Economic Methodology
● Social science- studies the society and the relationships of individuals within that
society
● Economics studies the economic behaviour and the economic relationships of
individuals and groups
● It relates to science through tests:
- Observing consumer behaviour
- Forming hypotheses to explain how consumers spend their money
- Developing predictions from hypothesis
- Using evidence to test predictions- if evidence concluded with hypothesis
then further tests are made. If not, a new or revised hypothesis is made.
● Often economic theories only survive with significant exceptions which generates
criticism as theories are more likely generalisations
● Economics response to this by saying that they only wish to associate with positive
economics (facts that can be scientifically tested) rather than normative theories
which involve value judgements
Positive Statement: statement of fact that can be scientifically tested to see if it is correct or
not
Normative Statements: statement that included a value judgement that cannot be refuted
just by looking at evidence. People have different opinions of right and wrong.
- Government ministers make value based judgements when deciding economic
policies, try to be scinefict by hiring experts but choice of experts is also normative.
The Nature and Purpose of Economic Actions:
The central purpose of political activity is to satisfy the needs and wants of someone.
Satisfying the needs and wants improves economic welfare- anything that improves human
happiness. Short term happiness can be found at the expense of long term happiness. Eg
consuming McDonalds.
- Not all welfare has to be through consumption of material goods- quality of life factors
such as fun from spending time with friends also count
Economic Resources
Production: process that turns inputs into outputs of goods and services
Factors of production: Land, Labour, Capital and Enterprise
The Environments Natural Resources: physical (soil) gases (hydrogen) and abstract (wind
energy). Can be split into renewable and non renewable/ finite resources. Part of the factor
of production land.
Scarcity, Choice, Resource Allocation
Fundamental economic problem- how best to make decisions about the allocation of scarce
resources among competing uses to improve economic welfare
Scarcity- the fact that there are a limited amount of resources and unlimited wants.
- This means that people have to make choices as people face budget or time
constraints. This means there are opportunity costs (the cost of giving up the next
best alternative) that arise, as people cannot have everything and it is assumed that
people will make a choice to maximise the economic welfare due to behaving
rationally
, - Firms also have to make choices on how/what to produce eg clothes designer
choosing to produce more shirts would have to produce less dresses as they only
have a limited amount of material
- Teenagers also have to decide to leave school and get a job or go to university.
Defined as intertemporal choice (choice over time) as it involves deciding between
money now or in the future
The rationing of scarce resources is done by:
1. Market Price
2. Consumer income
3. Assessment of need
4. Household postcode
5. Educational level
6. Age
7. Gender
8. Nationality
Production Possibility Diagrams
● Production possibility frontier- a curve that depicts the various combinations of two
products that can be provided when all the available resources are fully and
efficiently employed.
● Shows all the combinations of consumer goods and capital goods that can be
produced using all available resources
● Productive efficiency- when it is impossible to produce more of one good without
producing less of another. For a firm, it occurs when the average total costs of
production is minimised. Any point on the PPF is productively efficient as it is the
result of a commendation of resources produced when all resources are employed
● PPFs do not show allocatively efficient outputs (when the available economic
resources are used to produce the combination of resources that will maximise
society's economic welfare) as this requires a value judgement about what society
preferences are.
● Law of diminishing returns occurs because not all factors inputs are equally suited to
producing items leading to lower productivity
- If the equilibrium point lies on the curve, it is operating at full current potential
- If below the curve, not all the factor inputs are being used efficiently eg
unemployment
- If above the curve, this productivity potential is not yet attainable
Economic Growth
This causes the PPF to shift to the right, this could be due to improvement in the factors
inputs eg more advanced technology
Economic shrink causes the PPF to shift inwards eg natural disasters or the brain drain
meaning the overall production potential has decreased- this is permanent unline strikes or
unemployment which are the inputs not being used efficiently
- When operating inside the curve, get closer to the curve by increasing outputs of
goods and services
- Trade between countries allows nations to consume beyond their own productive
potentials
● Social science- studies the society and the relationships of individuals within that
society
● Economics studies the economic behaviour and the economic relationships of
individuals and groups
● It relates to science through tests:
- Observing consumer behaviour
- Forming hypotheses to explain how consumers spend their money
- Developing predictions from hypothesis
- Using evidence to test predictions- if evidence concluded with hypothesis
then further tests are made. If not, a new or revised hypothesis is made.
