ECONOMICS - IB EXAMS 2024

Unit 1 - Introduction to economics

well-being :
the level of economic prosperity and quality of life inside an
economy

interdependence :
the growing interaction and reliance on others in order to achieve economic growth (not self sufficient)

scarcity = resources are scarce (limited in supply) relative to the unlimited amount of needs and wants

efficiency
=
making the best possible use of scarce resources in order to avoid overall waste

choice =
the behavior observed when deciding something based on consequences and opportunity cost

intervention :
any action carried out by the government that affects markets with
goal of changing outcome/equilibrium

change =

how/why economies change over time ; adapting to rapidly changing .

world

equity
= the normative concept of fairness ; it means different things to different societies/contexts

Sustainability meeting the needs and wants of current generation wout jeopardizing those of future generations

* the basic economic problem refers to the issue of how best to allocate an economy's scarce resources in order to

properly satisfy the unlimited needs and wants of individuals , firms and governments

factors of Production :

* land /or natural Capital) the natural resources used during the production process
:

·
the reward is rent : rental income or revenue that comes from ownership or land

* labour (or human capital) required

the human resources in the production process
:

·
the rewards are wages/salaries : paid in an
hourly basis /national minimum wage)
* Capital (or physical evidence) manufactured products used
-

during the production process

·
the reward is interest :
if low it is better for firm /households to borrow money for production purposes (costs ↓)
* enterprise (or entrepreneurship) risks that an entrepreneur has
skills of
creativity taking to manage production
=
+

·
the reward is profit : money that remains after all costs of production have been accounted for

key important concepts

:

Opportunity cost : cost of an economic decision measured in terms of the best alternative choice forgone (econ cost of choice

private firms and individuals produce goods and services

·
Private sector : Where

Public sector
·
: where the government produces or supplies certain goods and services

free market
·
that relies market forces of
economy : system on the demand/supply to allocate scarce resources in economy

Planned economy
·
: a system where the government (or public sector) allocates scarce resources

·
mixed economy : system that features from the planned economy alongside free market
a
economy

regarding the
opportunity cost ,
a well known economist named Milton Friedman stated that "there's no such thing

as a free lunch" in order to suggest that it is not possible to get something for nothing owning the concept of opportunity cost)

* formula of return of most profitable choice (what you sacrifice)

return of investment choosen (what you gain)
opportunity cost
 the production possibility curve

the PPC is diagrammatic representation of the maximum combination products that

a of two a
country can produce
,

given the efficient use of all its resources at in time

, any moment

↓...
A
in the diagram , points A
,
B and
C are in the PPC so
they represent the

↑
E
maximum capacity of the economy if all resources are
being used efficiently
.

Point E be reached
is outside the PPC suggesting it cannot in this moment in

·
,

·
- time . Point C indicates that the
economy can increase output without occurring

an
opportunity cost if it shifts towards point D
.
for example

services

any point inside the PPC suggests that not all resources are
being utilized efficiently
·
any point beyond the PPC is not attainable with the current level of resources and state of technology

however ,
for all points on the curve
,
the
following requirements need to be met

*
full employment : all factor of production are fully utilized , meaning there ale no
unemployed resources

* efficiency all resources put to their best use and is no production

: ale there wastage in the process

There are two main features when

constructing a PPC

* it slopes downwards from left to right :

shows that the economy must forgo a certain quantity of one product

in order to gain more quantity of the other product

* it is concave in its origin :

owning to the concept of opportunity cost

ASSUMPTIONS OF THE MODEL

I
fixed production possibilities : assumes that an economy only produces various combinations of two products

2
scarcity :
there is a limited amount of resources in the economy at any moment in time

3 assumed held constantly certain level of it

constant state of technology : to be because the economy only has a

4
efficiency : all resources are
fully utilized in an efficient way

increasing vs constant opportunity cost the gradient of the PPC

When the PPC is shown as a straight line , it means that the marginal rate of transformation between two

two products in question is the same ,

so there is a constant opportunity cost

·
Pareto Efficiency occurs when is not possible to be better off without someone becoming worse off

Actual growth and growth in the PPC

it can shift outwards as a result of an increase in the productive capacity of an economy

this results in an improvement of quantity/quality of

:

* education/training of workforce * descovery/reclamation of land * freer/fairer international

* innovation of new products/services * technological progress + ↑ production techniques trade deal

* and development * greater population growth

investments in research
 1.
u
O
an outward shift of the PPC curve
N
8
os there must be some sort of economic growth ; actual growth is illustrated

E by moving towards the PPC (A-PB) showing that the economy is now

able to produce mole. growth in production possibilities is illustrated by

e
⑳

A
7 an outward shift from PPC1 to PPC2 ,
or shifting the economy's
PPC1 PPC2 production from B to C

Capital goods

·
actual growth : is caused by an increase in the economy's productive capacity
·
growth of production possibilities caused by : an increased productivity of existing resources

by contrast , the PPC can shift inwards due to detrimental changes in the
economy
, such as major

natural disasters or war , which destroys a

large part of the economy's overall resources
. This means

that the economy suffered from a decrease in its productive capacity

.

Modeling the economy

the circular flow of income is used to explain how economic activity and national income ale determined

based on the interactions of economic decision makers

.

Injections

LARAGES
* taxes

*
savings
-
Alter
*

*
government spending

investments
exports

·
* imports households

Expenditure
on 6/5

↳
factors of

Production

M
firms
Find mean

* economic agents : households , firms and governments

* closed economy :
Part of the flow that is compromising domestic economic agents

* open economy :
flow that is and
Part of the compromising domestic foreign economic agents

* leakages : takes money out of the flow (W = 5 +T + M)

* Injections :
Puts money into the flow (compromises gov spending , export earnings and investment expenditure)
How DO economists view the world

* Ceteris Parabus : "All other factors remaining constant" or "all else unchanged". It is used by economists to

explain cause and effects of economic variables

* laissez-faire :
approach that allows transactions to take place without government interference

* invisible hand : adam Smith's metaphor - how individual's behavior and decision making ends up benefiting

society as a whole because they are incentivized to act in their own self .
interest

* classical economists economists focused that markets self-regulate to allocate

: on the
theory can resources

utility refers to the level of consumer satisfaction

·

*
marginal utility benefit/satisfaction gained
: from consuming an additional unit of a good or service

* law of diminishing marginal utility states that : as individuals consume mole of a product ,
the satisfaction

gained from each additional unit of consumption declines ;

consumers would only buy more at lower prices

* say's law :
basically stated that supply can create it's own demand

* marxism :
policy that focuses on meeting the needs and values of masses rather than for the privilege

of a
minority of capitalists .

interventionist approach
* Keynesian economics : to macro policy by advocating for increased government

expenditure and lower taxes in order to stimulate demand in the economy

monetarists :
believe that monetary policies powerful and effective stabilization
ar the most policy to

influence the overall level of economic activity

.

* new classical counter revolution : favored supply-side policies over interventionist arguments , such as

privatization of state-owned enterprises and deregulation of markets

* circular economy : a system in which raw materials , components and other resources ale used sustainably
to generate ortpul