Economic Methodology and the Economic Problem
1.1 Economic Methodology
● Economists need to make assumptions, A key assumption that is made is assuming
that events occur with ceteris paribus. This assumption is that other things are being
held equal or constant so nothing else changes.
● Economists cannot conduct scientific experiments like in sciences, so models are
devised. Economists then use real life scenarios to build these modules upon and
assumptions are made with these models
● It is important to be able to distinguish between a fact and fiction in current affairs
● Positive Statements: these are objective. They can be tested with factual evidence
and can consequently be rejected or accepted
● Look for words such as “will” or “is”
● For example, “Raising the tax on alcohol will lead to a fall in the demand of alcohol
and a fall in the profits of pub landlords” is a positive statement. “Higher temperature
will lead to an increase in the demand for sunscreen” is also a positive statement
● The key thing here is that these statements can be tested, and the results can be
examined which then leaves the statement to be rejected or accepted
● Normative statements: these are based on value judgement. These are subjective
and based on opinion rather than factual evidence.
● Look for words such as “should” and if the statement is suggesting one action is
more credible than another,
● For example, “The free market is the best way to allocate resources” is a normative
statement because it is based on opinion and suggests one method of resource
allocation is better than another, “The government should increase the tax on
alcohol” is another normative statement.
● Value judgments can influence economic decisions making and policy. Different
economists may make different judgements from the same statistic. For example, the
rate of inflation can give rise to different conclusions
● People's views concerning the best option are influenced by the positive
consequences of different decision and my moral and political judgements
1.2 The Nature and Purpose of Economic Activity
● The purpose of economic activity is to produce goods and services which satisfy
consumer needs and wants
● This requires using resources (inputs in the form of the factors of production) to
produce outputs (the goods and services)
● Economists have to make decisions about how to use scarce resources:
What is to be Produced?
The government and private sector is faced with this decision. They also have
to consider how much of each good is to be produced. Due to this problem of
opportunity cost, they have to be careful about the decisions made
How should it be produced?
This considers how goods and services produced will be distributed. The
rewards from each factor of production are considered. Firms aim to minimise
, costs and maximise profits, so production needs to be efficient. They will
consider how much each factor of production cost and how productive it is.
This will help them decide between labour intensive production and capital-
intensive production
Who will benefit from the goods and services produced?
Consumers who have purchasing power can benefit from the goods and
services produced. Those who are willing and able to pay the price charged
for a good or service will get the good or service.
1.3 Economic Resources
● Economic resources are the factors of prediction. These are land, labour, capital and
enterprise
● The factors of production (CELL):
Factor Description Incentive/ Reward
Capital Physical: goods and services Interest from the investment
which can be used in the
production process.
Fixed: Machines, buildings
Working: finished or semi-
finished consumer goods
Entrepreneurship Managerial ability. The Profit- an incentive to take risks
entrepreneur is someone who
takes risks, innovated and
uses the factors of production.
Resources are draw together
into the production process
Land Natural resources which Rent
include oil, coal, wheat, and
water. It can also be the
physical space for the fixed
capital.
Labour Human capital, which is the Wages
workforce of the economy
● The environment is a scarce resource. There are only a limited amount of resources
on the panet. These are made up of renewable and nonrenewable resources.
Renewable and Non Renewable:
➔ Renewable resources can be replenished so the stook level of the resources can be
maintained over a period of time. For example commodities such as oxygen, fish or
solar power are renewable assuming the rate of consumption of the resources is less
1.1 Economic Methodology
● Economists need to make assumptions, A key assumption that is made is assuming
that events occur with ceteris paribus. This assumption is that other things are being
held equal or constant so nothing else changes.
● Economists cannot conduct scientific experiments like in sciences, so models are
devised. Economists then use real life scenarios to build these modules upon and
assumptions are made with these models
● It is important to be able to distinguish between a fact and fiction in current affairs
● Positive Statements: these are objective. They can be tested with factual evidence
and can consequently be rejected or accepted
● Look for words such as “will” or “is”
● For example, “Raising the tax on alcohol will lead to a fall in the demand of alcohol
and a fall in the profits of pub landlords” is a positive statement. “Higher temperature
will lead to an increase in the demand for sunscreen” is also a positive statement
● The key thing here is that these statements can be tested, and the results can be
examined which then leaves the statement to be rejected or accepted
● Normative statements: these are based on value judgement. These are subjective
and based on opinion rather than factual evidence.
● Look for words such as “should” and if the statement is suggesting one action is
more credible than another,
● For example, “The free market is the best way to allocate resources” is a normative
statement because it is based on opinion and suggests one method of resource
allocation is better than another, “The government should increase the tax on
alcohol” is another normative statement.
● Value judgments can influence economic decisions making and policy. Different
economists may make different judgements from the same statistic. For example, the
rate of inflation can give rise to different conclusions
● People's views concerning the best option are influenced by the positive
consequences of different decision and my moral and political judgements
1.2 The Nature and Purpose of Economic Activity
● The purpose of economic activity is to produce goods and services which satisfy
consumer needs and wants
● This requires using resources (inputs in the form of the factors of production) to
produce outputs (the goods and services)
● Economists have to make decisions about how to use scarce resources:
What is to be Produced?
The government and private sector is faced with this decision. They also have
to consider how much of each good is to be produced. Due to this problem of
opportunity cost, they have to be careful about the decisions made
How should it be produced?
This considers how goods and services produced will be distributed. The
rewards from each factor of production are considered. Firms aim to minimise
, costs and maximise profits, so production needs to be efficient. They will
consider how much each factor of production cost and how productive it is.
This will help them decide between labour intensive production and capital-
intensive production
Who will benefit from the goods and services produced?
Consumers who have purchasing power can benefit from the goods and
services produced. Those who are willing and able to pay the price charged
for a good or service will get the good or service.
1.3 Economic Resources
● Economic resources are the factors of prediction. These are land, labour, capital and
enterprise
● The factors of production (CELL):
Factor Description Incentive/ Reward
Capital Physical: goods and services Interest from the investment
which can be used in the
production process.
Fixed: Machines, buildings
Working: finished or semi-
finished consumer goods
Entrepreneurship Managerial ability. The Profit- an incentive to take risks
entrepreneur is someone who
takes risks, innovated and
uses the factors of production.
Resources are draw together
into the production process
Land Natural resources which Rent
include oil, coal, wheat, and
water. It can also be the
physical space for the fixed
capital.
Labour Human capital, which is the Wages
workforce of the economy
● The environment is a scarce resource. There are only a limited amount of resources
on the panet. These are made up of renewable and nonrenewable resources.
Renewable and Non Renewable:
➔ Renewable resources can be replenished so the stook level of the resources can be
maintained over a period of time. For example commodities such as oxygen, fish or
solar power are renewable assuming the rate of consumption of the resources is less
