USE PHYSICAL CARDS ib economics chapter 1

the foundations of economics

Positive Statement

a statement regarding something that is, was or will be (true or false)

Normative Statement

a statement regarding something that is out to be (judgement)

Ceteris Paribus

to isolate the effect of one variable as a result of a change in another variable

Scarcity

Insufficient resources to satisfy all needs and wants, therefore scarcity of resources causes scarcity of goods and services (in factors of production: land, labour, capital, and enterprise)

Resource allocation

Overallocation: too many resources assigned to the production of particular goods and services

Under allocation: too few resources assigned to the production of particular goods and services

Leads to ⇨ reallocation of resources or misallocation of resources

Opportunity Cost

Opportunity Cost: Results from the condition of scarcity that forces a choice between competing alternatives where the value of the next best alternative foregone to obtain something else

Scarcity ⇨ Choice ⇨ Opportunity Cost

Factors of Production

Factors of Production: the inputs that are used in production of goods or services in the attempt to make an economic profit (land, labour, capital, and enterprise)

• CAPITAL- wealth formed for the purpose of investing in a company/thing

• Physical Capital- machinery, tools, and buildings

• Human Capital- skills, attitude, and knowledge

• Natural Capital- expanded meaning of land

• Enterprise- the combination of all factors of production to earn an economic profit

Production Possibility Curve (PPC)

A visual representation of all possible combinations of two types of goods that can be produced with given factors of production

• Assumed that quality and quantity of resources remain the same
• Assumed that the state of technology remains the same
• For PPC to be achieved, all resources must be fully employed and used efficiently
• However, output is always below frontier in real world due to unemployment of resources (higher unemployment= further away from point)
• Scarcity, choice and opportunity cost are always taken into account

PPC Graph

o Curve shows maximum resources that can be utilised
o PPC displays the law of increasing opportunity cost (the more produced of one thing, the more of the other thing that needs to be forgone)
o Further down the curve, one thing is benefitted more than the other
o Shape of PPC displays opportunity cost of producing goods and services
o Various combinations, e.g. gives up laptops for phones

Economic Efficiency

6 Types of Economic Efficiency: (don’t need to learn all of them yet)
1. Allocative Efficiency
2. Productive Efficiency

3. X-inefficiency
4. Pareto Optimality
5. Dynamic Efficiency
6. Social Efficiency

Allocative Efficiency

(1) Allocative Efficiency: when firms are producing the combination of goods and services that are most wanted by consumers
o Both consumers and producers are satisfied
o Allocation the right amount of resources to the right amount of products and no waste
o P=MC (price = marginal cost (cost of producing one additional unit of output))
o As allocative efficiency is a “combination” of goods and services, it will reach the most ideal point for consumer demand

Productive Efficiency

(2) Productive Efficiency: when firms are producing at the lowest cost possible

o When maximum number of goods and services are produced with a given amount of inputs
o Impossible to produce more goods without producing less services
o Curve can’t move outwards anymore because all resources are exhausted (without growth)

Types of Economic Systems

3 Types:
1. Free Market Economy
2. Command/Planned Economy
3. Mixed Economy

Free Market Economy

Command/Planned Economy

Mixed Economy

Transition Economy