Economics basics

Economics methodology

• Develop theories and create economic models to explain phenomena

• Use simplifying assumptions to limit the number of variables in an investigation

• Test theories and models against relevant known facts, making use of observation, deduction, graphs, statistics and other tools

• Use empirical data to improve and revise economic models

• Use economic models to make predictions

Ceteris paribus

All things remaining equal

Positive statement

Objective statements that can be tested by referring to the available evidence.

‘A reduction in income will increase the amount of people shopping in pound shops.’

Nomative statement

Subjective statements which contain a value judgement - they are opinions.

‘The use of fossil fuels should be taxed more highly than the use of renewable fuels.’

Basic economic problem

How can the available scarce resources be used to satisfy people’s infinite needs and wants as effectively as possible?

Four factors of production

Land, labour, capital and enterprise

Purpose of economic activity

To increase people’s economic welfare by creating outputs that satisfy their various needs and wants

Fundamental economic questions

1. What to produce?

2. How to produce?

3. Who to produce it for?

Production possibility frontier (PPF)

Shows the options that are available when you consider the production of just two types of goods and services

Trade-off

When you have to choose between conflicting objectives because you can’t achieve all your objectives at the same time. It involves compromising.

Productive efficiency

When all resources are used as efficiently as possible to produce the maximum possible output

Allocative efficiency

The allocation of resources that leads to the production of goods which maximises consumer satisfaction.

Opportunity cost

The next best alternative that you give up in making a decision