Economic Problem | 4.1.1 | AQA A-Level Economics Notes
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4.1.1 Economic Methodology and the Economic Problem
Economics is a social science. We can’t conduct experiments like scientists can. Instead we build models and form hypotheses based on real life scenarios.
Ceteris paribus means we assume tha other factors are held constant.
Positive statements are objective. They can be tested and then be accepted or rejected.
Normative statements are subjective. They are based on opinions/ suggestions and value judgement. They cannot be tested.
People’s views concerning the best option are influenced by the positive consequences of different decisions and by moral and political judgements.
4.1.1.2 The Nature and Purpose of Economic Activity
The central purpose of economic activity is the production of goods and services to satisfy needs and wants.
The key economic decisions are: what to produce, how to produce and who is to benefit from the goods and services produced.
What is to be produced? – consider opportunity costs.
How to produce? - firms aim to minimise costs and maximise profits.
Who is to benefit? – those who are willing and able to pay the asking price can get the good or service.
4.1.1.3 Economic Resources
There are four factors of production: (CELL) capital, enterprise, labour and land.
Capital: man made goods used in the production of other goods (machinery).
Enterprise: risk-taker/ decision maker.
Land: natural resources.
Labour: workers
The environment is a scarce resource. Resources are either renewable (can be replenished) or non-renewable. Resources will also run out if the rate of consumption is greater than the rate is renewed at.
4.1.1.4 Scarcity, Choice and the Allocation of Resources
The fundamental economic problem is scarcity and that it results from limited resources and unlimited wants.
Scarcity means that choices have to be made about how scarce resources are allocated between different uses.
Choices have an opportunity cost.
Opportunity cost is the value of the next best alternative that had to be sacrificed.
4.1.1.5 Production Possibility Diagrams
Production possibility diagrams (PPFs) illustrate different features of the basic economic problem, such as: resource allocation, opportunity cost and trade-offs, unemployment of economic resources, economic growth.
All points on the boundary are productively efficient because output is maximised.
They are not always allocatively efficient because this links to how resources are distributed within society e.g. apples are healthier than wine.
On the curve is productively efficient, inside the curve is inefficient as resources are not fully employed, outside the curve is unattainable with current resources, but an outward shift shows economic growth.
We draw the curve assuming factors of production are fixed.
