1 Economic Methodology and the Economic Problem Flashcards
(163 cards)
1
Q
What is economics?
A
Economics is a social science.
2
Q
What is the difference between social science and a humanity?
A
Methodology less speculative.
3
Q
How does economic scientific methodology work?
A
- Observe consumer behaviour
- Formulate a hypothesis
- Develop predictions from the hypothesis
- Use evidence to test the predictions
- Reflect on whether the evidence proves or debunks the hypothesis.
4
Q
What is a theory vs a hypothesis?
A
A hypothesis is a speculative statement used to explain economic behaviour not yet backed up by substantive evidence. A theory is a statement to explain economic behaviour which is backed up by evidence.
5
Q
What two things can happen if a hypothesis’ predictions fail to come fruition?
A
The hypothesis can be revised or discarded.
6
Q
What is a positive statement?
A
A statement that can be tested and validated.
7
Q
What is a normative statement?
A
A statement that cannot be tested and validated.
8
Q
Why can normative statements not be tested?
A
They contain a subjective value judgement.
9
Q
Example that shows that normative economics and positive economics are inseparable?
A
Chancellor said ‘rising unemployment and the recession have been the price we have had to pay to get inflation down. That price is well worth paying.’
10
Q
How can governments disguise normative judgements in positive judgements?
A
Hire policy ‘experts’ to deliberate on a given issue.
11
Q
What is a need? What is a want?
A
A need is something necessary for human survival. A want is something desirable but not necessary for survival.
12
Q
How do we improve economic welfare?
A
Satisfying needs and wants.
13
Q
What is economic welfare?
A
A measure of how satisfied consumer’s needs and wants are.
14
Q
Is economic welfare always maximisable? Why?
A
No. Short-run vs long-run - some things may improve your economic welfare in the short-run at the expense of long-run wellbeing.
15
Q
What is an economic system?
A
The set of institutions within a society that decides what, how and for whom to produce goods and services.
16
Q
What are the two main kinds of economic systems?
A
- Market economies
- Command economies.
17
Q
What is a mixed economy? Example?
A
A country between a command economy and a market economy. Example: UK.
18
Q
What distributes resources in a market economy?
A
The price mechanism.
19
Q
What distributes resources in a command economy?
A
The administrators.
20
Q
What are the four factors of production?
A
- Capital
- Enterprise
- Land
- Labour.
21
Q
What is a capital good?
A
A good used in the production of something else.
22
Q
What is a consumer good?
A
A good used in the household.
23
Q
What are the two kinds of environmental resource?
A
- Renewable
- Non-renewable.
24
Q
How can we further categorise economic resources beyond renewable and non-renewable?
A
- Recyclable
- Non-recyclable.
25
Why do we economise?
Economic resources are scarce.
26
What is production?
A process or set of processes that converts economic resources into outputs.
27
What does the entrepreneur do?
Manage the other factors of production and decides how much to employ.
28
What is the entrepreneur's reward?
The profit left behind after the factors of production have been paid for.
29
What is the fundamental economic problem?
Scarcity - how do we best allocate resources among competing uses to maximise economic welfare.
30
What is opportunity cost?
The cost of the next best alternative foregone.
31
In utility theory, what are people seeking to do to opportunity costs?
Minimise them.
32
What is the key thing with opportunity cost that causes it often to be too high?
Inability to tell the future.
33
Is it irrational to go see a bad film?
No, because you didn't know it was bad when you started.
34
What is inter-temporal opportunity cost?
Opportunity costs where the full cost is felt much further down the line, in the long-run.
35
What does a PPF illustrate?
Opportunity cost.
36
When an economy is on the PPF?
It is employing all its resources and factors of production as efficiently as possible.
37
What is productive efficiency?
When a firm or economy is on the PPF.
38
Short-run economic growth on a PPF means?
Becoming productively efficient, moving towards or onto the PPF.
39
Long-run economic growth on a PPF means?
Shifting the PPF outwards, moving onto this new PPF.
