4.1.1 Economic Methodology And The Economic Problem

4.1.1 Economic methodology and the economic problem

4.1.1.1 Economic methodology

Economics as a social science.

Economics studies the economic behaviour of both individuals and groups of people, and their economic relationships

Similarities to and differences in methodology from natural and other sciences.

Similarities

Differences

Observe behaviour to form a hypothesis to develop predictions and use evidence to test this

If the evidence doesn t support the hypothesis, it is rejected, otherwise further tests are done before it becomes a law

Laws will have exceptions

Economics cannot use experiments as it relies on data from the real world so models are devised.

Assumes ceteris paribus all things equal

Difficult to prove a theory or the effectiveness of a policy(e.g. the multiplier effect) due to lots of factors

The difference between positive and normative statements.

positive statement- objective statements that are able to be tested and proved / disproved

( words like will , is .)

Eg Higher interest rates will reduce house prices

normative statement- opinion based statements that cannot be proved or disproved.

( words like should , or if statement is suggesting one action is more credible than another)

Eg Unemployment is more harmful than inflation

How value judgements influence economic decision making and policy.

How do value judgements influence economic decision making and policy?

Different economists may make different judgements from the same statistic.

Eg The rate of inflation can have different conclusions.

What can people s views concerning the best option be influenced by?

Consequences of different decisions

Moral and political judgements.

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4.1.1.2 The nature and purpose of economic activity

What is the central purpose of economic activity?

Production of goods and services to satisfy needs and wants of consumers.

What are the three key economic decisions?

What to produce- due to the opportunity cost, current trends etc

How to produce- how to manage the FOP (factors of production) in order to increase profits (e.g. labour intensive or capital intensive workforce)

Who will benefit from the goods and services produced- consumers with sufficient purchasing power

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4.1.1.3 Economic resources

Economic resources are the factors of production.

Capital- goods used to produce other goods (e.g. machinery)

Enterprise- & identifying business opportunities and organising FOP

Land- natural resources (oil) and premises

Labour- human input into the production process

The environment is a scarce resource.