices are necessary because resources are scarce, and wants are unlimited, so we must decide how to allocate resources to satisfy as many wants as possible.

Why is economics considered a study of choice?

Economics is a study of choice because of the basic economic problem of allocating scarce resources.

What is meant by a ‘market economy’?

A market economy is an economic system where prices for goods and services are set by the forces of supply and demand, with individuals and businesses making decisions about production and consumption with minimal government intervention.

What is the role of government intervention in a market economy regarding who gets to consume goods and services?

The government can step in to help those who may not be able to afford goods and services in a purely market-driven outcome.

What are the three key economic decisions?

-What to produce

-How to produce

-Who benefits from the goods and services produced

In a market economy, who decides what to produce?

In a market economy, businesses decide what to produce based on consumer demand.

How do businesses decide 'how to produce' in a market economy?

Businesses decide based on what's most cost-effective and productive to minimise the use of scarce resources.

In a market economy, who gets to consume the goods and services produced?

In a market economy, those who have enough income to afford goods and services get to consume them.

What are resources referred to in economics?

Factors of production

How is the environment classified in economics?

The environment is a scarce resource

What is the ultimate goal of resource allocation?

The goal is to allocate scarce resources to satisfy as many wants as possible.

What are the four factors of production?

-Capital

-Enterprise

-Land

-Labour

What is 'capital' in economic terms?

In economics, capital refers to man-made aids to production, such as machinery, factories, and computers.

What is the role of 'enterprise' as a factor of production?

Enterprise refers to the risk-takers (entrepreneurs) who innovate and produce goods and services, typically to make a profit.

What is the role of innovation in enterprise?

Entrepreneurs innovate to produce goods and services, seeking to make a profit.

What is the role of risk-taking in enterprise?

Entrepreneurs are risk-takers who innovate and produce goods and services, hoping to make a profit.

Give examples of 'land' as a factor of production

'Land' includes natural resources like farmland and rainforests where goods can be produced or extracted.

What does 'labour' represent as a factor of production?

Labour refers to human resources or workers who can produce goods and services.

What is opportunity cost?

Opportunity cost is the next best alternative foregone when a choice is made

What is the purpose of studying opportunity cost?

Opportunity cost helps us understand whether the choices being made in the world are good choices or not.

What is the significance of opportunity cost in economics?

Opportunity cost is significant because it provides a way to measure whether choices made are good or bad.

How does opportunity cost influence resource allocation?

Resources should be allocated towards the option with the higher value, considering both the current choice and the next best alternative.

What happens to businesses that are best at producing at the lowest cost?

Businesses that are best at producing at the lowest cost, minimising the use of scarce resources, survive in the market.

How can opportunity cost be used to measure whether a choice is good or bad?

If the value of the current choice is greater than the value of the opportunity cost, the choice was good. If the opposite is true, the choice was bad.

If the value of your current choice is less than the value of the next best alternative, what should you do?

You should allocate resources towards your opportunity cost (the next best alternative) instead of your current choice

What does a production possibility diagram show?

A production possibility diagram shows the maximum output combinations of two goods or services given resource availability

What economic concepts can be illustrated using a production possibility diagram?

-Resource allocation

-Opportunity cost

-Trade-offs

-Unemployment

-Economic growth

Why are all points on the PPF curve productively efficient?

All points on the curve use all available resources efficiently

Why are not all points on the PPF curve allocatively efficient?

Allocative efficiency depends on whether the output combination matches society’s preferences