40
It is not economic growth if it?
Involves an opportunity cost.
41
How would unemployment show on a PPF and why?
Economy would be within the PPF since factors of production are not being used.
42
PPF's are usually bowed outward, this is because?
Resources are specialized; that is, some are better at producing particular goods rather than other goods.
43
What does ceteris paribus mean?
Everything else remains equal.
44
How is economics a social science?
Models and theories are used to explain real world evidence.
45
Why are models limited?
There are assumptions and simplifications in all models.
46
What is positive analysis?
When analysis is done concerning observable/disproveable facts.
47
What makes a normative statement?
It contains a value judgement.
48
What is the purpose of economic activity?
Produce goods and services to satisfy people's wants and needs.
49
What are needs?
Things people cannot live without.
50
What are wants?
Things people can live without but desire.
51
What is the basic economic problem?
Scarcity - reconciling unlimited wants with limited resources.
52
What are the 4 classes of economic resources?
CELL: 1. Capital 2. Enterprise 3. Land 4. Labour.
53
What is capital?
Equipment and structures used to produce goods and services within the production process.
54
Labour is related to which other economic resource?
Capital - labour is essentially human capital.
55
What determines how useful you are as human capital?
Your productivity in the workplace.
56
What is entrepreneurial motivation in orthodox economics?
Make profit.
57
Example of a finite renewable resource being squandered?
Water - water cycle. Cape Town experienced a drinking water shortage in 2018.
58
What is the exemplary infinite renewable resource and the exception?
Clean air - Beijing.
59
What are economic agents?
The people within an economy interacting via economic means.
60
What is economic agent motivation?
Varies between agents.
61
What is a firm's incentive?
Maximise profits.
62
What are goods?
Tangible products.
63
What are services?
Intangible products.
64
What are the 2 main economic activities?
Consumption and production.
65
Who decides how to allocate resources?
Economic agents - consumers, producers, governments.
66
Why is opportunity cost relevant?
Rational consumers minimise opportunity cost when spending their incomes.
67
What is the opportunity cost of a £300 bike?
£300 on the next best thing.
68
Why do firms often not simply follow minimum opportunity costs?
Factors of production are fixed.
69
What are 4 issues with opportunity cost analysis?
1. Alternatives may be unknown or suffer from information failure - bounded rationality
2. Factors can be fixed so it is not only a clear choice
3. Inter-temporal issues
4. Some factors have no alternative.
70
When is opportunity cost > monetary cost logical?
When there is an inter-temporal aspect.
71
What does opportunity cost mean?
The cost of the best alternative foregone.
72
Why is the PPF curved?
Law of diminishing marginal returns.
73
What is the law of diminishing returns?
Marginal returns fall.
74
When does the PPF shift outwards?
When there is economic growth.
75
What does it mean when an increase in production of Good Y vs Good X on a PPF can occur for both goods without opportunity cost?
Economic growth.
76
What is productive efficiency?
When it is impossible to produce more of one good (or service) without decreasing the quantity produced of another good (or service).
77
What is static efficiency?
Efficiency at a particular point in time.
78
What are PPF points on the curve?
All productively efficient.
79
What is allocative efficiency?
A point on the curve when the needs and wants of consumers are most optimally satisfied.
80
Is every point on the PPF allocatively efficient?
No - productively efficient.
81
What happens when the total number of resources available increases?
PPF shifts outwards.
82
What is negative economic growth?
PPF shifts left.
83
Why is the PPF bowed?
Diminishing returns.
84
How many points on the PPF are productively efficient? How many allocatively?
All of them are productively efficient; one is allocatively efficient.
85
What is allocative efficiency?
When resources are allocated in such a way as to maximise welfare.
86
What is productive efficiency?
When resources are allocated in such a way that any further production in any market would involve an opportunity cost in another; there is no spare capacity in the economy.
87
What does economics study?
How humans make decisions when they face scarcity.
88
Why is economics a social science?
