economics methodology and the economic problem

• cetris paribus 


  assumption that other things are being held equal or constant, so nothing else changes
• positive statement


  • objective
  • can be tested with factual evidence
  • can be accepted or rejected
• normative statement 


  • value judgements
  • subjective
  • based on opinion
  • eg: should
• purpose of economic activity

  to produce goods and services that satisfy consumer wants and needs
• how to use scarce resources:

  
  

  • what is to be produced? (opportunity cost)
  • how it should be produced?
  • who will benefit from the g+s produced? (willing and able)
• FOP: land 


  natural resources eg: oil, coal

  reward: rent
• FOP: labour

  human capital

  reward: wages
• FOP: capital

  machinery used in production process

  reward: interest
• FOP: entrepreneurship 


  risk taker, combines the FOP

  reward: profit
• renewable resources

  • can be replenished
  • rate of consumption must be lower than rate of replenishment
• non-renewable resources


  • cant be replenished
  • stock level decreases over time
• basic economic problem

  unlimited wants, finite resources (scarcity)
• opportunity cost 


  value of the next best alternative foregone