Economic Methodology

• Ceteris Parabus 


  Means all other things being constant in latin
• Positive vs Normative Statements

  • A positive statement is objective and can be tested and declared true or false
  • A normative statement is subjective and contains a value judgement that cant be declared true or false
• What's the basic economic problem

  There is a limited amount of resources available to satisfy the unlimited wants and needs of consumers (links to scarcity)
• What 3 questions does the economic problem try to answer?

  What to produce, how to produce, and for whom to produce.
• 4 Factors of production and their rewards?

  1 Capital - Interest

  2 Enterprise - Profit

  3 Land - Rent

  4 Labour - Wages
• What does a PPF graph illustrate?

  A production possibility curve shows the maximum possible output combinations of two goods produced by a firm or an economy, assuming full employment of efficient resources. This includes how we allocate resources, opportunity cost and efficiency
• What do the points on a PPF diagram show?


  
• What is economic growth?

  An increase in real output measured by GDP
• What does economic decline depend on?

  The quality and quantity of FOP
• Production efficiency?

  Maximizing output with minimum input.
• Allocative efficiency?

  Allocative efficiency refers to the optimal allocation of resources to maximize societal welfare from society's POV
• What does a point inside the PPF curve indicate?

  Underutilization
• What does a point on the PPF curve indicate?

  Efficient allocation
• What does a point outside the PPF curve indicate?

  That there currently are not enough resources to meet that point. Its impossible
• What does a straight line PPF show?

  Constant opportunity cost
• What is opportunity cost?


  The value of the next best alternative that you give up when making a decision.
• Economics

  A social science that studies how the world's scarce resources are allocated to competing used to satisfy society's wants and needs
• Economic welfare


  The standard of living or general wellbeing of people in society
• Define 'factors of production'


  They are a countries productive economic resources made up of CELL
• How can a free market economy answer the three fundamental economic problems?

  Firms would discover what goods and services consumers demand, e.g. via market research. Firms would then strive to produce those goods and services as efficiently as possible in order to maximise profits. Those consumers with the highest incomes, i.e. the greatest ability to pay, would get the goods they desire.
• Difference between free good and economic good

  An economic good is one which has an opportunity cost in consumption because it uses up scarce resources, e.g. a car. A free good is one which does not have an opportunity cost in consumption because it does not use up scarce resources, e.g. air.