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4.1.1 - Economic Methodology and The Economic Problem

The document discusses economic methodology, highlighting economics as a social science focused on resource allocation and the behavior of individuals in society. It outlines the nature and purpose of economic activity, emphasizing the production of goods and services to satisfy consumer needs and wants, and introduces the factors of production. Additionally, it addresses the economic problem of scarcity, choice, and the allocation of resources, including concepts like opportunity cost and production possibility diagrams.

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kareenasharma1806
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28 views5 pages

4.1.1 - Economic Methodology and The Economic Problem

The document discusses economic methodology, highlighting economics as a social science focused on resource allocation and the behavior of individuals in society. It outlines the nature and purpose of economic activity, emphasizing the production of goods and services to satisfy consumer needs and wants, and introduces the factors of production. Additionally, it addresses the economic problem of scarcity, choice, and the allocation of resources, including concepts like opportunity cost and production possibility diagrams.

Uploaded by

kareenasharma1806
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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4.1.

1 ECONOMIC METHODOLOGY AND THE ECONOMIC PROBLEM

4.1.1.1 – ECONOMIC METHODOLOGY:


 ECONOMICS AS A SOCIAL SCIENCE: the study of how to allocate scarce resources in the most
effective way. Economics is classified as a social science, meaning it observes and studies the
behaviour of people in society, and the way in which they interact

 NATURAL SCIENCE: the study of natural phenomenal, concerned with understanding said
phenomena, describing it, and consequently, predicting it
o SIMILARITIES TO ECONOMIC METHODOLOGY: both use models to simplify complex
systems and use data to accept or reject hypotheses
o DIFFERENCES WITH ECONOMIC METHODOLOGY: economics may be subjective at times,
whilst natural sciences generally aren’t

 POSITIVE STATEMENTS: objective, fact-based statements that can be tested to verify if they
are true or false (look for words like: will; is; can etc.)
 NORMATIVE STATEMENTS: subjective statements that contain value judgements (opinions)
(look for words like: may; should; might etc.) → normative statements have the ability to
influence economic decision-making significantly because moral and political judgements
can sway a leader's thoughts (and thus, the decisions they make)
4.1.1.2 – THE NATURE AND PURPOSE OF ECONOMIC ACTIVITY:
 THE CENTRAL PURPOSE OF ECONOMIC ACTIVITY: to produce goods and services that satisfy
the wants and needs of consumers in an economy
o WANTS: non-essential items that may improve economic welfare and utility (e.g. a car or
a new phone)
o NEEDS: essential items needed for survival (e.g. food and water or shelter)

 there are 3 key decisions every producer needs to make when producing goods and services:
o WHAT?: what good / service will they produce?
o HOW?: how are they going to produce this?
o WHO?: who are they producing their good (service for? (i.e. who will benefit?)
4.1.1.3 – ECONOMIC RESOURCES:
 ECONOMIC RESOURCES: items that are used to create goods / services - also know the
factors of production (FOPS). there are 4 FOPs used for production purposes:
o CAPITAL: assets / resources that are used to produce goods (e.g. technology of
machinery)
o ENTERPRISE: individuals who establish and manage businesses
o LAND: natural resources / geographical locations used to produce goods (e.g. coal, or
forests)
o LABOUR: human inputs into the production process, i.e. the individuals who work to
create goods / services (employees)
 [NOTE: the factors of production are scarce resources, meaning they will all eventually run
out. this means FOPS must be allocated where needed as best as possible, to promote
efficiency and prevent wastage of resources]
4.1.1.4 – SCARCITY, CHOICE AND THE ALLOCATION OF RESOURCES:
 THE ECONOMIC PROBLEM: the wants and needs of consumers are infinite; however,
economic resources are scarce. this means the allocation of resources has to be divided
between several various uses and sectors, and choices have to be made regarding how to do
so
o OPPORTUNITY COST: the choices made about the allocation of resources create what is
known as an opportunity cost, i.e. the cost of the next best alternative forgone (what you
have given up in order to benefit from something else) → it is the BEST option given up
o TRADE-OFF: the quantity of what you have given up in order to get something else
(generally depicted on a PPF curve) it is a culmination of ALL the options even up
4.1.1.5 – PRODUCTION POSSIBILITY DIAGRAMS (PPF CURVES):
 PRODUCTION POSSIBILITY DIAGRAMS: a diagram showing the maximum output a
combination of 2 goods / services can produce, if all its resources are fully and efficiently
employed  a PPF can depict an opportunity cost and trade-off
(insert PPF diagram here – label all the points etc)

 MOVEMENTS ALONG A PPF CURVE (insert diagram here): movements along a PPF curve are
caused by changes in consumer tastes or fashions. this leads to firms deciding to allocate
more resources towards producing a particular type of good that is in higher demand than
another good
 SHIFTS INWARDS AND OUTWARDS OF A PPF CURVE (insert diagram here): shifts inwards
and outwards of a PPF curve are caused by changes in an economy’s potential to produce
goods and services
o SHIFTS INWARDS: occurs when an economy can no longer produce as many goods and
services as they previously had done (PPF 1 to PPF 2). for example, if the level of
unemployment increased (a decrease in labour, one of the FOPs), there would be less
employees to produce output
o SHIFTS OUTWARDS: occurs when an economy can produce more goods and services
than they previously had done (PPF 1 to PPF 3). for example, developments in
technology or machinery may allow an economy to produce more output

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