Economic methodology and the economic problem

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74 Terms

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Economics is classified as... science and uses the ...

Social

Scientific method as a basis for its investigiation

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Economics is the study of... economists build...

How groups of individuals make decisions about the allocation of scarce resources

Models and theories to explain economic interactions

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The scientific mathod is

-postulates a theory (hypothesis cable of refutation

-gathers evidence to support or refute the theory

-accepts, modifies or refutes the theory

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Ceteris Paribus

All things being equal; the assumption that, whilst the effects of a change in one variable are being investigated, all other variables are kept constant

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Law

A theory or model which has been verified by empirical evidence

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Normative economics

The study and presentation of policy prescriptions involving value judgements about the way in which scarce resources are allocated

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Normative statement

A statement which cannot be supported or refuted because it is a value judgement

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postive economics

The scientific or objective study of the allocation of resources

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Positive statement

A statement which can be supported or refuted by evidence

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Scientific method

A method which subjects theories or hypotheses to falsification by empirical evidence

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Social science

The study of the societies and human behaviour using a variety of methods including the scientific method

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Theory or model

A hypothesis which is capable of profusion by empirical evidence

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Laws are

Theories which gain universal acceptance

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Natural science v social science

Natural - relatively easy to use scientific method, observations can be made with some degree of certainty, control groups can be established, easy to accept or refute data

Social science - often not possible to set up experiments to test hypothesis, often not possible to establish control groups or to conduct experiments in environments which enable one factor to be be varied and others kept constant

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Economists and data conclusions

-economists can sometimes come up with very different conclusions when considering a particular set of data

E.g. an unemployment rate of 6% in Scotland compared to a national average of 3% may indicate a failure of government policy to help in this area

-some may conclude that policy has been a success and unemployment may have been far greater

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Scarcity, choice and the allocation of resources

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basic economic problem

Resources are scarce but wants are infinite, it is this which gives rise to the basic economic problem and which forces economic agents to make choices. They have to allocate resources between competing uses

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Capital

The stock of manufactured resources used in production of goods and services

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Choice

Economic choices involve the alternative uses of scarce resources

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Economic goods

Goods that are scarce because I use has an opportunity cost

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Entrepreneur

Individuals who seek out profitable opportunities for production and take risks in attempting to exploit these

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Enterprise or entrepreneurship

The seeking out of profitable opportunities for production and taking risks in attempting to exploit these

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Factors of production

The inputs into the production process land labour capital and enterprise or entrepreneurship

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Fixed capital

Economic resources such as factories and hospitals which are used to transform working capital into goods and services

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Free goods

Good that are unlimited in supply and which therefore have no opportunity cost

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Human captai,

The value of the productive potential of an individual or group of workers; made up of the skills talents educationa and training of an individual group and represents the value of future earnings and production

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Labour

The workforce

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Land

All natural resources

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needs

The minimum that is necessary for a person to survive as a human being

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Non-renewable resource

Resources which once exploited can not be replaced

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Non-sustainable resource

A resource which can be economically exploited in such ways that it's stock is being reduced over time

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Opportunity cost

The benefits forgone of the next best alternative

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Renewable resources

Resources that can be exploited over and over again because they have the potential to renew them selves

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Scarce resources

Resources that are limited in supply so choices have to be made about their use

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Sustainable resources

Renewable resource that is being economically exploited in such a way that it will not diminish or run out

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Wants

The desire for the consumption of goods or services

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Working or circulating capital

Resources that are in the production system waiting to be transformed into goods or other materials before being finally sold to the consumer

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Scarcity means that

Economic agents can only obtain a limited resources at any moment in time and choices have to be made between difference uses. Thus choices have an opportunity cost

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Choices can be graded in terms of the ...

