Section 1 - The Economic Problem Flashcards
What do economists do to compensate for being unable to control one variable at a time?
To get around the problem of the existence of multiple variables in an economy, economists use the assumption known as ceteris paribus.
Ceteris Paribus - definition
Latin for ‘all other things remaining equal’.
When do economists use ceteris paribus?
> When they are looking at the relationship between 2 factors.
E.g. price and demand.
They’ll assume only these 2 factors change and all other factors (income, changes in taste) that would have an effect on any other variable being considered remain the same.
What do economists use ceteris paribus for?
To develop theories and models, and make predictions.
Economic decision vs economic sense
> Economic decisions might not always make economic sense.
Economics deals with real people so keep in mind decisions made by individuals, firms or governments will often be based on opinions or judgements.
What might decisions be based on?
- Normative statements.
- Moral views and value judgements.
- Political judgements.
- Short-term positive consequences.
Moral views and value judgements
E.g. the view that people shouldn’t live in poverty, so wealth should be shared.
Political judgements
E.g. lowering taxes may win votes for government.
Short-term positive consequences…
of a decision, regardless of long-term consequences.
E.g. reducing taxes may win an election, but it will reduce the government’s income and may lead to public spending cuts.
How many types of economic statements are there?
2
What are the 2 kinds of statements you can make in economics?
- Positive Statements
2. Normative Statements
Positive statements
> Are objective statements that can be tested by referring to the available evidence.
E.g. “a reduction in income will increase the amount of people shopping in pound shops”.
With suitable data collected over a period of time, you should be able to tell if the above claim is true or false.
Positive claims are important because they can be tested to see whether economic ideas are correct.
Normative statements
> Are subjective statements which contain a value judgement - they’re opinions.
E.g. “the use of fossil fuels should be taxed more highly than the use of renewable fuels”.
It’s not possible to say whether the above statement is true or not - only whether you agree or disagree with it.
Normative statements are also important because value judgements influence decision-making and government policy, e.g. party may increase taxes on rich and distribute to poor.
Short definition of economics
How best to satisfy infinite desires using limited resources.
What is the fundamental economic problem?
> There’s only a limited amount of resources available to satisfy infinite desires.
i.e. resources are scarce.
The basic economic problem
How can the available scarce resources be used to satisfy people’s infinite needs and wants as effectively as possible?
Factors of production - explaination
> The scarce resources (inputs) used to make the things people want and need (outputs) can be divided into four factors of production.
Individuals and firms are rewarded dor providing these factors e.g. with a wage or rent.
What are the factors of production?
- Land
- Labour
- Capital
- Enterprise
Factors of production - Land
> Including all the natural resources in and on it.
As well as actual ‘territory’, land includes all the Earth’s natural resources.
Nearly all things that fall under the category of land are scarce - there aren’t enough natural resources to satisfy the demands of everyone.
One exception is air, but even this isn’t as simple as it first looks.
Earth’s natural resources
> Non- renewable resources, such as natural gas, oil and coal.
Renewable resources like wind or tidal power, or wood from trees.
Materials extracted by mining (e.g. diamonds and gold).
Water.
Animals found in an area.
Land - air
> Air isn’t usually considered a scarce resource as there’s enough for everyone.
But doesn’t mean all air is equally good - polluted air.
In fact, the environment is considered by some people to be a scarce resource.
It’s a free good.
Free good
> Something that is not scarce or has no price, such as atmosphere, sunlight, or gravity; something that can be obtained at no cost.
Impossible to sell it.
Economic good
> Things that are scarce and which can therefore be traded.
Factors of production - labour
> Labour is the work done by those people who contribute to the production process. The population who are available to do work is called the labour force.
There’s unemployed.
Also there’s people who aren’t in paid employment but still provide things people need or want, e.g. homemakers.
Different people have different levels of education, experience or training. These factors make some people more ‘valuable’ or productive than others - they have a greater amount of human capital.
UK - no. of working age with a job is arounf 30 million.