Economic methodology and the economic problem
Economic methodology
● Economists assume events occur with ceteris paribus - other things are
held equal or constant, so nothing else changes
● Can’t scientifically experiment, so models are devised + build up by real-
life scenarios
● Distinguish between fact + fiction in current affairs
● Positive statements are objective + can be tested with evidence -
rejected or accepted
● Normative statements are based on value judgements - subjective
● Economists may make different judgements from the same statistic
● Views are influenced by the positive consequences of decisions and by
moral + political judgements
The nature and purpose of economic activity
The purpose of economic activity is to produce goods and services which
satisfy needs + wants. This uses inputs to produce outputs.
Decisions on scarce resources:
What is to be produced?
● Consider how much is produced
● Consider opportunity costs
How should it be produced?
● Considers distribution, rewards + costs from each factor of production
● Efficiency to maximise profits
● Labour or capital intensive
Who will benefit?
● Consumers with purchasing power can benefit
● Those willing + able to pay the price
Economic resources
The factors of production (CELL):
, The environment is a scarce resource with limited resources.
Renewable resources
Can be replenished + maintained. Commodities are renewable if
consumption is less than the rate of replenishment. Can be managed by e.g.
limiting deforestation + fishing quotas. As of consumption rates, 2 planets
will be required to meet demand by 2050.
Non-renewable resources
Cannot be renewed e.g. fossil fuels. The stock levels decrease but methods
e.g. recycling + substitutes can reduce the rate of decline.
Scarcity, choice and allocation of resources
Scarcity is the basic economic problem. Wants are unlimited and resources
are finite, so choices have to be made. Resources have to be used +
distributed optimally. Scarcity of the resource (e.g. money) means a choice
has to be made.
This creates an opportunity cost - the value of the next best alternative
forgone. This is important to economic agents e.g. producers (choose
between labour or capital), government (spending on NHS or education).
Production possibility diagrams
Production possibility frontiers (PPFs) depict the maximum productive
Economic methodology
● Economists assume events occur with ceteris paribus - other things are
held equal or constant, so nothing else changes
● Can’t scientifically experiment, so models are devised + build up by real-
life scenarios
● Distinguish between fact + fiction in current affairs
● Positive statements are objective + can be tested with evidence -
rejected or accepted
● Normative statements are based on value judgements - subjective
● Economists may make different judgements from the same statistic
● Views are influenced by the positive consequences of decisions and by
moral + political judgements
The nature and purpose of economic activity
The purpose of economic activity is to produce goods and services which
satisfy needs + wants. This uses inputs to produce outputs.
Decisions on scarce resources:
What is to be produced?
● Consider how much is produced
● Consider opportunity costs
How should it be produced?
● Considers distribution, rewards + costs from each factor of production
● Efficiency to maximise profits
● Labour or capital intensive
Who will benefit?
● Consumers with purchasing power can benefit
● Those willing + able to pay the price
Economic resources
The factors of production (CELL):
, The environment is a scarce resource with limited resources.
Renewable resources
Can be replenished + maintained. Commodities are renewable if
consumption is less than the rate of replenishment. Can be managed by e.g.
limiting deforestation + fishing quotas. As of consumption rates, 2 planets
will be required to meet demand by 2050.
Non-renewable resources
Cannot be renewed e.g. fossil fuels. The stock levels decrease but methods
e.g. recycling + substitutes can reduce the rate of decline.
Scarcity, choice and allocation of resources
Scarcity is the basic economic problem. Wants are unlimited and resources
are finite, so choices have to be made. Resources have to be used +
distributed optimally. Scarcity of the resource (e.g. money) means a choice
has to be made.
This creates an opportunity cost - the value of the next best alternative
forgone. This is important to economic agents e.g. producers (choose
between labour or capital), government (spending on NHS or education).
Production possibility diagrams
Production possibility frontiers (PPFs) depict the maximum productive
