Complete Economic methodology and the economic problem

Normative statements

Statements that involve a value added judgement

positive statements

Objective statements that can be tested

How to remember positive and normative statements

Positive statements → can be true or false → positive or negative → can be tested

Normative → emotive → value judgement

How is economics similar to a science

Economists write statements, test these and evaluate government intervention

How is economics different to a science

In economics it is hard to test hypothesis in the real world. Whereas scientists can conduct experiments to determine the validity of their assumptions. They also have the ability to control and alter individual variables precisely to establish causality.

Economists cannot replicate the complexity of the world economic system in a controlled environment. Therefore we instead rely on models which focus of the changing of an individual variable by keeping all other variables constant (ceteris paribus assumption).

Economics relies on human nature, which is often unpredictable, so economists can only make predictions rather than positive statements.

Conclusions derived from economic phenomena will change over time, whereas scientific conclusions are more static and repeatable.

How thinking as an economist may differ from other sciences

Economists may have normative goals, whereas scientists do not.

What are peoples views concerning the best option often influenced by

The positive consequences of different decisions and moral and political judgements

ceteris paribus

all other things being equal

another word for free market

laissez-faire

laissez-faire

abstention by governments from interfering in the workings of the free market

People’s views concerning the best option is influenced by

The positive consequences of different decisions

Moral and political judgments

what is the “central purpose of economic activity“

the production of goods and services to satisfy needs and wants

What are the key economic descisions

What to produce?

How to produce?

Who is to benifit from the goods and services produce?

Key economic descions short form

What/How/For whom to produce

needs

anything required for human survival eg food. water, shelter

wants

anything that someone desires or would like to have

economic reasorces acronym

CELL

economic resources

capital, enterprise, land and labour

capital

a man made resource used in the production of a good or service

examples of capital

tractor, machineary, tools

Factors of production are _____ to produce ….

inputs to produce the output of goods and services

the environment is a _______ resource

scarce

which FoP are environmental reasources a part of

Land

renewable resources are

resources that will replenish faster than depleted

Human capital

The value human labour brings to the production process

productive efficiency is a point

anywhere on the PPF curve

allocativly efficient

a specific point on the PPF

If a point is _____ efficient then it must be ______

If a point is allocatively efficient then it must be productively efficient

why is the ppf curved

The law of diminishing returns

• as you increase units of one resource and keep other factors constant the marginal benefit from the extra units will eventually start to decline in the short run

how does the ppf show opportunity cost

For points on the curve to produce more of good y the opportunity cost is good x (in the photo opportunity cost of A to B is 50 units of good x)

how does the ppf show unemployment of economic reasources

Any point inside the ppf as there is spare capacity

how does the ppf show economic growth

Outward shift because the productive capacity of the economy has increased

what is on the y axis of a ppf

consumer goods/good y

what is on the x axis of a ppf

capital goods/good x

what does a point outside the ppf curve show

unabtainable

pareto efficiency is where on the ppf diagram

any point that lies on the production posibility curve and for example it is not possible to increase the quantity of consumer goods without sacrificing capital goods

What is a Pareto improvement

A change in output where no one is worse off (D to A or B)

what is the economic problem

scarcity resulting from limited resources to satisfy unlimited wants

scarcity means that

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

resources are _____ and wants are ______

limited

unlimited

opportunity cost

the value of the next best alternative forgone when a descision is made

In some cases opportunity cost excedes…

The monetary cost/price

Example of where opportunity cost excedes monetary value

Attending university

Opportunity cost = price of university + lost potential earnings

Issues with opportunity cost

1) not all factors have alternatives

2) some alternatives are unknown

3) Agents may lack information on alternatives to assign a monetary value

4) can be difficult to switch some factors to another use