4.1.1 – Economic methodology and Economic Problem

    81 Economic methodology

    Economics is a social science looking at the
    behaviour of humans as individual or in organisations (e.g. firms) and their use of scarce resources.
    • Economists develop theories and models to explain things e.g. interest rates
    There are two types of economic statements:
    • Normative statements – subjective statements that are based on value judgement and opinions. They
    cannot be tested as people have different views of what is right or wrong.
    • Positive statements – objective statements that can be tested to see if it is correct. Nature and Purpose of Economic Activity
    • Economic activity – mix of factors of production to create outputs that people can consume
    o Goods – products you can touch e.g. kettle
    o Services – Things you can’t touch e.g. education, medical appointments
    o Consumption – consume goods or services to satisfy a want or need
    • The fundamental three questions are:
    o What to produce? – goods that firms can make profit from
    o How to produce? – firms want to produce goods most efficiently as possible to maximise profit
    o Who to produce for? – firms produce goods that consumers want to pay for
    • Economic Agents react to Incentives
    o Producers – firms or people that make goods and services
    o Consumers – firms or people that buy the goods and services
    o Governments – produces and consumers goods and services and set rules participants must follow
    • Economic Agents make decisions on how the resources are allocated
    o Producers – decide what to make and how much to sell it for
    o Consumers – decide what to buy and how much they are willing to pay
    o Governments – decide how much to intervene in the way producers and consumers act
    • In market economy, all economic agents make decisions best for themselves. These are based on economic
    incentives like profit or paying as little as possible for a product – Economic resources

    The Economic problem – How can available scarce
    resources satisfy peoples infinite wants and needs
    • Need – something that you need to survive (e.g. food, water, clothes and shelter)
    • Want – Goods or services that are not a necessity but wish for them.
    Four factors of production:
    o Land – natural resources from the sea, earth and sky (renewable and non-renewable).
    o Labour – the work done by people (physical and mental).
    o Capital – goods used to create other goods and services.
    o Enterprise – organises all other factors of production, takes risks and tries to earn a profit. – Scarcity, Choice and Allocation of Resources

    Production possibility frontiers (PPF) – shows maximum
    possible output

    • The PPF shows maximum number of sugar and pizza that can
    be made using existing resources in economy
    • Points A, B,C are all achievable without any extra resources
    • A trade off occurs from point B to A
    • Trade off = choosing between conflicting objectives as all the objectives can’t be
    achieved at the same time
    • All points on PPF are productively efficient
    • Not all points are allocative efficient as it doesn’t reflect goods people want or need
    • The trade-off described involves opportunity cost
    • Opportunity cost = the next best alternative that you give up in making that decision
    o There are a few problems with using this concept:

    Economic growth Shifts the PPF
    • Economic growth leads to a shift in the curve.
    An outwards shift is caused by:
    o Improved technology – more output
    o Increase in labour force – more output
    o Discoveries of new raw materials

    An inwards shift is caused by:
    o Resources running out
    o Failure for investments
    o Wars in the countries
    o Natural disaster’s



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