It requires a study of how groups of people collectively allocate resources - it cannot focus purely on the individual.
89
What are 3 ways economics is a social science?
1. Models and theories are used to explain observed evidence, and not the other way around
2. Hypotheses can be tested and discredited with reference to evidence
3. Statistical analysis can be used to evaluate hypotheses.
90
What are 4 flaws of economics as a social science?
1. Relies on significant assumptions because it relies on theories/models
2. Often, methodology is discarded and theory comes before facts
3. Normative economics is more powerful
4. Very hard to make controlled tests where ceteris is actually paribus.
91
Whenever you seek to evaluate any economic decision using opportunity cost, you must consider?
Is there an inter-temporal element?
92
Example of normative analysis?
The government should raise welfare benefits because it is the right thing to support the unemployed.
93
Positive or normative: HS2 should be built because the benefits outweigh the costs?
Ostensibly positive.
94
What is useful about economic social science theory?
Allows us to make predictions about the future.
95
What is the difference between an economic resource and a factor of production?
All factors of production are economic resources, but not all economic resources are factors of production.
96
Example of an economic resource that is not a factor of production?
Financial capital - it is not directly productive in the process.
97
What is human capital?
The skills, knowledge, experience and training that workers possess, which increases their productivity and economic value.
98
Example of expanding human capital?
Training for a machine engineer.
99
AQA A Level definition of the fundamental economic problem?
The issue of scarcity and how best to allocate resources to satisfy unlimited wants.
100
AQA A Level definition of economic activity?
Production, distribution and consumption of goods and services to satisfy human wants and needs.
101
What are the 3 main economic agents?
1. Producers
2. Consumers
3. Governments.
102
What role does a government fulfill in an economy?
Sets rules.
103
True or False; the economy can choose to produce at any point as long as it is on the PPF?
No, could produce inside the PPF too.
104
Why is the PPF bowed outwards?
Law of diminishing marginal returns.
105
What must you say when explaining the outwards bowing of the PPF?
It is caused by diminishing marginal returns, but not the same kind in a firm.
106
Why is an outward shift of the PPF a limited indicator of economic growth?
Growth may be driven by certain sectors, so it might not be possible to increase production of some goods or services.
107
What is the slope of the PPF?
Is the opportunity cost.
108
What is economic efficiency?
Optimal use of scarce resources which maximises economic welfare.
109
Why is economics sometimes criticised as soft? How do economists respond?
Economic theories often must be caveated to remain valid in all cases. They claim to use 'positive economics' to make judgement seem objective or rational.
110
Why can economics never be normative? Two reasons.
1. Decision to value positive economics more than normative economics is itself a value judgement.
2. Ascribing value to the options in a positive judgement is still ultimately a normative exercise.
111
Example of how positive and normative economics are inseparable?
When the government tried to find the best location for a new London airport, they had to set money values to a business person versus a holidaymaker's time.
112
Why is a legitimate government important to economics?
Making decisions with controversial value judgements or high opportunity costs necessitates legitimacy.
113
Is everything either a need or a want?
Yes, but some things can be both, e.g. food.
114
What does planned economy mean?
Just another word for command economy.
115
What is the problem with command economies?
Command economies can plan production, but not consumption, potentially leading to shortages and surpluses.
116
What is an environmental resource?
All natural resources which can be used in the economic system.
117
Do free objects have opportunity costs?
Yes, in terms of time or welfare.
118
What are 3 definitions of productive efficiency?
1. When output is maximised from available inputs.
2. When it is impossible to produce more of a good or service without producing less of another.
3. When the ATC of production is minimised.
119
Microeconomics is fundamentally?
Satisfying the basic economic problem.
120
Economic resources, when combined together?
Create production.
121
What is capital's distinct feature from land?
Manmade.
122
What are entrepreneurs?
Risk takers.
123
What are the 3 economic choices in a free market economy?
1. What to produce
2. How to produce
3. For whom to produce.
124
What is opportunity cost's relevance to economics at the most fundamental level?
