1. AS Micro – Economic Methodology and Economic
Problem
Economic methodology
Definition of economics – the study of choice and decision making in a world with limited
resources
Social science – a type of science that studies society and the relationships within society
Positive and Normative statements:
Positive (objective) – a statement, which objectively describes the economy (can be proven)
Normative (subjective) – an opinion or view about what ought to, or should, be done. AKA
value judgement
The nature and purpose of economic activity
The basic economic problem:
• Scarcity – there are only a limited number of resources to produce goods and
services. The finite resources used to produce goods and services are known as the 4
factors of production
The key economic decisions are:
• What to produce?
• How to produce?
• Who is to benefit from the goods and services produced?
Economic resources
Factors of production:
• Land – representing the primary resources involved in production
• Labour – representing human effort and work in transforming inputs to outputs
• Capital – machinery and plant that are used to help transform resources into
production
• Enterprise – decision making and risk taking in terms of combining the other factors
of production to produce particular goods or services
Scarcity, Choice and Allocation of Resources
1
,Why is scarcity a problem?
• Needs – Anything that we need to keep us alive, e.g. food, clothing and shelter
• Wants – Anything that we do not need is a want
Economic and Free goods:
• Economic goods – resources which are scarce
• Free goods – are plenty resources that cost nothing to society, e.g. the air
Choices are influenced by:
• Economic factors
• Non-economic factors
Sectors of the economy:
• Primary – this area extracts raw materials from the ground, and includes farms and
mines
• Secondary – the secondary sector manufactures using materials from primary sector
• Tertiary – provide services, e.g. shops
Specialisation:
• The production of a limited range of goods by an individual, firm or country in
cooperation with others, so that together a complete range of goods is produced
Objectives:
• An objective is something that someone wishes to achieve
• Consumer objectives - want to maximise their own economic welfare (utility or
satisfaction)
• Worker objectives – want to maximise their own welfare at work, often determined
by rate of pay
• Firm objectives – usually firms want to make profit
• Government objectives – it’s assume that the government acts in the best interest of
their citizens
Economic system:
There are 2 allocative mechanisms by which economic systems are defined
• Market mechanism (price mechanism) – market economy, market forces allocate
scarce resources (supply and demand)
• Planning mechanism – command economy, an economy in which decisions about
what, how much, and when to produce are made by the centre planning authority
2
,Market – a place where buyers and sellers meet
Private and public sectors:
• Private sector – own and run by private individuals, usually for profit
• Public sector – own and run the government for the benefit of the public
Systems of resource allocation:
The role of the market:
• Markets bring together buyers and sellers of goods and services
• Command economy – has choices made, which decide how to use resources through
a process of central planning
• Free market – where the government doesn’t intervene (there are no pure free
market)
• Mixed – a blend of command economy and free market
The classification of economies:
• Public sector – the part of the economy, which is organised directly or indirectly by
national or local government. Decisions will tend to be made in the public interest,
rather than on the basis profitability, although some although some activities are
required to cover their costs
• Private sector – all the firms, which are owned by shareholders or individuals.
Decisions in the sector based on market forces, with businesses responding to the
conditions of supply and demand
• Planned economy – an economy in which all the resource allocation decisions are
taken by government departments
• Mixed economy – one in which there is both public and private sector
• Socialist economy – a social economic system which involves collective ownership of
the means of production and a major role for the state in the provision of services
which can improve people’s welfare. Communism is the extreme form of a socialist
economy
• Capitalist economy – an economy in which the price mechanism is used to
determine how resources are allocated
Opportunity costs and trade-offs:
• Opportunity costs – the next best alternative forgone
• Trade-offs – occur when individuals, businesses or government tries to compromise
and trade options off against each other
Production Possibility Diagrams
3
, This diagram shows the different combination of goods that can be produced using available
resources
• Capital goods – those used to produce other goods and services, e.g. machinery,
vehicles
• Consumer goods – goods for consumption (or use) for all
• If there was an increase in the factors of production, then the PPF would shift
outwards. This represents an increase in the potential output of an economy
• Productive efficiency – occurs when it’s impossible to produce more of 1 good
without producing less of another (macro). For micro environment, this occurs when
the average total costs of production are minimised
• Allocative efficiency – available economic resources are used to produce the
combination of goods and services that best match people’s taste and preferences
4
Problem
Economic methodology
Definition of economics – the study of choice and decision making in a world with limited
resources
Social science – a type of science that studies society and the relationships within society
Positive and Normative statements:
Positive (objective) – a statement, which objectively describes the economy (can be proven)
Normative (subjective) – an opinion or view about what ought to, or should, be done. AKA
value judgement
The nature and purpose of economic activity
The basic economic problem:
• Scarcity – there are only a limited number of resources to produce goods and
services. The finite resources used to produce goods and services are known as the 4
factors of production
The key economic decisions are:
• What to produce?
