Economic methodology and the economic problem

How do scientists form a theory?

1. Postulate a theory - scientist puts forward a hypothesis capable of refutation

2. Gather evidence to support or reject the theory e.g. through experimentation

3. Accept, modify or refute the theory

   • Theories that gain universal acceptance known as laws

What is a social science?

Study of human society - economist has to gather information in the ordinary everyday world where many variables are changing over a given time period. However, economists are studying behaviour of groups of individuals which is often far more predictable than the behaviour of single individuals

Positive Statement definition

A statement of fact that can be scientifically tested to see if its correct or incorrect. Contains no value judgements

Normative Statement definition

Describes what should/ought/must happen. Will contain a value judgement

3 parts of the economic problem

1. What is to produce in the UK or world economy

2. How is it to be produced?

3. Who is to benefit from the goods and services produced?

Basic economic problem

Resources are scarce but wants are infinite

Opportunity cost definition

The cost/benefit of giving up the next best alternative whenever an economic decision is made. Can be shown using a PPF

4 Factors of Production

• Labour - the workforce in the economy

• Land - Raw materials (renewable and non-renewable)

• Capital - The manufactured stock of tools, machines and factories used in the production of goods and services

• Entrepreneurship - Individuals who organise production

What does a PPF diagram show?

PPF (Production Possibility Frontier) shows the combinations of goods or services which can be produced with an economy's resources

Productive Efficiency definition

This occurs when it is impossible for an economy to produce more of one good without producing less of another. The economy would be operating somewhere on its PPF.

X Inefficiency definition

Inefficiency in production that occurs when a firm does not minimise its costs and is usually present in monopolies or oligopolies where there is less competitive pressure to operate efficiently.

2 main causes of X Inefficiency

1. Overstaffing or employing machines that are underutilised

2. Paying its staff unnecessarily high wages or buying raw materials or capital at unnecessarily high prices

Allocative Efficiency definition

This occurs when the available economic resources are used to produce the combination of goods and services that best matches peoples' tastes and preferences. Also known as the Pareto Optimality

Dynamic Efficiency definition

Measures improvements in technical and productive efficiency that occur over time. Can result from an introduction of better methods of producing existing products

Value Judgement definition

Subjective opinion based on principles and beliefs rather than facts

Capital/producer good definition

A good which is used to produce other goods (e.g. tractors, factories)

Consumer good definition

A good which is consumed by individuals or households to satisfy their needs or wants

Technical progress definition

New and better ways of making goods and techniques for producing more output from scarce resources

Full employment definition and how is it shown on a PPF

• When all who are able and willing to work are employed

• All points on the PPF

Unemployment definition and how is it shown on a PPF

• When not all of those who are able and willing to work are employed

• Points inside the PPF indicate idle resources