Helps us make optimal choices.
125
Why are PPFs versatile?
Can be used in both a micro and a macro context.
126
PPFs are only necessary because of?
The fundamental economic problem (scarcity).
127
What are the 3 economic choices in a free market economy?
1. What to produce
2. How to produce
3. For whom to produce
128
What determines economic choices?
Decided by the price mechanism, hence by consumer sovereignty and hence producers
129
What is opportunity cost's relevance to economics at the most fundamental level?
Helps us make optimal choices
130
Why are PPFs versatile?
Can be used in both a micro and a macro context
131
PPFs are only necessary because of...
The fundamental economic problem (scarcity)
132
What does a micro PPF show?
Shows us the maximum level of 2 goods and services which can be produced given a certain amount of input
133
What does a macro PPF show?
Various combinations of 2 goods/services that can be produced with given factors of production
134
How to identify a micro PPF?
Two specific goods/services
135
What does the curve of the PPF show?
The law of increasing opportunity cost
136
Example of a macro PPF?
Consumer vs capital goods
137
Why does a micro PPF bow outwards?
Specialised factors of production for a fixed set of factors of production
138
Both macro and micro PPF are in...
THE SHORT RUN
139
What does a linear PPF show?
Constant opportunity cost
140
A point inside the macro PPF necessitates...
Unemployment
141
What is Pareto efficiency on a PPF?
Nobody can be made better off without making someone else worse off
## Footnote
ALL POINTS ON A PPF ARE PARETO EFFICIENT BECAUSE AN OPPORTUNITY COST IS INCURRED
142
What can increase PPF?
Quantity and Quality of CELL
143
If one side of the PPF remains glued to the axis and the other one moves, it implies that...
The QsquaredCELL of the specialised factors of production for the axis which benefits the most has increased
144
What is demand?
The quantity of a good or service consumers are willing and able to buy at a given price in a given time period
145
What is the law of demand?
Inverse relationship between price and quantity demanded, ceteris paribus
146
The law of demand relies upon what assumption?
Ceteris paribus
## Footnote
Only measuring price changes - CONDITIONS OF DEMAND REMAIN CONSTANT
147
What is contraction of demand?
Move along demand curve due to change in price
148
What is extension of demand?
Move along demand curve due to change in price
149
What are the 7 factors determining demand?
P.A.S.I.F.I.C
## Footnote
Population, Advertising, Substitute price, Income, Fashion/Tastes, Interest Rates, Complement Price
150
What are 2 reasons for the law of demand?
1. Income effect - with less discretionary income, we demand less
2. Substitution effect - demand for cheaper substitutes rise
151
Key thing about conditions of demand?
Price remains constant whilst Qd changes
152
Classic example of substitutes?
Coke and Pepsi
153
Why would demand for UK holidays rise after a fall in wages across the economy?
Inferior good
154
Interest rates' effect on demand is most felt for...
Big-ticket items
155
What are 2 exemptions to the law of demand?
1. Veblen goods
2. Giffen goods
156
What is a Giffen good?
Proportional relationship between price and quantity before it recurves again due to substitution, despite being an inferior good
157
How can Giffen goods work?
Given a fixed income, consumers are forced to opt towards inferior goods and away from superior goods as their price rises to maintain the same total expenditure
158
When MR = 0, AR's PED is...
ZERO
## Footnote
BECAUSE IT IS THE MIDPOINT OF THE CURVE
159
Top half of the demand curve is the more/less elastic part of the curve?
More
160
Bottom half of the demand curve is the more/less elastic part of the curve?
Less
161
Why do all demand curves have perfectly elastic and perfectly inelastic PED?
The y-axis intercept is perfectly elastic
The x-axis intercept is perfectly inelastic
162
Explain why PED varies along the demand curve.
For the top half of the demand curve, the percentage change in quantity demanded will always exceed the percentage change in price for the bottom half, and vice versa. The midpoint is unity
163
For a demand curve, revenue is maximised at...
THE MIDPOINT
