1.1

• What is economics?

  The study of how scarce resources are allocated to satisfy unlimited wants and needs
• what is the basic economic problem?

  Scarcity - we have limited resources but unlimited wants, so choices must be made about allocation
• what is opportunity cost?

  the next best alternative foregone when making a decision
• what are the factors of production?

  • land - natural resources
  • labour - human effort
  • capital - tools, machinery
  • enterprise - risk-taking to combine the above
• what is the different between positive and normative statements?

  • positive statements: facts, testable, objective
  • normative statements: opinions, value judgments, subjective
• what makes economics a social science?

  it uses scientific methods to study how people make decisions - observing, modelling, and testing behaviour in real-world setting
• why do economists use models?

  to simplify complex real-world behaviour, make prediction, and understand economic relationships
• what are the limitations of economic models ?

  • rely on assumptions
  • may not reflect reality
  • human behaviour is unpredictable
• what is the ceteris paribus assumption?

  latin for ‘all other things being equal‘ - used to isolate one variable in analysis
• what is the role of value judgments in economic decision-making?

  value judgments influence normative statements and policy decisions, as people have different view on what’s ’fair‘ or ‘important‘
• can positive economics influence normative views?

  yes - factual data (positive) often informs opinions (normative), but the conclusions still depend on personal values
• what are the objective of economic agents ?

  • consumers: maximise utility
  • firms: maximise profit
  • governments: balance growth, inflation, unemployment, equity
• Which statement can be tested ?

  Positive statement - can be falsified if does not pass the test
• can normative statements be tested?

  No
• value judgments is about whether something is desirable or not
• normative statement definition

  a statement that includes a value judgment and cannot be refuted just by looking at the evidence
• positive statement definition

  a statement of fact that can be scientifically tested to see if it is correct or incorrect
• government ministers make value-based judgments when deciding on economic policies