Micro 4.1.1 & 4.1.3 Exam
4.1.1.1 —> Economic methodology
Economics is a social science.
SIMILARITIES to natural sciences: there are equations, rules, quantitative data, predicts
behavior using models.
DIFFERENCES to natural sciences: a ected by external factors, it quanti es human
behavior/psychology (eg. Con dence), there are unintended consequences, solving
problems is di cult or impossible (eg. Scarcity), aim not agreed beforehand (there are
clashes), no constants/relationships, no way to measure expectations.
-POSITIVE STATEMENT: objective, tested with evidence.
-NORMATIVE STATEMENT: based on value judgements, subjective, based on opinion.
People’s views concerning the best option are in uenced by positive consequences of
di erent decisions by moral and political judgements.
4.1.1.2 —> The nature and purpose of economic activity
PURPOSE: production of goods and services to satisfy needs and wants.
KEY ECONOMIC DECISIONS
• WHAT IS PRODUCED: decision by government and private sector. How much of each
good produced. Due to opportunity cost, they have to be careful about decisions.
• HOW SHOULD IT BE PRODUCED: how goods and services are distributed. Rewards
from each F of P is considered. Firms aim to minimize cost and maximize pro t so
production needs to be e cient.
• WHO WILL BENEFIT FROM GOODS AND SERVICES: consumers, those who are willing
and able to pay the price charged for the good/service.
4.1.1.3 —> Economic resources
FACTORS OF PRODUCTION
• LAND: natural resources (oil, coal). Output —> rent.
• CAPITAL: physical, goods used in production process (machines). Output —> interest
from investment.
• LABOUR: human capital, workforce of economy. Output —> wages.
• ENTREPRENEURSHIP: managerial ability, someone who takes risks, innovates, uses F
of Ps. Output —> pro t.
The environment is a scarce resource, limited amount of resources.
4.1.1.4 —> Scarcity, choice and the allocation of resources
Fundamental economic problem: scarcity due to limited resources and unlimited wants.
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, Choices have to be made about how scarce resources are allocated between di erent
uses. These choices have an opportunity cost (the next best alternative forgone).
4.1.1.5 —> Production possibility diagrams
Illustrate di erent features of the fundamental economic problem such as: resource
allocation, opportunity cost and trade-o s, unemployment of economic resources and
economic growth.
As we move towards extremes, opportunity cost increases (that’s why it’s a curve).
IMPERFECT FACTOR SUBSTITUTION: certain factors of production can’t switch
between industries very well.
The limit of PPF can increase if any of our factors of production increase in terms of their
quality, quantity or e ciency.
A
D
B
C
-Points A and B are the most e cient combinations of output.
-Point C is ine cient, resources are not used to full productive potential (unemployment
of natural resources.)
-Point D is not yet attainable with current resources.
-The curve is assuming that there is a xed amount of resources used and constant state
of technology.
-If the curve shifts outwards —> economic growth.
-Capital goods: goods which can be used to produced others (machinery.)
-Consumer goods: goods which cannot produce others (clothing).
It illustrates the maximum amounts of goods and services an economy produces given
full use of the F of Ps. This means that the economy is productively e cient.
ff ffi ffi ffi fi ff ffi ff
4.1.1.1 —> Economic methodology
Economics is a social science.
SIMILARITIES to natural sciences: there are equations, rules, quantitative data, predicts
behavior using models.
DIFFERENCES to natural sciences: a ected by external factors, it quanti es human
behavior/psychology (eg. Con dence), there are unintended consequences, solving
problems is di cult or impossible (eg. Scarcity), aim not agreed beforehand (there are
clashes), no constants/relationships, no way to measure expectations.
-POSITIVE STATEMENT: objective, tested with evidence.
-NORMATIVE STATEMENT: based on value judgements, subjective, based on opinion.
People’s views concerning the best option are in uenced by positive consequences of
di erent decisions by moral and political judgements.
4.1.1.2 —> The nature and purpose of economic activity
PURPOSE: production of goods and services to satisfy needs and wants.
KEY ECONOMIC DECISIONS
• WHAT IS PRODUCED: decision by government and private sector. How much of each
good produced. Due to opportunity cost, they have to be careful about decisions.
• HOW SHOULD IT BE PRODUCED: how goods and services are distributed. Rewards
from each F of P is considered. Firms aim to minimize cost and maximize pro t so
production needs to be e cient.
• WHO WILL BENEFIT FROM GOODS AND SERVICES: consumers, those who are willing
and able to pay the price charged for the good/service.
4.1.1.3 —> Economic resources
FACTORS OF PRODUCTION
• LAND: natural resources (oil, coal). Output —> rent.
• CAPITAL: physical, goods used in production process (machines). Output —> interest
from investment.
• LABOUR: human capital, workforce of economy. Output —> wages.
• ENTREPRENEURSHIP: managerial ability, someone who takes risks, innovates, uses F
of Ps. Output —> pro t.
The environment is a scarce resource, limited amount of resources.
4.1.1.4 —> Scarcity, choice and the allocation of resources
Fundamental economic problem: scarcity due to limited resources and unlimited wants.
ff ffi fi ffi fi ff fl fi fi
, Choices have to be made about how scarce resources are allocated between di erent
uses. These choices have an opportunity cost (the next best alternative forgone).
4.1.1.5 —> Production possibility diagrams
Illustrate di erent features of the fundamental economic problem such as: resource
allocation, opportunity cost and trade-o s, unemployment of economic resources and
economic growth.
As we move towards extremes, opportunity cost increases (that’s why it’s a curve).
IMPERFECT FACTOR SUBSTITUTION: certain factors of production can’t switch
between industries very well.
The limit of PPF can increase if any of our factors of production increase in terms of their
quality, quantity or e ciency.
A
D
B
C
-Points A and B are the most e cient combinations of output.
-Point C is ine cient, resources are not used to full productive potential (unemployment
of natural resources.)
-Point D is not yet attainable with current resources.
-The curve is assuming that there is a xed amount of resources used and constant state
of technology.
-If the curve shifts outwards —> economic growth.
-Capital goods: goods which can be used to produced others (machinery.)
-Consumer goods: goods which cannot produce others (clothing).
It illustrates the maximum amounts of goods and services an economy produces given
full use of the F of Ps. This means that the economy is productively e cient.
ff ffi ffi ffi fi ff ffi ff
