IB Econ Unit 1
a centrally planned economic system is also known as a command economy
the public sector is run by the government
labor, land, capital, and entrepreneurship are factors of production
an economic statement which is a fact is a positive statement
the private sector is run by private businesses
the market sets prices in a free market
the additional enjoyment gained when consuming just one more is marginal utility
the ppc represents the maximum number of products an economy can produce
an economy where the customer is king is the free market
the point where TU falls below 0 is the saturation point
Spending your limited income wisely is to economize
An opinion based economic statement is a normative statement
An economic system is a system of production, resource allocation, and distribution
Pleasure that you can measure is utility
Labor is all the human time, effort, skill, and talent that is involved in the production process.
Capital are the human-made resources that are used to produce or distribute other goods and services.
Financial capital includes money, loans, etc.
Human capital includes knowledge, skills, etc.
Natural capital includes natural resources
Entrepreneurship is the most important factor as it brings the other factors together
- entrepreneurs bring the idea/vision to fruition and are visionary, innovative, and willing to take risk
Incentives are benefits offered to encourage people to act a certain way
Utility is a measure of usefulness and pleasure
To economize is to pick the best alternative
Trade offs are giving up something to get something else
Opportunity cost is the value if what is given up to get what is wanted
The option with the least opportunity cost should be picked
An economic model is a simplified representation of economic forces
Assumptions simplify reality and make it easier to understand
Ceteris Paribus is that all other things remain the same
PPC depicts the effects of scarcity on production
Free goods are unlimited goods that have no opportunity cost
- including fresh air, sea water, sand, etc
- they are limitless and have no economic value
Economic goods are goods that have a value, and are limited in supply
Efficiency refers to the production of the max number of goods and services possible
Inefficiency or underutilization means producing fewer goods and services than possible. These points are found inside the PPC
Any points outside the PPC are impossible
The Law of Increasing Opportunity Costs states that the more of product we produce, the more resources are needed to be given up from production of the other product.
Changes in resources and technologies can lead to a PPC shifting outwards.
If there are negative changes, the PPC will shift in
Absolute advantage is when one nation can produce a good more efficiently than another nation
Comparative advantage is when one nation can produce a good with a lower opportunity cost that another.
Microeconomics deals with the economics of individuals, families, and businesses.
Macroeconomics deals with the global, national, and regional economy.
Positive economics describes economics as it is and can be tested.
Normative economics explains what the economic behavior should be and involves value judgement.
Value judgement is an evaluative statement of how good or bad you think an idea or action is.
Equity is fairness versus equality which is being the same.
Economics can be though of as a science of rationing systems (allocation of resources)
Planned economics are centrally planned/command economics where resources are collectivelyy owned.
- government makes product, wage, and price decisions
- seek to provide for everyone
Marxist theory was that capitalism would lead to overthrowing of the system by the works due to their exploitation
In Socialism, the government owns all basic means of production
- some private property ownership may be allowed
In Communism, there is little to no political freedom and all property is government owned
Democratic socialism is a form of socialism which is established through the democratic political process
In planned economics, resources can be dislocated resulting in shortages of surpluses. There can also be lack of motivation and innovation due to low incentives, and loss of personal liberty and freedom of choice can be demoralizing.
Adam Smith is known as the father of modern economics and he criticized mercantilism (which was the idea that raw materials were thought as wealth or colonies). He argued for a free market engaging in free trade.
Free market economies have limited government involvement, hold consumer sovereignty, and profit motive is the incentive for producers.
Merit goods may be underproduced while demerit goods may be overproduced.
Mixed economies have varying degrees of both Free Market and Planned Economic systems.
Marginal cost is the cost of using one or more additional units of the good or service
Marginal benefit/utility is the satisfaction of utility derived from using more unit of a product
If marginal cost is greater than marginal benefit, then an additional unit is not consumed.