Economic methodology and the economic problem Flashcards
What is a positive statement?
A statement of fact that can be scientifically tested to see if it is correct or incorrect
What is a normative statement?
A statement that includes value judgements and cannot be refuted just by looking at evidence
What is the economic problem?
The fundamental economic problem is the issue of scarcity and how best to produce and distribute these scare resources. How best to make decisions about the allocation of resources to improve and maximise human happiness and welfare
Why does the economic problem exsist?
Resources are scare, meaning the resources are finite, they will run out. People have unlimited wants and
the resources needed to fulfil these wants are limited. People would like to consume more goods and services than the economy is able to produce.
What is opportunity cost?
The cost of giving up the next best alternative. the need for choice arises when an economic agent (individual, household, firm) has to choose between two mutually exclusive alternatives
What is rational behaviour?
When people try to make decisions in their self-interest or to maximise their private benefit
Define
- production
- capital good
- consumer good
Production- converts inputs or factor services unto outputs for goods and services
Capital good- a good which is used in the production of other goods and services
Consumer good- a good which is consumed by individuals or households to satisfy their needs or wants
What are the facotrs of production?
Inputs into the production process
Land, Labour, Capital and Enterprise
What does the ppf curve stand for and show?
Production Possibility Frontier
It shows:
- the maximum possible production of two goods/services with the given factors of production
- the various combination of 2 goods/services that can be produced with given factors of production
Define long run economic growth
An increase in the potential level of real output the economy can produce over a period of time. The productive capacity of the economy is INCREASED.
Define short run economic growth
An increase in GDP in a given period of time. If the economy is operating below capacity (inside the production possibility frontier), short run growth is possible without any increase in productive capacity. Spare capacity in int economy is USED UP
How would you show
- short run
-long run
growth on a PPF?
Short run growth-
A point inside the curve would shift closer to or onto the curve.
Long run growth-
The curve would shift outwards
Define
- full employment
- unemployment
Where would theses be on a PPF
Full employment- all those willing and able to work are employed. Point will be ON the PPF curve
Unemployment- not all of those who are willing and able to work are employed. Point will be INSIDE the PPF curve
What is productive efficiency?
For the economy as a whole-
Producing goods and services with the optimal combination of inputs to produce maximum output. producing one or more good without having ti produce less of another
For a firm-
When the average total cost of production is minimised
Where are productively efficient points on a PPF?
Not all point of the PPF curve will reflect the production of goods and services people want or need
