1.1: Economic Methodology and the Economic Problem
Economic Methodology
Positive economic statements
Objective statement that can be tested against the facts to be declared either true or false
They do not necessarily have to be true
Normative economic statements
Subjective opinions/value judgements that cannot be tested against facts
Concerns view about what individuals, firms and governments should do, based on people’s ethical, moral or
political views
Much of economic policy rests on normative judgments, about the ‘right’ levels of taxes, minimum wages
etc.
Needs and Wants
The purpose of economic activity is the production of goods/services to satisfy people's needs and wants
A need is something that is necessary for survival - A want is something that is desirable, but not essential
Satisfying people's needs and wants means improving economic welfare (the economic well-being of an
individual)
Welfare refers to the consumer's happiness – anything that makes a person happier improves their economic
welfare
The Economic Problem
The fundamental problem is that resources are scarce but wants are infinite
Economies must allocate scarce resources (factors of productions) between alternate uses
How best to allocate scarce resources to improve and maximise human happiness and welfare
Scarcity
Occurs because our limited resources are insufficient to make all the products consumers want
For an individual, resources include time, money and skill (labour)
For a country, resources include natural resources, labour forces, capital and technology
Resources: items used to produce goods/services - referred to as inputs/factors of production
Trade-offs:
Due to limited resources, decisions are made about what goods/services can be produced and forgone
Trade-offs are economic choices involve deciding between having more of one item and less of the other
Products, Goods and Services
Product – an item that satisfies a want or need – either a good or service
Good – physical item that satisfies a want or a need (e.g. car)
Service – non-physical item that satisfies a want or a need (e.g. a haircut)
Free goods:
A good without an opportunity cost, made without using scarce resources – no economic cost
Can be produced by a society in as much quantities as needed, with little or no effort
, An item given away for 'free' is not always a free good
e.g. if a firm gives away a 'free' toy, it is not free as it required time and raw materials to produce
Choice and Opportunity Cost
Choice: selecting one option between alternatives
The resources are limited - producers and consumers make choices between competitive alternatives
Individuals choose how best to use their skill/effort - firms choose how best to use their workers and
machinery
Governments must choose how best to use the taxpayers' money – building a hospital or building schools
Opportunity cost: cost of the next best alternative forgone (given up)
Making an economic choice involves a sacrifice – an alternative is given up and results in the loss of the
benefit that the next best alternative would have provided
The benefit referred to is either the product, income, time or resource sacrificed in choosing the other option
Consumers decide what to buy with their limited income – computer or holiday
Workers decide how to use their time – extra hour overtime for pay or more leisure time
Economic Sectors
Primary sector – extracts raw materials (e.g. metals/coal/oil)
Secondary sector – manufacture goods into products (e.g. building homes)
Tertiary sector – commercial services that support the production and distribution of goods (e.g. transport)
Quaternary sector – intellectual and information processing services (e.g. technology)
Private sector: Made up of households and firms, controlled by private individuals - not owned/operated by the
government
Public sector: Made up of the central government in London, local government and public corporations -
organisations that are owned or operated by the government - e.g. educational and health bodies, police and
prisons
The Economic Unit
Households: An individual/group of people who live at the same address – consumptive unit – they must
consider their limited income and distinguish between their wants and needs when making economic choices
Firms: An organisation that hires and organises resources to make products for consumers - productive unit –
profit incentive
Government: Part of the public sector- varies depending on the party selected, regarding their political views
Economic Methodology
Positive economic statements
Objective statement that can be tested against the facts to be declared either true or false
They do not necessarily have to be true
Normative economic statements
Subjective opinions/value judgements that cannot be tested against facts
Concerns view about what individuals, firms and governments should do, based on people’s ethical, moral or
political views
Much of economic policy rests on normative judgments, about the ‘right’ levels of taxes, minimum wages
etc.
Needs and Wants
The purpose of economic activity is the production of goods/services to satisfy people's needs and wants
A need is something that is necessary for survival - A want is something that is desirable, but not essential
Satisfying people's needs and wants means improving economic welfare (the economic well-being of an
individual)
Welfare refers to the consumer's happiness – anything that makes a person happier improves their economic
welfare
The Economic Problem
The fundamental problem is that resources are scarce but wants are infinite
Economies must allocate scarce resources (factors of productions) between alternate uses
How best to allocate scarce resources to improve and maximise human happiness and welfare
Scarcity
Occurs because our limited resources are insufficient to make all the products consumers want
For an individual, resources include time, money and skill (labour)
For a country, resources include natural resources, labour forces, capital and technology
Resources: items used to produce goods/services - referred to as inputs/factors of production
Trade-offs:
Due to limited resources, decisions are made about what goods/services can be produced and forgone
Trade-offs are economic choices involve deciding between having more of one item and less of the other
Products, Goods and Services
Product – an item that satisfies a want or need – either a good or service
Good – physical item that satisfies a want or a need (e.g. car)
Service – non-physical item that satisfies a want or a need (e.g. a haircut)
Free goods:
A good without an opportunity cost, made without using scarce resources – no economic cost
Can be produced by a society in as much quantities as needed, with little or no effort
, An item given away for 'free' is not always a free good
e.g. if a firm gives away a 'free' toy, it is not free as it required time and raw materials to produce
Choice and Opportunity Cost
Choice: selecting one option between alternatives
The resources are limited - producers and consumers make choices between competitive alternatives
Individuals choose how best to use their skill/effort - firms choose how best to use their workers and
machinery
Governments must choose how best to use the taxpayers' money – building a hospital or building schools
Opportunity cost: cost of the next best alternative forgone (given up)
Making an economic choice involves a sacrifice – an alternative is given up and results in the loss of the
benefit that the next best alternative would have provided
The benefit referred to is either the product, income, time or resource sacrificed in choosing the other option
Consumers decide what to buy with their limited income – computer or holiday
Workers decide how to use their time – extra hour overtime for pay or more leisure time
Economic Sectors
Primary sector – extracts raw materials (e.g. metals/coal/oil)
Secondary sector – manufacture goods into products (e.g. building homes)
Tertiary sector – commercial services that support the production and distribution of goods (e.g. transport)
Quaternary sector – intellectual and information processing services (e.g. technology)
Private sector: Made up of households and firms, controlled by private individuals - not owned/operated by the
government
Public sector: Made up of the central government in London, local government and public corporations -
organisations that are owned or operated by the government - e.g. educational and health bodies, police and
prisons
The Economic Unit
Households: An individual/group of people who live at the same address – consumptive unit – they must
consider their limited income and distinguish between their wants and needs when making economic choices
Firms: An organisation that hires and organises resources to make products for consumers - productive unit –
profit incentive
Government: Part of the public sector- varies depending on the party selected, regarding their political views
