economic methodology and the economic problem

Normative statement

• Based on value judgements and cannot be tested

Positive statement

• Can be proven true or false

How do value judgements effect policy making

• Governments make decisions depending on what will work and what is favourable to the public

• Judgements can have a moral or political motive

What is the purpose of economic activity?

• To fulfil societies needs and wants through goods and services

• Which improves economic welfare

4 factors of production

• Land- natural resources

• Labour- Human input

• Capital- Machinery, roads, factories

• Enterprise- Risks taken

The fundamental economic problem

How to best make decisions about the allocation of scarce resources to maximise welfare

Why does the fundamental economic problem exist?

• Because goods and resources needed are scarce

What is opportunity cost?

• The cost of giving up the next best alternative

Inter-temporal choice

• Choice between having something now or later

What does the production possibility frontier indicate?

• Various combinations of 2 products that can be produced, when all resources are fully employed

What is spare capacity?

• Resources are not fully employed

Why may the ppf be a straight line

• Depicts a constant opportunity cost

Allocative efficiency

• When economic resources are used to produce the combination of goods and services that best matches peoples preferences