1.1. Economic Methodology and the Economic Problem

• • economics is the study of decision making and choice in a world of scarce resources
  • economics is a social science
  • normative statement - opinion based and rely on value judgements
  • positive statements - based on factual evidence and have no element of personal opinion
  • decisions may be influenced by the positive consequences of different decisions and by moral and political judgements
• ceteris paribus - all other factors remain the same
• • the purpose of economic activity is the production of goods and services to satisfy needs and wants

  key economic decisions are;

  • what to produce
  • how to produce
  • who benefits from goods and services produced
• economic resources are classified into:

  • land
  • labour
  • capital (man-made goods)
  • enterprise (the idea)

  the environment is classed as a scarce resource as there are unlimited wants but not all can be fulfilled
• • the fundamental economic problem is scarcity
  • the economic problem results from limited resources and unlimited wants
  • opportunity cost is the opportunity that has to be sacrificed
• • a PPF shows different combinations of output for products when allocating all available resources
  • a movement is travelling along the curve
  • a shift is when the entire curve moves

  A) good X

  B) good Y

  C) unattainable

  D) underutilised resources

  E) opportunity cost

  
• economic shock - an unexpected event that disrupts/ decreases resources
• potential features of the fundamental economic problem include:

  • resource allocation
  • opportunity cost
  • trade offs
  • unemployment of economic resources
  • economic growth
• • productive efficiency - when all resources are used efficiently
  • allocative efficiency - the needs of consumers are met

  on the PPF diagram, any point on the curve is productively efficient but not always allocatively efficient

  • an outwards shift arises from economic growth (i.e. tech advancements, increased population from immigration)
  • an inwards shift can arise from an economic shock (e.g. war, natural disasters etc)
• types of economies

  • free market - businesses and people make decisions
  • mixed economy - combination of free market and command economy
  • command economy - government are the decision makers
• Human capital describes how valuable a worker is to an organization based on their education, skills, and experience.