IB Economics Unit 1 - Introduction to Economics

Economics

The social science that studies the relationship between humans and the economy using past experiences and observations.

Economic System

A system of production, resource allocation, and distribution

Factors of Production def

Resources or inputs used in the production process to produce goods and services

Factors of Production types

land labour capital entrepreneurship.

Land

The raw materials used in production.

Labor

The workers used in the production of goods and services.

Capital

The machinery and equipment used in the production of goods and services.

Entrepreneurship

A person or people who bring together and manage the factors of production (land, labour and capital) to produce goods or services to make a profit.

Production possibility curves

Also called production possibility frontiers, illustrates the maximum possible output combinations of goods or services an economy, when all resources are fully employed.  A shift right in the PPF curve represents a rise in either the quantity and / or quality of the production factors.

Positive economic statement

Objective statements that can be tested, amended or rejected by referring to the available evidence.

Normative economic statement

A subjective statement of opinion which can neither be proven or dis-proven.

Circular flow of income

A diagrammatic illustration of a simple economy diagram.

Two sector model

A simplified form of the circular flow diagram, presuming no international trade or government intervention.

Four sector model

A more complex form of the circular flow diagram, containing leakages and withdrawals in the model.

Leakages from the circular flow

Leakages out of the economy from savings, taxes, and imports.

Injections into the circular flow

Injections into the economy from investment, government purchases, and exports.

Transfer payments

Government redistribution of income and wealth (payment) made without any transfer of goods or services in exchange. 

Mixed Economy

Not planned or free market

Planned Economy

A centrally planned economic system

Free Market Economy

An economy where the customer is king, when the law of supply and demand regulates production, labor, and the marketplace with minimal or no interference from government.

Market

Sets prices in a free market

Public Sector

Organisations that are owned, controlled and managed by the government or other state-run bodies.

Private Sector

Organisations that are owned, controlled and managed by individuals, groups or business entities.

Marginal Utility

The additional enjoyment of consuming something just one more time.

Utility

The benefit or satisfaction received from consuming a good or service.

Law of Diminishing Marginal Utility

The ratio of satisfaction (utility) to price.

Saturation Point

When the volume of a product or service in a marketplace has been maximized.

Rationality

Spending your income wisely

Scarcity

All the resources used to produce goods and services are in limited supply. This means unlimited human wants are chasing too few resources.

Wants

People’s unlimited desire to consume goods and services to derive satisfaction from their consumption.

Needs

The basic necessities that a person must have in order to survive.

Economic Goods

Products produced using scarce resources that cost money.

Free Goods

Goods which are free of cost due to its unlimited quantity.

Opportunity cost

The highest value alternative foregone for the option chosen in a decision-making situation.  It arises because of scarcity which forces individuals, firms and governments to choose between alternatives.

Consumer goods

Products sold to general public. Can be classified as durable and non-durable.

Capital goods

Products purchased by other businesses to produce other goods and services.

Services

Intangible products provided by businesses

Ceteris Paribus

‘all else constant’ An assumption which allows economic models to predict outcomes and relationships by assuming that variables not addressed in the model are kept constant.

The three economic questions

What to produce? How to produce it? Who shall receive it?