4.1.1.1- Economic methodology
Economics is a social science looking at the
behaviour of humans as individual or in organisations (e.g. firms) and their use of scarce resources.
• Economists develop theories and models to explain things e.g. interest rates
There are two types of economic statements:
• Normative statements – subjective statements that are based on value judgement and opinions. They
cannot be tested as people have different views of what is right or wrong.
• Positive statements – objective statements that can be tested to see if it is correct.
4.1.1.2- Nature and Purpose of Economic Activity
• Economic activity – mix of factors of production to create outputs that people can consume
o Goods – products you can touch e.g. kettle
o Services – Things you can’t touch e.g. education, medical appointments
o Consumption – consume goods or services to satisfy a want or need
• The fundamental three questions are:
o What to produce? – goods that firms can make profit from
o How to produce? – firms want to produce goods most efficiently as possible to maximise profit
o Who to produce for? – firms produce goods that consumers want to pay for
• Economic Agents react to Incentives
o Producers – firms or people that make goods and services
o Consumers – firms or people that buy the goods and services
o Governments – produces and consumers goods and services and set rules participants must follow
• Economic Agents make decisions on how the resources are allocated
o Producers – decide what to make and how much to sell it for
o Consumers – decide what to buy and how much they are willing to pay
o Governments – decide how much to intervene in the way producers and consumers act
• In market economy, all economic agents make decisions best for themselves. These are based on economic
incentives like profit or paying as little as possible for a product
4.1.1.3 – Economic resources
The Economic problem – How can available scarce
resources satisfy peoples infinite wants and needs
• Need – something that you need to survive (e.g. food, water, clothes and shelter)
• Want – Goods or services that are not a necessity but wish for them.
Four factors of production:
o Land – natural resources from the sea, earth and sky (renewable and non-renewable).
o Labour – the work done by people (physical and mental).
o Capital – goods used to create other goods and services.
o Enterprise – organises all other factors of production, takes risks and tries to earn a profit.
4.1.1.4 – Scarcity, Choice and Allocation of Resources
Production possibility frontiers (PPF) – shows maximum
possible output
• The PPF shows maximum number of sugar and pizza that can
be made using existing resources in economy
• Points A, B,C are all achievable without any extra resources
• A trade off occurs from point B to A
• Trade off = choosing between conflicting objectives as all the objectives can’t be
achieved at the same time
• All points on PPF are productively efficient
• Not all points are allocative efficient as it doesn’t reflect goods people want or need
• The trade-off described involves opportunity cost
• Opportunity cost = the next best alternative that you give up in making that decision
o There are a few problems with using this concept:
Economic growth Shifts the PPF
• Economic growth leads to a shift in the curve.
An outwards shift is caused by:
o Improved technology – more output
o Increase in labour force – more output
o Discoveries of new raw materials
An inwards shift is caused by:
o Resources running out
o Failure for investments
o Wars in the countries
o Natural disaster’s
