IB Economics/Introduction to Economics
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[edit] Introduction to Economics
[edit] Basic Definitions
Definition of social science and Economics
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- Social Science: The study of society and the way individuals interact within it.
- Economics: the study of how society employs its finite resources in the attempt to satisfy infinite wants.
Definition of Microeconomics and Macroeconomics
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- Microeconomics: The study of individual economic units such as households and firms.
- Macroeconomics: The study of the economy as a whole. (e.g. Inflation)
Definition of growth, development, and sustainable development
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- Economic Growth: An increase in real GDP or an increase in the quantity of resources.
- Economic Development: A qualitative measure of a country's standard of living which takes into account numerous factors such as education and health. The Human Development Index is normally used to measure a country's economic development.
- Sustainable development: The rate at which a country can develop without compromising the needs of future generations.
'Positive and Normative Concepts
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- Normative Economics: Based on opinion. Uses words such as "should". The government should make fixing unemployment its number one priority.
- Positive Economics: Based on testable theories. For example, a hike in interest rates leads to a fall in aggregate demand can be proven using data.
Know the concept of Ceteris Paribus.
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- Latin for all things being equal. Since Economics is basically the study of society, we have to understand that there are thousands of variables present, and to control each one of these variables is downright impossible. Thus we make everything else "ceteris paribus" in order to see the effect of one aspect.
[edit] Know the concept of Scarcity
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- Scarcity is the observation that no resource is infinite.
- Factors of Production
- Factors of production are basic components or inputs which are required in the production of goods and services.
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- Land: Gifts of nature, this includes everything on the land, under the land, above the land, or in the sea. Oil is an example.
- Labour: The human component hired to assist in producing a good or service.
- Capital: Any man-made aid to production.
- Entrepreneurship: Combines the other factors and takes risks recognizing the possibility of gain from employing these factors in a specific way.
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- Factors of Payment (FoP):
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- Land: Rent
- Labour: Wages
- Capital: Interest
- Entrepreneurship: Profit
[edit] The concept of Choice
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- Know the concept of Utility
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- Utility: The satisfaction gained from the consumption of a good or service. The demand curve slopes downward because of the law of diminishing marginal utility. The marginal utility, or extra happiness, we gain from buying an extra ice cream decreases with every ice cream we buy at a fixed price.
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- Know the concept of opportunity cost
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- Opportunity cost: The cost of the next best alternative forgone. If I have $5.00 and can either buy a tamogotchi or dinner, and I buy the tamogotchi, then the opportunity cost is the dinner I could have bought.
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- Define Free and Economic Goods
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- Free good: A good with no scarcity, that has unlimited supply and therefore no price. A good which has no opportunity cost associated with its consumption.
- Economic Good: A good which is scarce and therefore has a possible opportunity cost.
[edit] Production Possibility Curves
Draw Diagrams showing opportunity cost, actual and potential output
Draw diagrams showing Economic growth and actual output
[edit] Rationing Systems
What are the basic economic questions?
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- What to produce?
- How to produce it?
- For whom to produce?
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- Free Market: A market where the forces of supply and demand decide the economic questions and therefore where to allocate resources.
- Command Economy: A market where the government or some central authority decides where to allocate resources.
- Mixed Economies: An economy consisting of both. Some decisions are made by market forces while some other decisions are made by the government or some central authority.
Advantages and Disadvantages of the Free Market
Advantages
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- Resources allocated more efficiently by the price mechanism.
- The profit motive is a great incentive, and forces producers to reduce costs and be innovative.
- With no imperfections, the free market maximizes community surplus.
Disadvantages:
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- Instability
- Market Failure- see Chapter II.
- Monopolies and corruption - The natural goal of all firms is to attain monopoly, as this eliminates competition, eliminating the associated costs and thus maximizing profit. If the market structure does not include limiting social forces, financial forces will cause firms to externalize costs such as pollution to gain monopoly. Union Carbide's gas leak in Bhopal is an example of such an externalized cost.
Advantages and Disadvantages of a Planned Economy
Advantages:
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- The government can influence the distribution of income.
- The government can determine which goods are supplied.
Disadvantages:
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- In order to function well, requires an enormous amount of information which is difficult to obtain.
- No real incentive for individuals to be innovative. Goods are of poor quality since there is a lack of profit motive.
- May NOT lead to allocative efficiency or productive efficiency due to lack of competition and profit motives.
- Corruption - the government has the ability to abuse its absolute power.
- The economy does not respond as well to supply and demand, firms are simply told to produce a certain number of goods or services
[edit] Other important things to remember
Sectors of an economy:
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- Primary sector: Natural resources and raw materials.
- Secondary sector: Manufactured goods.
- Tertiary sector: The service sector, things like leisure, health, and sport.
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- Market: Convenient set of arrangements where buyers and sellers agree to exchange goods.
