Economic methodology and the economic problem

• What is economics as a social science?

  Economics is the study of how societies allocate scarce resources to produce goods and services to satisfy human wants. As a social science, it examines human behavior in economic decision-making, focusing on interactions between individuals, groups, firms, and governments.
• How does economics compare to natural sciences?

  • Similarities: Both rely on empirical observation, data collection, and the use of models to explain phenomena.
  • Differences: Economics deals with subjective human behavior and social systems, making predictions less deterministic than in natural sciences. Also, isolating variables is more challenging in economics due to the complexity of human choices.
• What is the difference between positive and normative statements in economics?

  • Positive Statements: Objective, fact-based claims that can be tested or verified (e.g., "An increase in government spending increases output").
  • Normative Statements: Subjective, value-based claims that express opinions about what should be (e.g., "The government should raise the minimum wage").
• How do value judgments influence economic decision-making?

  Economic decisions, especially public policies, are often influenced by political and moral beliefs. For example, debates about income inequality and wealth redistribution reflect differing views on equity and justice.
• How does the thinking of economists differ from other scientific disciplines?

  • Causality and Predictability: Economics is more probabilistic, as human behavior is difficult to predict with certainty.
  • Human-Centered Method: Unlike natural sciences, which focus on objective laws, economics examines subjective human preferences, which are influenced by psychology, history, and culture.
• What is the central purpose of economic activity?

  The central purpose is to produce goods and services that satisfy human needs and wants. This is driven by limited resources and unlimited desires, leading to the need for choices in resource allocation.
• What are the three key economic decisions every society must make?

  1. What to produce? Deciding which goods and services to make.
  2. How to produce? Determining the most efficient methods of production.
  3. Who gets the goods and services? Deciding how to distribute the output fairly.
• What are the four factors of production?

  • Land: Natural resources used in production (e.g., minerals, water, forests).
  • Labour: Human input in production, both physical and mental.
  • Capital: Man-made resources like machinery, buildings, and tools.
  • Enterprise: The entrepreneurial ability to combine land, labor, and capital to produce goods and services.
• Why is the environment considered a scarce resource?

  Environmental resources are limited due to over-exploitation and pollution. Economic activities increasingly affect the environment, making sustainability a critical issue for future generations.
• What is the fundamental economic problem?

  The fundamental problem is scarcity—limited resources versus unlimited wants, leading to the need to make choices about how to allocate resources efficiently.
• What is opportunity cost in economics?

  Opportunity cost is the next best alternative that is forgone when a choice is made. It represents the value of the sacrificed option in every decision.
• How are resources allocated in different economic systems?

  • Market Economy: Resources are allocated by supply and demand, with prices guiding decisions.
  • Planned Economy: The government allocates resources through central planning.
  • Mixed Economy: A combination of market forces and government intervention.
• What do production possibility diagrams (PPFs) show?

  PPFs illustrate the trade-offs between two goods, showing:

  1. Resource allocation between goods.
  2. Opportunity cost of choosing one good over another.
  3. Economic efficiency: Points on the curve are efficient, and points inside indicate inefficiency.
  4. Economic growth: The outward shift of the curve represents growth.
• What are the key features of a production possibility frontier (PPF)?

  • Trade-offs: As more resources are devoted to one good, fewer resources are available for the other.
  • Opportunity Cost: The cost of sacrificing one good for another.
  • Efficiency: Points on the curve represent productive efficiency; points inside the curve indicate inefficiency.
  • Growth: An outward shift represents an increase in resources or technology.
• What does an outward shift of the PPF represent?

  An outward shift in the PPF represents economic growth. This can result from an increase in resources (labor, capital) or improvements in technology, allowing the economy to produce more of both goods.
• What is the difference between positive and normative economics?

  • Positive Economics: Deals with objective statements and facts that can be tested, verified, or refuted. It concerns what is, or what will be (e.g., "Increasing taxes reduces consumer spending").
  • Normative Economics: Involves subjective statements based on opinions or values. It concerns what should be, offering recommendations for action (e.g., "The government should reduce taxes to increase economic growth").
• How do value judgements influence economic decisions?

  • Value judgements shape economic policy decisions. For instance, government decisions on income distribution, taxation, or welfare are influenced by moral views of equity, fairness, and justice.
  • Different economists or policymakers may have varying opinions on the trade-offs between economic efficiency and social equity, influencing their recommendations.
• How does economic activity satisfy needs and wants?

