Economic Problem | 4.1.1 | AQA A-Level Economics Notes

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 based on real life scenarios.
• We assume that events occur ceteris paribus (other factors held constant).
• Positive statements are objective. They can be tested for factual evidence and then be accepted or rejected.
• Normative statements are subjective. They are based on opinions/ suggestions and value judgement.
• 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? – Government and private sector consider opportunity costs.
• How to produce? - Firms aim to minimise costs and maximise profits.
• Who is to benefit? – Those willing and able to pay the asking price can get the good or service. Consumers with the most purchasing power will benefit the most.

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. 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 cost of the highest valued alternative that had to be sacrificed.

4.1.1.5 Production Possibility Diagrams

• Production possibility diagrams illustrate different features of the fundamental 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 but not always allocatively efficient because costs are minimised, however more of one good can’t be produced without sacrificing another good. Allocative efficiency links to how resources are distributed within society.
• On the curve is productively efficient, inside the curve is inefficient as resources aren’t utilised completely, outside the curve is unattainable with current resources, and an outward shift shows economic growth.
• We draw the curve assuming factors of production are fixed.