1.1.1 - economics as a social science, 1.1.2 - positive and normative economic statements, 1.1.3 - the economic problem Flashcards
(23 cards)
What is the ‘ceteris paribus’ assumption?
‘Ceteris paribus’ means ‘holding other things constant’ or ‘all other things being equal.’ It is used to isolate the effect of a specific variable while keeping other factors constant.
Why is the ceteris paribus assumption useful?
Many economic variables are interconnected, so it is often challenging to hold all other factors constant.
What are the difficulties in conducting scientific experiments in economics?
It is a social science
What are positive economic statements?
Objective statements that can be tested and evaluated based on empirical evidence and without expressing value judgements or opinions
What do positive statements often involve?
Cause-and-effect theories, objective explanations, and the testing and rejection of theories
What are normative economic statements?
Subjective statements which are based on opinion and aren’t testable by empirical evidence alone, they carry one or more value judgements about what ought to be
What do normative statements often involve?
Ethical issues and economic policies.
What are value judgments?
A assessment of something in terms of one’s standards and policies, which is subjective. They are used to express opinions and guide policy decisions based on personal beliefs, moral considerations or policy preferences.
What is the basic economic problem?
Scarce resources must be allocated efficiently to satisfy infinite human wants.
What are non-renewable resources?
Resource of economic value which can’t be replenished by natural means on a level equal to consumption
What are renewable resources?
Resource of economic value replaced by natural processes on a level equal to consumption
What is meant by ‘enterprise’ in the context of factors of production?
The willingness and ability to take risks to combine the other factors of production to make a product or service
What is meant by ‘capital’ in the context of factors of production?
All the man-made resources that are used to produce goods or services in the future, such as machines, factories, and offices
What is meant by ‘labour’ in the context of factors of production?
All production human effort, both physical and mental, paid and unpaid
What is meant by ‘land’ in the context of factors of production?
All the natural resources used in production such as raw materials, minerals, land, and produce of the sea
What is opportunity cost?
The value of the best alternative forgone when a choice is made, loss in output of one good: gain in output in another good
How do consumers make choices?
Consumers will make choices on how to use their limited income to maximise utility.
What must producers decide?
Producers must choose what to do with their limited resources and their decisions will be based on profit.
How does the government make spending decisions?
The government must make decisions on where they should spend their limited tax revenues based on what will maximise social welfare.
What is an economic good?
A good which has an opportunity cost.
What is a free good?
A good which has no opportunity cost, as no degree of scarcity, but abundance; can’t be traded as won’t be paid for.
Why does opportunity cost exist?
Because the same resources can’t be made to produce different goods at the same time, so decisions have to be made on how to use them.
What happens if the marginal productivity of resources is declining?
The opportunity cost will increase as more is sacrificed to get extra of another.
As you shift more resources (like workers) to producing a certain good, those resources become less effective (because of declining marginal productivity).
So to get each extra unit of that good, you have to use more and more resources.
And since those resources could have been used to make something else, you’re giving up more and more of that something else (increasing opportunity cost).
