IB Economics Section 1: Intro to Economics
Terms in this set (53)
What is a Social Science?
The study of human society, relationships between people or organisations. It involves collecting and compiling data, looking at patterns, formulating a hypothesis and testing the hypothesis to create a theory.
What is Economics?
The study of societies' best use of scarce resources (land, labour, capital) and the analysis of the production, distribution and consumption systems of goods and services.
Something we MUST have in order to survive (eg. water, food, housing)
Something we desire (eg. pens, computers, automobiles)
The study of individual economic units such as households and firms
The study of the economy as a whole (eg. a country, inflation, unemployment)
An increase in real GDP or an increase in the quantity of resources
A qualitative measure of a country's standard of living which takes into account numerous factors such as education and health.
The rate at which a country can develop without compromising the needs of future generations.
Positive economics is based on theories which can be tested by looking at past data. Positive statements concern what is, was, or will be, assertions about the world. Eg Justin Bieber is a woman.
Normative economics is based on opinion Normative statements involve value judgements about what is good and what is bad, and use words such as "should". They are not testable and are based on norms. In democracies normative statements are often settled by voting. Eg Justin Bieber is a terrible singer.
All other things being equal, we only take into account one variable changing when we are looking at a situation.
Factors of Production
Land- Everything on, under or above the land or in the sea eg water, oil. Labour- The human effort which adds value to natural resources eg used to make furniture. Capital- Man made factos of production eg factories, machinery which are used to make goods. Entrepreneurship- Visionary person who brings together the other factors of production to create goods.
Primary sector involves the extraction of resources, secondary sector involves the conversion of natural resources into goods, tertiary sector involves the production of services, quartenary sector involes production of technology, education
Payments to factors of production
Land- rent, Labour- wages, Capital- interest, Entrepreneurship- profit.
Countries which have economic development as a goal want to
Increase the availability and widen the distribution of basic necessities such as food water, shelter, health and physical protection, Raise living standards, employment, education & cultural activity, Provide economic and social choice for people by freeing them from servitude and dependence.
The observation that no resource is infinite
Demand for a good or service
Our willingness to pay for it
The satisfaction gained from the consumption of a good or service
Total satisfaction from consuming a good or service (Lauren's water)
Extra satisfaction from consuming the last unit (Lauren's latest cup of water)
Law of Diminishing Marginal Utility
Each additional cup of water provides a small increase in utility- the marginal utility decreases.
The next best alternative forgone in making that choice
Use scarce resources so there is an opportunity cost i.e using the scarce resource for something else. Tend to have price signals (price) attached since they are scarce.
There are no opportunity costs in choosing to use/produce this good eg air
Production Possibility Frontier- A curve depicting all maximum output possibilities for two or more goods given a set of inputs (resources, labour etc). The PPF assumes only two types of goods can be made, that the resources available can be used to produce both types of goods, and that all inputs are used efficiently.
Opportunity cost will occur when (with regards to PPF)
The economy is operating on the PPF frontier.
PPF curves tend to be concave/bowed shape to illustrate
1. Increasing opportunity (relative) costs- as more of one good is produced, the opportunity cost of the other good increases. 2.Diminishing Returns- a decrease in the production of one good will lead to diminished increases in the production of the other good
As the quantity of resources is increased towards the production of one good, the yield of it will be greater but at a diminished rate- i.e each addition to output will be less than the previous unit of output.
How Can Output Increase (PPFs)
1.Economic Growth within the PPF, 2. An increase in potential output (shift of the curve)-If the quality or quantity of the factors of production increase, then the economy has a potential to produce more- this does not mean that de facto output has increased. 3. Increasing de facto and potential output- if more resources are placed towards education this leads to a better educated workforce who will be more productive. Greater productivity leads to an outward shift of the PPF ie an increase in potential output.
A shift of the PPF curve can occur through two methods
1. Quality (Labour- education, training, experience. Land- fertiliser, irrigation, new growing methods. Capital- better technology allows more goods to be produced with the same amount of inputs). 2. Quantity (Labour- increase in population through immigration, increased birth rates. Land- making more land eg reclaiming it from the sea. Capital- using existing capital to make more capital).
Goods the government considers to be good for us.
Development, Reasons for the PPF to be shifting outwards (potential increasing)
1. If the government provides greater amounts of merit goods such as education and healthcare, this will create the possibility of future potential economic growth. 2. If more resources are placed into merit goods or goods that allow an increase in production of others (capital goods) and an increase in output occurs then other goods are sacrificed for the production of merit goods that will increase future and potential output & defacto output increases.
