Micro: Economic methodology and the economic problem

Economics as a social science

Economics looks at the behaviour of humans, individuals, firms & governments and how they use scarce resources

Similarities & Differences between economics and other sciences

Similarities:

• use empirical evidence to test theories against facts/evidence to make economic models

Differences:

• economics cannot use controlled lab experiments as all factors can't remain constant e.g., incomes

• BUT economists use "ceteris paribus" which is all things remain equal -this assumes all other factors don't change except the 2 being measured

Positive and Normative statements

Positive:

• they are objective statements that can be tested against well-known facts

• e.g., an increase in income will increase the demand for luxury cars

Normative:

• they are subjective statements which contain a value judgement

• e.g., fossil fuels should be taxed more highly than renewables

• you can't test if this is true or not, only if you agree or disagree with it

Value judgements

Value judgements - the idea that decision-making contains opinion

• Moral judgements e.g., the idea that people shouldn't live in poverty, and that wealth should be shared

• Political judgements e.g., the idea of a party lowering taxes so they can receive more votes

• governments may only look at short-term consequences - lowering taxes may benefit consumers now , but laik of tax revenue means less government spending on healthcare

• governments only use moral judgement when necessary - e.g., the liberal democrats in the 2010 election explained they would abolish uni fees. They became a part of the government and didn't remove the fees, losing their moral authority

Key economic questions & agents

Economic questions:

• What to produce? - goods that firms make a profit from.

• How to produce it? - firms will produce goods in the most efficient way.

• Who to produce it for? - consumers willing to pay for these goods.

Economic agents:

• producers - make goods / services

• consumers - buy goods / services

• governments - set rules & regulate market participants & also make goods / services.

What are the 4 factors of production

• Land - the environment & all the natural resources on it.

• Labour - the work done by people.

• Capital - equipment used in production of goods / services.

• Enterprise - the willingness of entrepreneurs to take risk.

The fundamental economic problem

The fundamental problem - scarcity

• roots from unlimited wants but limited resources

• therefore, decisions need to be made on where to allocate resources

Opportunity cost

OC = the return of the next best alternative not chosen - the return of the option chosen

• e.g., the return on producing mangoes = 10% & the return on producing cupcakes = 15%, if I chose mangoes the OC = 15 - 10 = 5% opportunity cost.

• this is based on the assumption that individuals are rational and act in their best interests.

PPF

Movement on the PPF - moving from one point to another, using the same resources in the economy.

Shifts on the PPF - expansion of the resources in the economy, shifting outwards, or even inwards.

Productively efficient - producing at points on the curve, not within in.

Allocatively efficient - producing at points where the goods supplied meet demand e.g., producing more houses than vehicles in a housing crisis.