4.1.1 (Micro) Economic methodology and the economic problem

4.1.1.4 complete so far

The economic problem

Infinite wants but finite resources

How to allocate scare resources (FoP) among competing uses to maximise living standards

Economics as a social science

Study of human behaviour - cannot be analysed in the same way as natural science

Economic vs Natural science testing

1. value judgements and ideological basis - study of behaviour

2. no laboratory for economists - no control group to test theories

Economic models

look at how different variables interact - use both qualitative information and statistical data

Purpose of economic activity

The production of goods and services to satisfy needs and wants

Key economic decisions

What to produce

How to produce

Who is it produced for

Factors of Production

Inputs, scarce resources in the production of goods and services

Land

All natural resources available

Labour

All human resources (Skilled and unskilled)

Capital

Any item that assists the production process and has been produced (machinery)

Enterprise

The entrepreneur, risk taker, bringing the other FoP together in order to make profit

Land reward

Rent - allowing corporations to utilise your natural resources

Labour reward

Wages - compensations for the individuals time

Capital reward

Interest - return on investment in machinery

Enterprise reward

Profit - reward for the entrepreneurs ideas/skills

Scarcity

The demand for a good or service is greater than the availability

Scarcity impact

Choices have to be made about how scarce resources are allocated between different uses

Opportunity Cost

the cost of the next best alternative forgone when a choice is made

Positive statements

Factual economic statements for which the accuracy can be verified through a scientific method (not an opinion)

Normative statements (value judgements)

Cannot be found true or false when tested