Economics 11HL Unit 1

Introduction to economics

Factors of Production

Factors of Production

Land, labour, capital, entrepreneurship

Land

natural resources

Labour

human resources

Capital

production of goods

Entrepreneurship

management

Scarcity

limited availability of economic resources relative to society’s unlimited demand for goods and services

Efficiency

Maximized production using supply and based off of individual choices (demand) or making the best possible use of scarce resources

Choice

not all needs and wants can be satisfied, so choices have to be made

Oppurtunity cost

what you give up to have something else

Economic cost

accounting/financial cost + oppurtunity cost

Sustainability

ability of the present generation to meet its needs without compromising the ability of the future generation(s) to meet their own needs

Production Possibilities Curve (PPC)

a graph which indicates the different possible choices a firm can make to maximize profit while maintaining maximum efficiency

Difference between Price 1 and Price 2 is not the same as the difference between Price 2 and Price 3 (oppurtunity cost)

curve is named PPF (Production Possibility Frontier)

Assumptions of the PPC

technology, time, and factors of production (FOP) is constant

only two goods are produced in this market

all of society’s income goes towards these two goods

Circular Flow Diagram

GDP = C + I + G + (X-M)

Consumption, Investment, Government, eXports, iMports

Simplification of reality that takes out certain factors and makes them constant

Methodology

Positive and Normative

Positive

Scientific perspective on economics (hypothesis + data)

Verifiable in principle

All other things remain equal (certeris parabus)

Normative

Subjective value judgement

Cannot be objectively verified/measured

Nonquantifiable adjectives (important, ought to, must, etc.)

Adam Smith

“the invisible hand” is a metaphor for efficient allocation of resources by society

laissaz faire

Karl Marx

labour theory of value

decreasing rates of profit and increasing concentration of wealth

more caring towards the masses

Keynes

counter-cyclical government and multiplier

argued that governments had an important management role in macroeconomics

provided a foundation for modern macroeconomics

full employment is a special case and is not frequently occuring

incentive to invest is too weak and the urge to hoard cash is too strong

without necessary investment, the economy maximizes the unfull employment which increases productivity

19th century classical economic ideas

Bentham, Jevon, Menger, Walras

Bentham

utilitarianism - most happiness among greatest number of people

utility - property in any object tends to produce benefits/advantages/pleasure/good/happiness or to prevent the opposite

Margin

theory of how prices are derived

derived from consuming something

not total utility, but extra utility of consuming

Say’s Law

unemployment cannot exist for long periods because production would create its own demand

Jevon’s Paradox

as technological advancements increase efficiency of labour, demand will increase thus not changing efficiency and waste

Carl Menger

subjective theory of value - in an exchange, both parties always profit as they trade something they think is less valuable for something they think is more valuable

Leon Walras

Walras’ Law - the existence of excess supply in one market must be matched by excess demand in another market so that both factors are balanced out

Milton Friedman

economic theory should be subject to empirical corroboration to test its relevance to the real world

prediction is a key factor

not the realism of the assumptions but the accuracy

Robert Lucas Jr.

individual’s rational expectations of inflation and government policies

Friedman + Lucas

the role of markets in bringing the economy back to a situation where there is full employment without any government intervention

Free Sector Diagram

Injections - investment (I), government spending (G), exports (X)

Leakages - savings (S), tax (T), imports (M)

if injections = leakages, the economy is in equilibrium/static

Assumptions made in behavioural economic graphs

1. People are rational/consistent

2. Utility is maximized

3. People have access to all information at all times

Bounded Rationalism

all rationality is lost past a certain point

Thinking Fast/Slow

heuristics where people use rule of thumb to make quick decisions

Present Bias

people under-invest because the benefits come in the future, and people generally would want benefits in the present

Representative Individual

one person is recorded/measured and “cloned” to create a larger demographic

Nudging

preserving freedom but helping people make decisions when they can’t/don’t (default)

Hot-hand fallacy

belief that a winning streak leads to further success

Bias 1 - overconfidence

a belief that one’s skill/judgement are better than they truly are, or that probability of success is higher than it actually is (health club membership example)

Bias 2 - Hyperbolic Discounting

tendency of people to make the present much more important than even the near future while making economic decisions (example: credit cards)

Bias 3 - Framing effects

Endowment effect - possessing a good makes it more valuable

Loss aversion - a framing bias in which consumers choose a reference point around which losses hurt more than gains feel good

Anchoring - a framing bias in which a person’s decision is influenced by specific pieces of information given

Bias 4 - Sunk cost fallacy

the mistake of allowing sunk costs to affect decisions

example: Robert Griffin III (NFL, Washington Redskins)

Degrowth communism

the economy is big enough already, when is the stopping point for growth?

focus growth on more important aspects such as healthcare and not consumption as it raises healthcare costs

Interdependence

a consideration of possible economic consequences of interdependences is essential when conducting economic analysis

nothing in the economy is self-sufficient, so they interact with one another (the greater the scale of interaction, the greater the interdependence)

Linear economy

Take → make → waste

resource extraction → production → distribution → consumption → disposal

Circular Economy

Take → Make/remake → Distribute → Use/re-use/repair → Selectively dispose → Enrich/recycle → Take

aims to minimize waste and promote a sustainable use of natural resources

Problems with the circular economy

1. No clear definition (too vague in the definitions and different defitions clash with one another)

2. Ignores scientific principles (you cannot create or destroy matter/energy)

3. Lack of scale (hard to scale up to a global level)

Systems Perspective

taking into account all of the behaviours of a system as a whole in the context of its environment

Economic efficiency

socially constructed concept with its politics and its political implications

public goal, competing with other public priorities

to improve the state of one party, you must hurt another

society gets maximum net benefits

Eco-efficiency

production of goods/services while using fewer resources and creating less waste and pollution

creating more value through an increase in resource productivity and a decrease in resource intensity

leads to less resource consumption

Economic Well-being

refers to levels of prosperity, economic satisfaction and standards of living among the members of a society