Benefits to be gained from each alternative. But all the other choices will then have to be given up. The benefit lost from the next best alternative is the opposite cost

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Opportunity cost for consumers

What has tp be given up when spending an item

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Resources are scarce because

-we live in a global village

-the worlds resources are finite

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Change in free goods

-pollution has caused seaside local authorities and water companies to clean local environment with their resources

-in the future with the destruction of the rainforests the air we breathe may no longer be a free good and factories may have to purify the air, this air would then become an economic good

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What are value judgements

A subjective statement of option in contrast to an objective fact or theory that can be tested by looking at the available evidence

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All government policies are influenced by...

Value judgements, which vary from person to person, resulting in fierce debate between competing political parties

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Are positive statements value judgements

-objective statements that can be tested (no)

-but hard to be value judgement free as we all bring a set of value judgements and ideas to debate

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How do value judgements influence economic decision making

Hello my name i

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How do value judgements influence economic policy

E.g. the choice to leave the eu was a value judgement made by many of the uk citizens

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The nature and purpose of economic activity

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What is an economy

A system which attempts to solve the basic economic problem

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The levels of the economy

-household

-local

-national

-international

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The types of the economy

-free market (minimum gov intervention)

-command (state makes resource and allocation decisions

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3 parts of the economic problem

-what to produce

-how to produce

-who benefits

-all economies face this problem

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Economic resources

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What are entrepreneurs

Individuals who:

-organise the land labour capital in the production of goods and services

-take risks- with their own money and the financial capital of others; they buy fop to produce goods and services in the hope that they will be able to make a profit but in knowledge that at worst they could loose all their money and go bankrupt

Typically the owners of small and medium size businesses who run those businesses on a daily basis

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What are the rewards to the fop

Owners = payments when they allow other economic agents to use them for a period of time

Land = rent/ lease payments

Workers = wage

Owners of capital = rent/ lease possible share of profits

Entrepreneurs = profit

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PPF

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Pff can be used to illustrate

Resource allocation

Opportunity cost

Trade-offs

Unemployment of economic resources

Economic growth

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PPF boundary shopws

The max potential output of an economy

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Growth in the economy causes

A shift outward of the PPF curve

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Production at a point inside the PPF indicates

Underuse or inefficient use of resources

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The PPF shows only what ...

Could be produced but not what should be produced

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Capital goods

Goods that are used in the production of other goods

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Consumer goods

Goods and services that are used by people to satisfy their needs and wants

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Margin

A point of possible change

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PPF/PPB/PPC/ transformation curve

A curve which shows the potential output of one good given a level of output for all other goods in the economy

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Consumption v investment

-potential conflict between consuming now and economic growth fuelled by investment

-shown by consumer goods v capital goods on PPF curve

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Consumption v investment PPF

-both economies grow but investment causes greater growth in the long-run as it devoted more of its finite resources to capital goods

-at the start consumer in country a (consumer goods) are better off because consumption of consumer goods was higher

-eventually country b is producing more consumer and capital goods and so is better off becuase it has a higher growth rate

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Why are all points on the boundary productivity efficient

Shows max potential output of an economy

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Opportunity cost and PPF

The slope of the PPF tells you the opportunity cost of one good in terms of the other.

Constant slope has constant opportunity costs. PPf with changing slope is curved. Changing PPF slope has changing opportunity costs.

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Why cant economy produce at a point outside the PPF

Shows max potential output, PPF can only shift showing an increase in productive potential allowing the economy to increase the max level of production

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When does growth in the economy occur

-increase in quantity of fop

-increase in quality of fop

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When does PPF shift inwards

Reduction of quantity or quality of PPF

E.g. Rapid fall in the workforce due to natural disaster

When economies experience high levels on unemployment factories lay idle and production occurs within the boundary not on the boundary

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How does PPF show efficiency

-show max output that be be produced from a given number of resources

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Types of efficiency on the boundary

-productive = production takes place at a lower cost, occurs when a given set of resources produces the max number of goods, all points on the boundary show a combination of goods produced at the lowest cost for that combination

-allocatively = occurs when social welfare is max, not all combinations of goods will achieve this and there could be just one