Economic methodology

• What is a positive statement?


  A positive statement can be tested against factual evidence. (Stating what is the truth) Positive economics is a scientific approach to economics. - An example woud be “Spending money on the hs2 train line will reduce commuter time”
• What is a normative statement?


  A normative statement is a statement that expresses an opinion or value judgment. An example would be “The HS2 train line is the right thing to invest in for the people of Birmingham”
• Economic Activity


  Production, distribution, and exchange of goods and services in the economy
• Goods


  Tangible items that carry human needs and wants
• Services


  Intangible items that satisfy human needs and wants
• Private goods


  are rival in consumption (i.e. if one person uses

  it another can’t) and are excludable (i.e. people can be stopped

  from using it)
• Public goods


  are not rival in consumption (i.e. if one person

  uses it another still can) and are not excludable (i.e. people

  can’t be stopped from using it)
• Free market economy


  Where all goods and services are provided through the interaction of supply and demand
• Command economy


  Decision on both production and allocation of resources are made by the government
• Mixed economy


  Some goods and services are provided through a free market economy and some are provided through government planning. The idea is to gain the benefits of the free market whilst avoiding its disadvantages through government intervention
• Allocative efficiency 


  The degree to which the allocation of resources

  maximises economic welfare. Perfect allocative efficiency occurs

  where price = marginal cost in all markets. It is where we can’t make

  anyone better off, without making someone else worse-off.
• Productive efficiency


  measures how well resources (inputs) are

  used to produce output by achieving lowest possible average costs.

  Productive efficiency is maximised when we can’t make any more of

  a good without making less of another
• Dynamic efficiency


  improving economic efficiency over time, arising

  from new technology, innovation and invention
• ADVANTAGES of using the free market


  Productive efficiency: Firms have to

  compete on cost to make profits so costs

  are at their lowest

  • Allocative Efficiency: Competition means

  firms have to produce what consumers

  demand improving choice and quality

  • Incentives in the form of wages for

  employees and profits for firms

  encourage work and risk taking
• DISADVANTAGES of using the free market


  • Distribution of wealth is unequal and

  poverty can result

  • External costs and benefits are ignored

  • Demerit goods produced with no

  restrictions

  • Under provision of public and merit

  goods

  • Monopolies may form

  • Economic cycle causes either inflation or

  unemployment
• The Economic problem


  Is where we have infinite wants but finite resources, leading to scarcity, choice and opportunity cost
• Opportunity cost


  The value of the next best alternative forgone when a decision Is made
• Economic good


  is a good or service that has a benefit to society. They have a degree of scarcity and therefore an opportunity cost. It can include both private and public goods
• Free goods


  They are not scarce which means there is no opportunity cost to their consumption. They cannot be traded in the market place
• What are the four factors of production?


  Land, Labour, Capital and Enterprise
• Factors of Production


  The essential inputs used to produce goods and services, including land, labor, capital, and entrepreneurship.
• Entrepreneurship


  The ability to organize and coordinate the other factors of production.
• Labor


  Human effort and skills, including managers, workers, and entrepreneurs.
• Capital


  Man-made tools, machines, and equipment, including factories and buildings.
• Land


  Natural resources, such as land, water, and minerals.
• Renewable resources


  is one that can replenish itself over time, so

  that new additions of the resources can match or exceed levels of

  use of that resource
• Non renewable resources


  is one that cannot replenish itself over

  time, so that once it is used it is no longer available in its original

  form.
• Production


  The process that converts inputs into final output
• Productive capacity


  Is the maximum output level of an economy (or a firm)
• Production possibility frontier


  Shows the maximum combination of product that can be produced during a given period of time with the available resource and technology.
• On a ppf if a point Is outside the curve what does it mean?


  It represents a combination of goods which is impossible to reach using the current level of resources and existing production techniques
• Consumer goods


  Are bought and used by consumers
• Capital goods


  Are used in producing other goods
• What point on the ppf is productively efficient


  Any Point on the curve
• what point on the ppf is allocatively efficient?


  There is a point but we don’t know it