IB Economics SL - CHAPTER 1.1

Microeconomics

Microeconomics

Microeconomics is the study of individual markets and sections of the economy, rather than the economy as a whole.

Macroeconomics

Macroeconomics is the study of economic behaviour and decision making in the entire economy, rasther than just an individual market.

Scarcity

Scarcity is the concept of the demand or a good or service being higher than the availability of the good or service.

Allocative efficiency

Allocative efficiency entails making the best possible use of scarce resources to produce the combinations of goods and services that are optimum for society.

Interventions

Interventions refers to government involvement in the workings of markets.

Change

Change is key as the economy is in constant change on all levels.

Choice

Choice arises from scarcity; not all needs and wants can be satisfied to society needs to make choices.

Sustainability

Sustainability is the ability of the present generation to meet its needs without compromising the ability of future generations to meet their own needs.

Equity

Equity refers to the idea of fairness, this means different things to different people and so is a normative concept.

Interdependence

Interdependence referce to interaction between individuals, communities and nations, as no one are self sufficient.

Economic well-being

Economic well-being is a multidimensional concept relating to the level of prosperity and quality of living standards enjoyed by members of an economy.

Factors of production

Factors of production are the resources used to produce goods and services. They are:

• Land

• Labour

• Capital

• Entrepreneurship

Financial rewards households receive for selling their factors of production

• Land → rent

• Labour → wages

• Capital → interest

• Entrepreneurship → profit

Opportunity cost

Opportunity cost is the loss of the next best alternative when making a decision.

Economic good

Economic goods are scarce in relation to the demand for them.

Free good

Free goods are abundant in supply.

The three main economic systems

1. Free market economy

2. Mixed economy

3. Planned economy

The three basic economic questions

1. What to produce?

2. How to produce it?

3. Who to produce it for?

The production possibilities curve

The production possibilities curve is an economic model that considers the maximum possible production of two goods/services if all factors of production are used.

Capital goods

Capital goods are assets that help a producer to produce more output.

Consumer goods

Consumer goods are end product and have no future productive use.

The PPC model can be used to

• depict the maximum productive potential of an economy

• depict opportunity cost

• depict efficiency, inefficiency, attainable and unattainable production

The PPC model make assumptions

1. Only two goods are produced

2. Scarcity of resources exists

3. Production is efficient

4. The state o technology is fixed

The PPC curve illustrates two types of opportunity cost

Constant opportunity cost

• All of the factors of production of one good can be used to produce the other good without any loss of resources.

Increasing opportunity cost

• The factors of production cannot be perfectly switched between the two products.

Constant- and increasing opportunity cost

The diagrams are:

PPC showing economic growth

Economic growth occurs when there is an increase in the quality or quantity of the available factors of production.

PPC showing economic decline

Economic decline occurs when there is a decrease in the quality or quantity of the available factors of production.

The circular flow of income

The circular flow of income is an economic model that illustrates the money flows in an economy.

Circular flow of income diagram

The circular flow of income model diagram: