microeconomics - 3.1

social science

a subject that studies societies and human interactions

assumption

a generalisation made to help build a model

ceteris paribus

all other variables remain constant

refutation

when empirical evidence proves a theory or statement wrong

empirical research

research based on observation, surveys, polls or data

rationality

making choices by weighing up benefits and selecting the best option

economic model

simplified version of reality

utility

satisfaction gained by consumers

what do natural sciences and economics both use?

Models, theories, hypotheses, data collection, and analysis.

what is a key similarity in methodology

Both try to make objective, testable statements.

Why is economics different from natural sciences?

Economics deals with human behaviour, which is complex and changes over time.

why can natural science experiments be more reliable?

They can often be controlled and repeated with the same results.

why are economics experiments harder to do?

You usually cannot control all variables in real economies.

profit maximisation

producers aiming to earn the highest possible profit

equity

fairness

equality

everyone being equal or having equal recognition/opportunity

value judgement

a personal or moral opinion about what’s best

positive statement

factual economic statements for which the accuracy can be verified through the scientific method are known as positive statements

normative statement

• contain a value judgement - they depend on the views of the individual

• normative should have the word ‘should’ or ‘must’

How do value judgements affect economic decision-making?

They influence what people see as a favourable outcome.

How do value judgements affect government policy?

hey influence which policies governments adopt and spend money on, based on what they believe is best.

What is the link between value judgements and normative statements?

Normative statements are based on value judgements and opinions, not facts, and often use “should”.

What influences people’s views about the best option?

Their views are influenced by positive outcomes, morality, and value judgements about what is fair or best and political judgements

central 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 to benefit from the goods and services produced

factors of production

resources used to produce goods and services

four factors of production

land

labour

capital

enterprise

land

Non man - made natural resources available for production

labour

The human input into production process

capital

Any man - made resource used to produce g/s —> tools, machines

enterprise

taking risks in setting up or running a firm

needs

are essential for survival, eg. food and shelter

wants

are desires for goods and services that are not essential, eg. electronics

purpose of economic activity

to produce goods and services

meeting customer needs

to add value

types of systems to determine the economic decisions

market system

mixed system

planned system

market system

an economy where demand and supply decide what is produced, in the most profitable/efficient way for those who can afford it

mixed system

an economy where both the market and government influence the decisions, with some efficiency with focus on wellbeing/welfare for those who can afford plus provision for those who cannot afford

planned system

an economy where government makes most of the decisions, ensuring everyone has a job for everyone

command economy

where gov makes decisions about the key economic decisions

resources are allocated by the state rather than demand and supply

free market

prices and resource allocation are mainly determined by demand and supply, with little government intervention.

reward for land

rent

reward for labour

wages

reward for capital

interest

reward for enterprise

profit

why is the environment a scarce resource?

because economic activity can degrade natural resources.

Increased economic activity → degradation of environmental resources → where current generations over consume and produce → scarcity → destroyed for use for future generations

non-renewable resources

imited and will run out; renewable resources can also become scarce if overused or not managed properly.

sustainability

means meeting current needs without harming the ability of future generations to meet theirs.

consequence of environment being a scarce resource

• environment has an opportunity cost

• as using it for one purpose like building houses means you cannot use it for something else

economic problem

limited resources and unlimited wants leading to scarcity

scarcity

resources are limited, but wants are unlimited

what does scarcity mean?

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

what do choices have/result in?

opportunity cost

opportunity cost

the next best alternative foregone

how does scarcity affect consumers

scarcer the resource, the higher the prices

how does scarcity affect producers

selling products made from scarce resources → cost of production is higher

how does scarcity affect workers

workers may want a more comfortable and safer working environment but employers may not have resources to create it

how does scarcity affect government

• have to decide if they will provide certain g&s or if they will allow private firms to provide

• their decision influences allocation of resources in society

what do production possibility diagrams illustrate?

shows the maximum possible output a economy can produce using all its resources to make two goods/services

what different features do PPC diagrams show?

resource allocation, opportunity cost, trade-offs, unemployment of resources and economic growth

what do points on the curve show?

productive efficiency - no resources are wasted

what do points inside curve show?

show inefficiency: resources are underused.

what do points outside curve show?

are currently unattainable with the resources we have

what does movement along the curve show?

opportunity cost: producing more of one good means producing less of the other.

what does an outward shift show?

shows economic growth caused by more or better resources.

what does an inward shift show?

shows economic decline caused by fewer or worse resources.

allocative efficiency

means resources are used to produce the mix of goods most wanted by society, but not every point on the PPC is allocatively efficient.

why is every point on curve not allocatively efficient?

allocative efficiency depends on whether the economy produces the best mix of goods for society, not just whether resources are fully used. A point can be on the PPC and still not match consumer wants, so there may be excess demand or excess supply.

why are all point on boundary productively efficient?

All points on the PPC are productively efficient because they use all resources fully, with no waste of scarce resources, so you cannot produce more of one good without giving up some of the other.

consumer goods

final goods bought for use, with no future productive use

capital goods

goods used to help produce other goods and services

what is an outward shift caused by?

This shift is caused by an increase in the quality or quantity of the available factors of production

what is an inward shift caused by?

a fall in the quantity or quality of factors of production, leading to economic decline.