● Often economic theories only survive with significant exceptions which generates
criticism as theories are more likely generalisations
● Economics response to this by saying that they only wish to associate with positive
economics (facts that can be scientifically tested) rather than normative theories
which involve value judgements
Positive Statement: statement of fact that can be scientifically tested to see if it is correct or
not
Normative Statements: statement that included a value judgement that cannot be refuted
just by looking at evidence. People have different opinions of right and wrong.
- Government ministers make value based judgements when deciding economic
policies, try to be scinefict by hiring experts but choice of experts is also normative.
The Nature and Purpose of Economic Actions:
The central purpose of political activity is to satisfy the needs and wants of someone.
Satisfying the needs and wants improves economic welfare- anything that improves human
happiness. Short term happiness can be found at the expense of long term happiness. Eg
consuming McDonalds.
- Not all welfare has to be through consumption of material goods- quality of life factors
such as fun from spending time with friends also count
Economic Resources
Production: process that turns inputs into outputs of goods and services
Factors of production: Land, Labour, Capital and Enterprise
The Environments Natural Resources: physical (soil) gases (hydrogen) and abstract (wind
energy). Can be split into renewable and non renewable/ finite resources. Part of the factor
of production land.
Scarcity, Choice, Resource Allocation
Fundamental economic problem- how best to make decisions about the allocation of scarce
resources among competing uses to improve economic welfare
Scarcity- the fact that there are a limited amount of resources and unlimited wants.
- This means that people have to make choices as people face budget or time
constraints. This means there are opportunity costs (the cost of giving up the next
best alternative) that arise, as people cannot have everything and it is assumed that
people will make a choice to maximise the economic welfare due to behaving
rationally
, - Firms also have to make choices on how/what to produce eg clothes designer
choosing to produce more shirts would have to produce less dresses as they only
have a limited amount of material
- Teenagers also have to decide to leave school and get a job or go to university.
Defined as intertemporal choice (choice over time) as it involves deciding between
money now or in the future
The rationing of scarce resources is done by:
1. Market Price
2. Consumer income
3. Assessment of need
4. Household postcode
5. Educational level
6. Age
7. Gender
8. Nationality
Production Possibility Diagrams
● Production possibility frontier- a curve that depicts the various combinations of two
products that can be provided when all the available resources are fully and
efficiently employed.
● Shows all the combinations of consumer goods and capital goods that can be
produced using all available resources
● Productive efficiency- when it is impossible to produce more of one good without
producing less of another. For a firm, it occurs when the average total costs of
production is minimised. Any point on the PPF is productively efficient as it is the
result of a commendation of resources produced when all resources are employed
● PPFs do not show allocatively efficient outputs (when the available economic
resources are used to produce the combination of resources that will maximise
society's economic welfare) as this requires a value judgement about what society
preferences are.
● Law of diminishing returns occurs because not all factors inputs are equally suited to
producing items leading to lower productivity
- If the equilibrium point lies on the curve, it is operating at full current potential
- If below the curve, not all the factor inputs are being used efficiently eg
unemployment
- If above the curve, this productivity potential is not yet attainable
Economic Growth
This causes the PPF to shift to the right, this could be due to improvement in the factors
inputs eg more advanced technology
Economic shrink causes the PPF to shift inwards eg natural disasters or the brain drain
meaning the overall production potential has decreased- this is permanent unline strikes or
unemployment which are the inputs not being used efficiently
- When operating inside the curve, get closer to the curve by increasing outputs of
goods and services
- Trade between countries allows nations to consume beyond their own productive
potentials