Reasons for PPF and economic growth to contract
1. If a factor of production such as labour is reduced through a famine/bird flu, the output of the economy will fall. The PPF curve will start to move inwards due to less labour due to sickness and those looking after them. Less people working means less tax revenue to spent on eg education therefore the curve will contract further. Other reasons War, Natural Disasters...
Inter-temporal Opportunities (between times)
Sometimes, the cost of consuming less now is the gain in consumption that can occur at a later date.
Inter-temporal Opportunities PPF
If more capital goods and less consumer goods are produced this allows an increase in future (potential) output. The PPF curve shifts outwards, the economy has the potential to reach this.
For any economy, a decision is made on
What to produce, how to produce it ie production methods & technology, who to produce it for.
The two main types of economies
Free/Competitive Market, Planned/Command Economy
Most countries have a ____ economy which is...
Mixed, a mix of both free market and planned economies. Many previous planned economies are moving into this.
State (national), local (eg city council), regional governments which are mostly funded from taxes. It includes the military, public healthcare and education, roading etc.
The government owning or controlling firms. Eg in NZ, Air NZ is now under mostly public ownership ie the government owns the majority of it.
Reasons for public control
Society benefits from the government providing certain goods/ services eg education which are then provided to all, not just those who can afford them. Private firms would not provide some goods/services in adequate quantities or at the right price if the govt did not provide them. To ensure that some goods eg merit goods are not under provided and some goods eg demerit goods are not overprovided.
Firms which own their own capital, establish property rights (ownership) over a resource which is then used for financial gain (to make a profit) for the owner(s) of the firm.
Reasons for a private sector
1. Firms create the goods and services that society wants and they will try to satisfy the wants of society. 2. Firms add value to basic resources eg furniture manufacture adds value to raw wood through labour and capital. 3. The economic activity of firms creates secondary economic activity eg a firm that employs someone enables that person to spend money at other firms. 4. New products are created by firms in order to maintain/increase their profits. 5. Research and development creates new technology which may improve the use of scarce resources.
Why did free/competitive market economies occur?
There was a shift in power from aristocrats to democracy with private ownershup rights, organised bartering with goods became cumbersome, to allow people to specialise in the production of goods and services, money which was used to measure the value of goods made buying and selling goods easier.
How do free/competitive market economies work
1. Market demand and supply determines the price of goods/services and if a good is produced or not. 2. The cost of scarce resources and a profit incentive helps determine the price 3.The price will determine how resources are used in society and who gets the goods rationing mechanism.
Why are free/competitive market economies seen to be good?
Goods are produced on demand with minimal waste- resources are only placed towards goods where there is demand. Producers can enter the market and create competition which lowers prices and creates new and better products for consumers.
How do planning/command economies work?
1. The govt decides what goods are produced, how many are produced and the price of goods. 2. The govt owns the resources that are used to produce goods. 3. A central committee assesses demand, sets production targets & coordinates production.
Why are planning/command economies seen to be good?
1. They create and allowed the socialist ideals of equality with the collective, not individuals. 2. All citizens had the right to be employed. 3. Prices were set at a low rate so everyone could afford goods. 4.Housing was provided by the govt. 5. Wage rates were set by the govt, rather than by individual firms. 6.Healthcare and education was free to all.
Why did planned economies fail?
1. The Soviet and eastern European economies collapsed due to internal and external pressure. 2.There was a failure by the government to coordinate the supply of materials to produce goods. 3. Production output targets were not met leading to a shortage of goods, leading to rationing and queuing for goods. 4. A lack of incentives for individuals such as wage differentiation between jobs. 5. Over employment in industries. 6. Political momentum inside some countries to change, especially lead by Gorbachev.
Mixed Economy Public/Govt Qualities
1. A census is used to help with planning of roads, hospitals, schools. 2. The govt implements legislation to control the activities of firms. 3.The govt provides public goods such as education, street lights. 4. The govt promotes the use of merit goods eg making vaccinations for children free. 5. The govt taxes or bans demerit goods.
Mixed Economy Private Qualities
1. The types and quantities of goods produced is based on consumer demand. 2. Businesses aim to make profits, thus operate in the most efficient way. 3. Private individuals/firms have ownership over resources used in production.