Hinckley Academy &
John Cleveland Sixth Form Centre
A Level Economics
3.1.1 Economic methodology and the economic problem
Name: _____________________________________
Teacher: ____________________________________
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1.1 Economic methodology
Economics is a social science. Social science is the branch of science that studies society and
the relationships of individuals within a society.
Can you list three other A level subjects which are social sciences?
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Economics studies the economic behaviour of both individuals and groups of people and the
economic relationships between individuals and groups.
In pairs, discuss what you think influences both individual/group economic behaviour and
economic relationships. Use the space below to make notes:
What factors influence
consumer behaviour i.e.
demand?
What factors influence
how consumers interact
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with firms/producers i.e.
supply?
Economics & scientific methodology
Observe consumer behaviour
in the market place
Form a hypothesis as to
how consumers spend money
Develop predictions
from the hypothesis
Use evidence to test
the predictions
Conclude that the
evidence supports the
hypothesis: the theory
of demand
Conclude that the
evidence does not support
the predictions:
hypothesis rejected
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Figure 1.1 Scientific method
Scientific method
How does Figure 1.1 illustrate the case of demand theory?
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Natural and social sciences
Outline a scientific theory you learned about in GCSE Science:
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Natural science theories are usually much ‘harder’ than the theories associated with social
science theories i.e. economics. Economic theories often only survive through allowing a
number of exceptions to their predictions, which, according to critics, turns the theories into
little more than generalisations.
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Economists often reply to criticisms that their subject is ‘soft’ by arguing that they are only
concerned with positive economics, which they claim is based on quite strict use of scientific
methodology.
Positive and normative statements
1. A statement of fact that can be scientifically tested to see if it is correct
or incorrect. This describes a ________________________
2. A statement that includes a value judgement and cannot be refuted by
looking at the evidence. This describes a ______________________
Examples
Normative
Positive
More of a good is demanded at a higher price
The opportunity cost of spending an extra hour sleeping is
always the same
Unemployment benefits should be cut to prevent idleness in
society
If pensions are cut, more old people will die of hypothermia
The government must devote more resources to healthcare
1.2 The nature and purpose of economic activity
What is the difference between NEEDS & WANTS?
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Satisfying NEEDS & WANTS means improving economic welfare.
What is meant by the term economic welfare?
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1.3 Economic resources
Most of the goods we consume must first be produced. This requires economic resources.
These goods are scarce in relation to demand, which gives rise to the need for economising
their use.
The basic nature of production is shown in the diagram below. These inputs are used to
produce both consumer and capital goods.
The four factors of production:
Factor endowments are the stock of factors of production.
So what is the problem then? Use the following terms to answer this question: natural
resources, renewable resources and non-renewable resources
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1.4 Scarcity, choice and the allocation of resources
The fundamental economic problem exists because both goods and the resources needed
to produce goods are scarce.
Scarcity means that
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Opportunity cost is the next best alternative forgone, when a choice is made, due to a
scarcity of resources.
1.5 Production Possibility Frontier (PPF) / Production Possibility Curve (PPC)
Economic models are simplified views of reality that are used by
economists as a means of explaining economic relationships.
Production Possibility Curves show maximum quantities of different
combinations of output of two products given current resources and the
state of technology.
Draw & label a Production Possibility Frontier to illustrate the different combinations
of capital goods and consumer goods when ALL the economy’s resources are employed
ALWAYS use a
pencil & ruler
Capital goods are goods used in the production of commodities e.g. Factories,
machinery, IT, office blocks and infrastructure.
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Consumer goods such as food and clothing satisfy human wants through their
consumption and use.
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Top Tip
P – Product
P – Product
C - Curve
The PPF shows what the economy can produce, assuming that all labour, capital and land at
the country’s disposal are employed to the full, and assuming a given state of technical
progress.
What happens to production of capital goods when there is an increase in production of
consumer goods? ______________________________________________________
What happens to production of consumer goods when there is an increase in production of
capital goods? _______________________________________________________
Productive efficiency and production possibility diagrams
Efficiency?
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Inefficiency?
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An impossible outcome?
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Look at the PPF below. Which point shows…? WHY?
Productive efficiency for the economy occurs when it is possible to produce more of one
good without producing less of another. For a firm it occurs when the average total cost of
production is minimised. Points on the PPF showing this are __________________
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Allocative efficiency occurs when the available economic resources are used to produce the
combination of goods and services that best match people’s tastes and preferences. This
point on the PPF is the point on the curve that best meets people’s tastes and preferences
HOWEVER this output does not necessarily optimise society’s welfare because it depends on
the distribution of wealth & income and value judgements relating to fairness and justice.
Shifts in the Production Possibility Curves
Explaining PPC diagrams
shift to the left/right
increase/decrease in
productive capacity
more/less resources in which
to allocate
increase/decrease production
How does the PPF illustrate the following?
a.
Scarcity
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b.
Choice
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c.
Resource allocation
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Opportunity cost
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d.
Using the data in the table below draw a PPF.
Tanks
100
90
80
70
60
50
40
30
20
10
0
Military aircraft
0
10
20
30
40
50
60
70
80
90
100
What does this PPF show? _____________________________________________________
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Economic systems to allocate resources
An economic system is the way in which production is organised in a country or group of
countries. It describes the means by which a country’s people, organisations and
government make decisions about:
Traditionally, economists have recognised three main types of economic system. These are
the:
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Command/Planned economy

Mixed economy
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Market economy
Planned
Mixed
Market
Economies
Economies
Economies
Planning mechanism
allocates scare resources
to their final uses
Large non-
Large market
market
sector
sector
Price mechanism
allocates scarce
resources in the system
of markets which makes
up the economy
The above diagram provides a broad explanation of where selected economies fall in the
relative strengths of the market and planned/command systems of resource allocation.
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*It should be noted that market and planned economies in their true form are only
theoretical*
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To varying degrees, all countries would seem to fit with the definition of a mixed economy.
Over the past 20-30 years, the planned economy has been replaced by the mixed economy
in countries such as Poland, Estonia and the former Soviet Union. The market now has an
increasing role to play, to a varying degree, in such economies.
The mixed economy
The mixed economy is undoubtedly the typical economic system. As its name
indicates, both private and public sectors have a part to play in the allocation
of resources.
Decisions involve an interaction between firms, labour and the government,
mainly through the market mechanism.
There is private ownership of the most productive resources, although public
ownership does exist to varying degrees.
The market economy
A market economy; is an economic system whereby resources are allocated
through the market forces of demand and supply. The price mechanism is a
method of allocating resources by the free movement of prices.
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Excess of supply from firms
What role does the government play in the workings of the market economy?
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The command/centrally planned economy
What role does the government play in the workings of the command/planned economy?
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What are the other key features of a command economy?
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