Economic methodology + economic problem

• Ceteris paribus


  Assumption that other things are being held equal or constant, so nothing else changes
• Economists


  • Cannot conduct scientific experiments like in the natural sciences, so models are devised
  • Use real-life scenarios to build these models upon, and assumptions are made with the models
• Positive statements


  Objective, can be tested with factual evidence, and can consequently be rejected or accepted
• Normative statements


  Based on value judgements, subjective and based on opinion rather than factual evidence
• Value judgements can influence economic decision making and policy
• People's views concerning the best option are influenced by the positive consequences of different decisions and by moral and political judgements
• Purpose of economic activity

  To produce goods and services which satisfy consumer needs and wants
• Producing goods and services

  1. Using resources (inputs in the form of the factors of production)

  2. Producing outputs (the goods and services)
• Factors of production

  • Land
  • Labour
  • Capital
  • Enterprise
• Capital

  Physical: goods which can be used in the production process

  Fixed: Machines; buildings

  Working: finished or semi-finished consumer goods
• Entrepreneurship

  Managerial ability. The entrepreneur is someone who takes risks, innovates, and uses the factors of production.
• Reward/Incentive for Capital

  Interest from the investment
• Reward/Incentive for Entrepreneurship

  Profit- an incentive to take risks
• Land

  Natural resources such as oil, coal, wheat, water. It can also be the physical space for fixed capital.
• Labour

  Human capital, which is the workforce of the economy.
• Renewable resources

  Can be replenished, so the stock level of the resources can be maintained over a period of time. For example, commodities such as oxygen, fish, or solar power.
• If the renewable resource is consumed faster than it is renewed, the stock of the resource will decline over time.
• Non-renewable resources

  Cannot be renewed. For example, things produced from fossil fuels such as coal, oil and natural gas.
• Wants are unlimited and resources are finite, so choices have to be made
• Opportunity cost

  The value of the next best alternative forgone
• Production possibility frontiers (PPFs)


  Depict the maximum productive potential of an economy, using a combination of two goods or services, when resources are fully and efficiently employed
• Economic growth


  Can be shown by an outward shift in the PPF
• Economic decline


  Can be shown by an inward shift in the PPF
• Factors that can shift the PPF curve

  • Increase in the quantity or quality of resources
  • Constant state of technology
• Capital goods


  Goods which can be used to produce other goods, such as machinery
• Consumer goods


  Goods which cannot be used to produce other goods, such as clothing
• Productive efficiency


  • All points on the PPF boundary are productively efficient, as resources are being used to their productive potential
• Allocative efficiency


  • When no one can be made better off without making someone else worse off (Pareto efficiency)
  • If more of both goods could be produced, there would be a gain in allocative efficiency as there is an improvement in welfare
• The PPF only shows potential output, and allocative efficiency is concerned with how goods are distributed in society