• How to produce?
• Who is to benefit from the goods and services produced?
Economic resources
Factors of production:
• Land – representing the primary resources involved in production
• Labour – representing human effort and work in transforming inputs to outputs
• Capital – machinery and plant that are used to help transform resources into
production
• Enterprise – decision making and risk taking in terms of combining the other factors
of production to produce particular goods or services
Scarcity, Choice and Allocation of Resources
1
,Why is scarcity a problem?
• Needs – Anything that we need to keep us alive, e.g. food, clothing and shelter
• Wants – Anything that we do not need is a want
Economic and Free goods:
• Economic goods – resources which are scarce
• Free goods – are plenty resources that cost nothing to society, e.g. the air
Choices are influenced by:
• Economic factors
• Non-economic factors
Sectors of the economy:
• Primary – this area extracts raw materials from the ground, and includes farms and
mines
• Secondary – the secondary sector manufactures using materials from primary sector
• Tertiary – provide services, e.g. shops
Specialisation:
• The production of a limited range of goods by an individual, firm or country in
cooperation with others, so that together a complete range of goods is produced
Objectives:
• An objective is something that someone wishes to achieve
• Consumer objectives - want to maximise their own economic welfare (utility or
satisfaction)
• Worker objectives – want to maximise their own welfare at work, often determined
by rate of pay
• Firm objectives – usually firms want to make profit
• Government objectives – it’s assume that the government acts in the best interest of
their citizens
Economic system:
There are 2 allocative mechanisms by which economic systems are defined
• Market mechanism (price mechanism) – market economy, market forces allocate
scarce resources (supply and demand)
• Planning mechanism – command economy, an economy in which decisions about
what, how much, and when to produce are made by the centre planning authority
2
,Market – a place where buyers and sellers meet
Private and public sectors:
• Private sector – own and run by private individuals, usually for profit
• Public sector – own and run the government for the benefit of the public
Systems of resource allocation:
The role of the market:
• Markets bring together buyers and sellers of goods and services
• Command economy – has choices made, which decide how to use resources through
a process of central planning
• Free market – where the government doesn’t intervene (there are no pure free
market)
• Mixed – a blend of command economy and free market
The classification of economies:
• Public sector – the part of the economy, which is organised directly or indirectly by
national or local government. Decisions will tend to be made in the public interest,
rather than on the basis profitability, although some although some activities are
required to cover their costs
• Private sector – all the firms, which are owned by shareholders or individuals.
Decisions in the sector based on market forces, with businesses responding to the
conditions of supply and demand
• Planned economy – an economy in which all the resource allocation decisions are
taken by government departments
• Mixed economy – one in which there is both public and private sector
• Socialist economy – a social economic system which involves collective ownership of
the means of production and a major role for the state in the provision of services
which can improve people’s welfare. Communism is the extreme form of a socialist
economy
• Capitalist economy – an economy in which the price mechanism is used to
determine how resources are allocated
Opportunity costs and trade-offs:
• Opportunity costs – the next best alternative forgone
• Trade-offs – occur when individuals, businesses or government tries to compromise
and trade options off against each other
Production Possibility Diagrams
3
, This diagram shows the different combination of goods that can be produced using available
resources
• Capital goods – those used to produce other goods and services, e.g. machinery,
vehicles
• Consumer goods – goods for consumption (or use) for all
• If there was an increase in the factors of production, then the PPF would shift
outwards. This represents an increase in the potential output of an economy
• Productive efficiency – occurs when it’s impossible to produce more of 1 good
without producing less of another (macro). For micro environment, this occurs when
the average total costs of production are minimised
• Allocative efficiency – available economic resources are used to produce the
combination of goods and services that best match people’s taste and preferences
4