  • Needs are basic requirements for survival (e.g., food, shelter), while wants are desires for goods and services that make life more enjoyable.
  • Economic activity involves the production and distribution of goods and services, and through this process, society attempts to balance the provision of both needs and wants, often prioritizing basic needs and fulfilling wants with available resources.
• What are the three key economic questions that every society must answer?

  • What to produce?: Deciding the mix of goods and services to produce based on available resources.
  • How to produce?: Determining the most efficient and sustainable way to produce goods, considering technology and labor.
  • For whom to produce?: Deciding how the goods and services will be distributed among the population.
• What is meant by the factor of production 'Land'?

  Land refers to natural resources used in the production of goods and services. This includes not only raw materials like minerals, water, and agricultural land, but also geographical location, weather, and climate conditions, which affect production efficiency.
• What is meant by the factor of production 'Labour'?

  • Labour refers to human input, both physical and mental, in the production process. It includes the efforts of workers and their skills.
  • The quality of labor (education, training, skills) plays a significant role in determining productivity and the efficiency of production.
• What is meant by the factor of production 'Capital'?

  • Capital refers to man-made goods used in the production of other goods and services. This includes machinery, tools, buildings, factories, infrastructure, and technology.
  • Capital can be divided into two types: Physical Capital (tangible assets like machines) and Human Capital (knowledge and skills).
• What is meant by the factor of production 'Enterprise'?

  • Enterprise refers to the entrepreneurial ability to combine land, labor, and capital to create goods and services. Entrepreneurs take risks, innovate, and make critical decisions in organizing and managing the production process.
  • They are responsible for organizing resources to produce and deliver products to market.
• What is the connection between scarcity and opportunity cost?

  • Scarcity refers to the limited nature of resources available for production, while opportunity cost is the cost of forgoing the next best alternative when making choices.
  • Since resources are scarce, every economic decision involves a trade-off, where choosing one option means giving up another.
• Can you give an example of opportunity cost in an economic decision?

  • For example, if a government decides to spend money on healthcare, the opportunity cost could be the roads, schools, or public transport that could have been built with that money instead.
  • In personal terms, if a student chooses to study for an exam instead of going out with friends, the opportunity cost is the enjoyment they would have experienced by socializing.
• What does a production possibility diagram (PPD) show about efficiency?

  • Points on the PPD curve represent productive efficiency, meaning that resources are being used in the most efficient way possible to produce maximum output.
  • Points inside the curve indicate inefficiency, where not all resources are being used, while points outside are unattainable with the current resources.
• What does a shift in the production possibility frontier (PPF) indicate?

  • A shift outward in the PPF indicates economic growth, meaning that the economy can now produce more of both goods due to an increase in resources, technological advancements, or improvements in productivity.
  • Conversely, an inward shift may occur during economic contraction, such as in a recession, when resources become scarcer or less productive.
• How does economic growth relate to trade-offs in a production possibility diagram?

  • Economic growth allows an economy to produce more of both goods without sacrificing one for the other. This is shown by an outward shift in the PPF.
  • However, trade-offs still exist because the production of one good may still require sacrificing the production of another, even with growth. This balance is central to the concept of opportunity cost.
• What is the difference between allocative and productive efficiency in economics?

  • Productive Efficiency: Achieved when the economy is producing goods at the lowest possible cost, using all resources in the most efficient way (represented by any point on the PPF).
  • Allocative Efficiency: Achieved when resources are distributed in such a way that maximizes overall societal welfare, meaning that the mix of goods produced aligns with consumer preferences (not necessarily on the PPF).
• What is the role of government in resource allocation in a mixed economy?

  • The government intervenes in a mixed economy to correct market failures, ensure equitable distribution of resources, and provide public goods.
  • Governments may also influence distribution through taxation, subsidies, and regulations to improve societal welfare.
• What do economists develop to explain choices in daily life?

  Models and theories
• What is the purpose of the ceteris paribus assumption?

  To isolate the effect of one variable
• What does "ceteris paribus" mean?

  All other factors remaining constant
• Why is economics considered a social science?

  It studies complex human behavior
• What is a challenge in conducting experiments in economics?

  People behave differently in real life
• What are the main purposes of economic activity?

  • Production of goods and services
  • Satisfying changing needs and wants
  • Addressing scarcity and choice
• What is the basic economic problem?

  Scarcity and choice
• What must societies decide regarding goods and services?

  What, how, and for whom to produce
• What does scarcity force consumers, businesses, and governments to do?

  Make choices
• What is an example of a trade-off in housing decisions?

  Choosing to rent or buy a home