Economic Methodology and the Economic Problem Flashcards
(16 cards)
What is the key assumption made by economists regarding events?
Ceteris paribus
Ceteris paribus means that other things are being held equal or constant, so nothing else changes.
What do economists use to build their models?
Real-life scenarios
Economists base their models on real-life scenarios and make assumptions with these models.
What is the difference between positive and normative statements?
Positive statements are objective and can be tested; normative statements are subjective and based on value judgements.
What type of statements can be tested with factual evidence?
Positive statements
Positive statements can be rejected or accepted based on evidence.
What type of statements are based on value judgements?
Normative statements
How can value judgements influence economic decision making?
Different economists may draw different conclusions from the same statistic.
What is the purpose of economic activity
to produce good and services which satisfy consumer needs and wants
What are the 4 factors of production
Capital, Entrepeneurship, Land, Labour (CELL)
What is the basic economic problem
Wants are unlimited but resources are finite
What is opportunity cost
The value of the next best alternative forgone
What do PPFs show
The maximum productive potential of an economy using a combination of two goods or services, when resources are fully employed
What is the law of diminishing returns
the opportunity cost of producing one good increases as you produce more of it, in terms of the other good that could be produced (e.g yogurt and cheese from milk)
How is economic growth/decline shown on a PPF
Growth - curve shifts outward
Decline - curve shifts inward
What are capital and consumer goods
Capital Goods - Goods which can be used to produce other goods (e.g machinery)
Consumer Goods - Goods which cannot be used to produce other goods
What is productive efficiency and where is it shown on a PPF
Productive efficiency is when resources are being used to their full productive potential, shown anywhere on the actual curve
What is allocative efficiency
Allocative efficiency is when no one can be made better off without making
someone else worse off
