Economic methodology and the economic problem

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Why can economics be considered a social science?
Because it looks at the behaviour of humans and their use of scarce resources
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Ceteris paribus
An assumption used by economics that all other things are being held equal or constant
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How is economics similar to other sciences?
Theories, models, simplifying assumption, test theories and models, empirical data, predictions
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Why is economics different to natural sciences?
Can't conduct controlled laboratory experiments
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Positive statements
Objective, can be tested with factual evidence, and can consequently be accepted or rejected
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Normative statements
Based on value judgements, subjective, opinion rather than factual evidence, can influence decision making
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What can economic decisions be based upon?
Normative statements, moral views, value judgements, political judgements, short-term positive consequences
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Basic economic problem
How can the available scare resources be used to satisfy people's infinite needs and wants as effectively as possible?
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Four factors of production
Land, Labour, Capital, Enterprise
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FOP - Land
Scarce - Includes all the Earth's natural resources: non - renewable, renewable, materials, water, animals etc
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FOP - Labour
The work done by those people who contribute to the production process
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FOP - Capital
Equipment used in producing goods and services
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FOP - Enterprise
Entrepreneurs who take risks and create things from the other three FOP
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Economic activity involves.....
Combining the FOP to create outputs that people can consume
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Purpose of economic activity
To increase people's economic welfare by creating outputs that satisfy their various needs and wants
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Goods
Physical products you can touch
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Services
Intangible things
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Three fundamental questions
What to produce? How to produce it? Who to produce it for?
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The three economic agents
Producers Consumers, Governments
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Producers
Decide what to make, and how much they're willing to sell it for
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Consumers
Decide what they want to buy, and how much they're willing to pay for it
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Governments
Decide how much to intervene in the way producers and consumers act
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In a market economy all agents are assumed to be....
Rational
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Rational means to
Make decisions that are best for themselves, will be based upon economic incentives
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Production Possibility Frontier (PPF)
Shows the maximum possible output, portrays a trade off
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Trade-off
When you have to choose between conflicting objectives because you can't achieve all your objectives at the same time. Involves compromising, and aiming to achieve each of your objectives a bit
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Are all points on the PPF productively efficient?
Yes, all resources are used efficiently as possible to produce the maximise possible output.
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Are all points on the PPF allocatively efficient?
No, not all points will reflect the production of goods people want or need
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Opportunity Cost
The opportunity cost of a decision is the next best alternative that you give up in making that decision
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Why is opportunity cost important?
It is used to ensure a more efficient allocation of resources
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Problems with the opportunity cost concept
Often not all alternatives are known, some factors don't have alternative uses, lack of information on alternatives, some factors can be hard to switch to an alternative use
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Movements along the PPF show
A reallocation of resources
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PPF Diagram
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Outward shift of the PPF
Increased resources, improved technology, improvements to labour - more output to be produced using the same resources - economic growth
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Inward shift of the PPF
Fewer total resources - negative economic growth
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Markets
A method of allocating scarce resources, each buyer or seller in a market chooses to exchange for some something they'd prefer to have instead
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Free market
Allocates resources based on supply and demand and the price mechanism
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Pros of a Free Market
Efficiency, Entrepreneurship, Choice
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Cons of a Free Market
Inequalities, Non-profitable goods may not be made, Monopolies
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Command economy
Government decides how resources should be allocated
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Pros of a Command Economy
Maximise welfare, low unemployment, prevent monopolies
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Cons of a Command Economy
Poor decision making, Restricted choice, Lack of risk taking and efficiency
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Mixed Economy
Both the government and markets play a part in allocating resources
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Public Sector
Government
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Private Sector
Privately owned
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Margin
Change in a variable caused by an increase of one unit of another variable, a lot of economic theory is based upon the assumption that ppl make decisions based upon marginal changes
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Marginal utility
The benefit gained from consuming one additional unit of a good
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Total utility
The overall benefit gained from consuming a good
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Law of diminishing marginal utility
For each additional unit of a good that's consumed, the marginal utility gained decreases
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At what point will a rational consumer choose to consume?
Marginal Utility = Price
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Why does the demand curve slope downwards?
Law of diminishing marginal utility - if marginal utility decreases with each extra good consumed then the price a consumer is willing to pay for each extra good will decrease
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Objectives of producers
Maximise profits, total sales, market share, ethical objectives
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Objectives of Consumers
Maximise utility while not spending more than their income, assumed they'll act rationally, consumers can also be workers who want to maximise income/free time
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Objectives of Governments
Try to balance the resources of a country with the needs and wants of the population, economic growth, full employment, equilibrium in BOP, Low inflation
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Other cards in this set

Card 2

Front

An assumption used by economics that all other things are being held equal or constant

Back

Ceteris paribus

Card 3

Front

Theories, models, simplifying assumption, test theories and models, empirical data, predictions

Back

Preview of the back of card 3

Card 4

Front

Can't conduct controlled laboratory experiments

Back

Preview of the back of card 4

Card 5

Front

Objective, can be tested with factual evidence, and can consequently be accepted or rejected

Back

Preview of the back of card 5
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