1 - Economic Methodology

Question 1

Economics?

Answer 1

A social science due to looking at the behaviour of humans either as individuals / part of organisations and their use of scarce resources

Question 2

Methodology used by Economists

Answer 2

• develop theories + create economic models to explain phenomena
• use simplifying assumptions to limit the no. of variables in an investigation
• test theories + models against relevant known facts
• use empirical data to improve + revise their models

Question 3

SIMILARITIES

from natural and other sciences

Answer 3

• observation of human behaviour
• develop hypothesis from observation
• predictions deducted from hypothesis
• prediction tested against evidence
• hypothesis changed if rejected

Question 4

DIFFERENCES

from natural and other sciences

Answer 4

• social sciences ‘softer’ than natural
• economics theories - contain no. Of exceptions to original prediction
• critics view it as generalisations
• economists tend to focus on positive economics

Question 5

Economic statements?

Answer 5

POSITIVE

• objective statements that can be tested by referring to the available evidence with suitable data collected over a period of time
• you’ll be able to tell if it’s T or F

NORMATIVE

• subjective statements which contain a value judgement
• it’s not possible to say whether it’s true or not, you agree/disagree

Question 6

Needs?

Answer 6

Something necessary for human survival

E.g. food

Question 7

Factors of production?

CELL

Answer 7

CAPITAL

• equipment that help produce goods/services

ENTERPRISE

• refers to people who take risks and create things from the 3 other factors

LAND

• non-renewable + renewable

LABOUR

• work done by people who contribute to production

Question 8

Economic agents?

Answer 8

PRODUCERS

• firms/people who make goods/services

CONSUMERS

• firms/people who buy goods/services

GOVERNMENTS

• sets the rules that other participants in the economy have to follow

Question 9

What do economic agents think about?

3 questions

Answer 9

WHAT TO PRODUCE?

• goods that are profitable

HOW TO PRODUCE IT?

• most efficient way to maximise profits

WHO TO PRODUCE IT FOR?

• willing consumers

Question 10

Goods and Services?

Answer 10

GOODS

• physical products that are tangible

SERVICES

• intangible products

Question 11

Wants?

Answer 11

Something desirable but not necessary

E.g. fashionable clothing

Question 12

Consumption?

Answer 12

Form of economic activity when you consume something

• you’re trying to satisfy a need/want

Question 13

Trade off?

Answer 13

When you have to choose between conflicting objectives as they’re unachievable at the same time

Question 14

Production possibility curve

PPC

Answer 14

A diagram that shows the options available when you consider the production of 2 types of goods/sevices

Question 15

PPC graphs

Answer 15

(Image)

Question 16

Opportunity cost?

Answer 16

The cost of giving up the next best alternative

• you have to make a choice

Question 17

Problems with Opportunity Cost

Answer 17

• not all alternatives are known
• some factors don’t have an alternative use
• lack on info on alternatives and their costs
• some factors (land) can be hard to switch to an alternative use

Question 18

Productive efficiency?

Answer 18

FOR A FIRM

• occurs when the average cost of production is minimised

FOR ECONOMY AS A WHOLE

• occurs when it’s impossible to produce more of one good without producing less of another

Question 19

Allocative efficiency?

Answer 19

Occurs when the available economic resources are used to produce the combination of goods/services that best matches peoples preferences

Question 20

Markets + Economies?

Answer 20

A way of allocating resources

• doesn’t have to be a place or exchanging physical objects

Question 21

Free market?

Answer 21

Allocates resources based on supply and demand and price mechanism

Question 22

PROs of a Free Market Economy

Answer 22

EFFICIENCY

• as any product can be bought/sold, only those of the best value will be in demand
• so firms have an incentive to try to make goods in the most efficient way

ENTREPRENEURSHIP

• the rewards for good ideas make them money, which encourages risks + innovation

CHOICE

• innovation leads to more choice for consumers
• consumers are not restricted to only buying what the government recommends

Question 23

CONs of a Free Market Economy

Answer 23

INEQUALITIES

• market economies lead to differences in income
• in a completely free market, those unable to work get no income

MONOPOLIES

• successful businesses can become the only supplier of a product
• market dominance is abused

NON-PROFITABLE GOODS MAY NOT BE MADE

• drugs treating conditions may not sell enough so it won’t be made

Question 24

Planned economy?

Answer 24

The government decides how resources should be allocated

Question 25

PROs of a Planned Economy

Answer 25

MAXIMISE WELFARE - they have more control so they prevent inequality + distribute equally LOW UNEMPLOYMENT - they try providing jobs/salaries PREVENT MONOPOLIES - market dominance prevented

Question 26

CONs of a Planned Economy

Answer 26

RESTRICTED CHOICE - firms make what they’re told to so consumers have to buy those goods/services POOR DECISION MAKING - lack of info means they make poor decisions about the production of goods LACK OF RISKS + EFFICIENCY - government-owned firms have no incentive to increase efficiency / take risks / innovate as they don’t need to make profit

Question 27

Mixed economy?

Answer 27

PUBLIC SECTOR - government PRIVATE SECTOR - businesses / individuals - usually have to break even or make a profit to survive

Question 28

Behavioural economics?

Answer 28

KEY ASSUMPTIONS IN THE TRADITIONAL THEORY - economic agents are rational and utility maximisers BEHAVIOURAL ECONOMISTS challenge it ☝🏽 - they look at social / psychological / emotional factors on decision making to make more realistic predictions about decisions made by individuals

Question 29

Rationality is used to explain the actions of Economic Agents

Answer 29

- it’s assumed that a rational individual will attempt to maximise their utility, they do this by comparing the costs/benefits of alternatives then choosing the option that maximises their net utility - acting rationally requires all info needed to correctly choose between alternatives - in real life, eco. agents have imperfect info, therefore leads them to market failure - asymmetric info prevents rationality occurs when 1 party has more info than the other in a transaction

Question 30

Why consumers DONT act rationally

Answer 30

- limited time to make a decision - not all info available + the info available may be incorrect - people are unable to process/evaluate high amounts of data in making a decision

Question 31

Rational individual?

Answer 31

Assumed to have total self-control and will only act to maximise their utility Behavioural economists argue that individuals have limits on their self-control they have ‘bound self-control’

Question 32

Behavioural economists believe that individuals are influenced by biases which affect their decision making, for example:

Answer 32

RULES OF THUMB - simple tools that help an individual make a decision ANCHORING - means placing too much emphasis on one piece of info AVAILABILITY BIAS - judgements made about the probability of events occurring based on how it is easily remembered SOCIAL NORMS - individuals behaviour can be influenced by the behaviour of their social group HABITUAL BEHAVIOUR - doing the same thing over and over again

Question 33

Governments can use the behavioural economic theory to help them create policies

Answer 33

Choice architecture - when an individuals choice is influenced by adapting the way the choice is presented Done in a number of ways: DEFAULT OPTIONS - people use this, so this can be used to encourage individuals to act a certain way FRAMING - context in which info is presented can influence a decision NUDGES - some alternatives are made easier to choose than others without removing the freedom of choice RESTRICTED CHOICE - people’s choices are restricted MANDATED CHOICES - people have to make a decision