4.1.1 Economic Methodology and the Economic Problem

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  • Created by: lyd_kate
  • Created on: 12-09-17 09:01

4.1.1.1 (Social sciences)

  • Social science - studies society (relationships of individuals within that society)
  • Economics studies the economic behaviour & the economic relationships of individuals & groups
  • Relates to science through tests:
    • observing consumer behaviour
    • forming hypothesis to explain how consumers spend their money
    • developing predictions from hypothesis 
    • using evidence to test predictions - if evidence concludes with hypothesis then further tests are made. If not new or revised hypothesis is made.
  • Often economic theories only survive with significant eceptions, which generates criticisms as theories are more like generalisations.
  • Economists respond to this by saying they only wish to associate with positive economics -(facts that can be scientifically tested) rather than normative economics (involving value judgments, cannot be refuted just by looking at evidence)
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4.1.1.1 (P&N statements)

Positive statement - statement of fact that can be scientifically tested to see if it is correct/incorrect

Normative statement - statement that includes a value judgement that cannot be refuted just by looking at evidence. People have different opinions of right and wrong.

Government ministers make value based judgments when deciding economic policies, try to be scientific by hiring experts, but choice of experts is also normative.

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4.1.1.2 - The nature/purpose of economic actions

The central purpose of political activity is to satisfy needs (something necessary for human survival e.g. food and clothing) and wants (something desirable, but not essential for human survival e.g. video games)

Satisfying needs and wants improves economic welfare - anything that improves human happiness (apart from illegal activity)

Short term happiness can be at the expense of long term happiness. E.g consuming a McDonald's (a want) can make you feel satisfied, but then later unsatisfied when the meal was found to have contributed to the person's obesity.

Not all welfare has to be through the consumption of material goods - quality of life factors (such as fun from spending time with friends) also count.

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4.1.1.3 - Economic Resources

Production - process that turns inputs into outputs of goods 

Factors of production - inputs into production process - land, labour, capital, enterprise.

The environment's natural resources - physical (e.g. soil ) gases (e.g. hydrogen) and abstract (e.g. wind energy). Can be split into renewable and non renewable/finite. Part of the factor of production land.

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4.1.1.4 Scarcity, choice, resource allocation

Fundamental economic problem - how bestto make decisions about the allocation of scare resourcesamong competing uses to improve economic welfare.

Scarcity - The fact that there are limited resources and people have unlimited wants - people would like to consume more than economy can produce with its limited resources.

Means that people have to make choices as people face budget or time constraints. This means there are opportunity costs (the cost of giving up the next best alternative) that arise, as people cannot have everything and it is assumed that people will make the choice to maximise the economic welfare, due to behaving rationally.

Firms also have to make choices on how/what to produce. E.g a clothes designer choosing to produce more shirts would have to produce less dresses as they only have a limited amount of material.

Teenagers also have to decide to leave school and get a job or go to university. Defined as inter-temporal choice (choice over time) as it involves deciding between money now or in the future.

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4.1.1.5 Production possibility diagrams

Production possibility frontier - a curve depicting the various combinations of two products that can be produced when all the available resources are fully and efficiently employed.

Shows all the combinations of consumer goods and capital goods that can be produced using all available resources

Productive efficiency - when it imopssible to produce more of one good without producing less of another. For a firm it occurs when the average total cost of production is minimised. any point on the PPF is productively efficient as it is the result of a combination of resources produced when all resources are employed. 

PPFs do not show allocatively efficient outputs (when the available economic resources are used to produce the combination of resources that will maximse society's economic welfare) as this requires a value judgment about what society's preferences are.

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