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SECTION 1- THE
FOUNDATION OF
ECONOMICS
Study Notes
Taken from the Cambridge IB Economics textbook
Ch
...
1 –
1
...
Needs –
Food – goods (physical)
Water – goods (physical)
Insurance – services (non-physical)
Education – services (non-physical)
Wants –
Cars – goods (physical)
Television – goods (physical)
Entertainment – services (non-physical)
2
...
Due to the
nature of scarcity, choices must be made in order to distribute these resources as people
cannot have everything they want
...
3
...
Since there is a limited amount of resources, it is vital that everything be utilised to its full
potential, so as to not waste any resources
...
4
...
Due to an abundance of need for water, more water is produced as it will be fully utilised
and there will be little to not waste, thus making it a cheaper and more available resource
...
2
Ch
...
2 –
1
...
What to produce?
2
...
For whom to produce?
2
...
The first two question are in regards to resource allocation, and the third question is about
the distribution of output and income
...
They are connected as the distribution of output/income only occurs if resources have been
allocated
...
Consider the following, and identify each one as referring to output/income
distribution or redistribution; or to resource allocation, reallocation, over allocation or
under allocation (note that there may be more than one answer)
...
Income redistribution and over allocation/under allocation
...
Resource over allocation
(c) Whereas rich countries typically spend 8–12% of their income on providing health
care services to their populations, many poor countries spend as little as 2–3% of
income
...
Income distribution, and resource over allocation
(e) If countries around the world spent less on defence, they would be in a position to
expand provision of social services, including health care and education
...
Output distribution
3
Ch
...
3
1
...
(b) What are the factors of production?
1
...
All natural resources
b
...
Minerals, oil reserves, forests
2
...
Physical and mental effort
b
...
Teachers, plumbers
3
...
Man-made factors of production
b
...
Machinery, tools, airports
4
...
Special human skill
b
...
Organises the three other factors and takes on the risks of success or failure
of a business
2
...
One could argue that entrepreneurship is man-made, however the
ability to innovate and think is natural to some people, and is not a man-made ability
...
Why is entrepreneurship considered to be a factor of production separate from
labour?
Entrepreneurship differs from labour in the way that it is processed
...
Entrepreneurship is different from labour as it involves mental effort not to
produce a product, but to develop and innovate ways to create said product
...
(a) What are the various meanings of the term capital’?
1
...
Human capital: Skills, abilities and knowledge acquired by people, making them
more productive
...
Natural capital: aka environmental capital
...
Provides a future stream of productivity in production of resources as a
healthy natural capital is essential for human life and production
...
Financial capital: Refers to financial instruments, e
...
stocks, money, bonds
...
(b) What do they all have in common?
All forms of capital provide a stream of future benefits
...
4
Ch
...
4
1
...
In its nature, scarcity in economics requires choice
...
A country
cannot produce unlimited amounts of defence machinery or healthcare as there just simply
not enough resources, so a choice must be made
...
Define opportunity cost
...
In other words, the opportunity cost is the value of what was given up in a
choice
3
...
Choice 1: Walking to the library instead of catching the bus
Opportunity cost: The shorter bus ride
Choice 2: Buying a burrito instead of a sandwich for lunch
Opportunity cost: The enjoyment of that sandwich
Choice 3: Having a banana instead of an apple for a snack
Opportunity cost: The enjoyment of that apple
5
Ch
...
5
1
...
1 and Figure 1
...
If the economy is initially at point A
and moves to point B, computer production will
increase by 17 units
...
the gain will be microwave ovens, but the
opportunity cost will be the computers that aren’t produced
(c) If it moves from point C to B, what will be the gain and what will be its opportunity
cost?
The gain will be the increase in microwave ovens, and the opportunity cost will be the
computers that aren’t produced if the economy were to move from point C to B
...
In production, cost does not always equate to money
...
These two
statements have the same meaning as they both convey the message that productive
efficiency means producing while creating the lowest possible opportunity cost, just in
different wording
...
(a) Distinguish between output actually produced and output on the PPC
...
While this works in theory, it is not an accurate portrayal of how
decisions will play out in the real world, so it is not realistic to produce any product on the
PPC
...
Almost certainly, countries will have thousands, if not
millions, of products to consider, so focusing on only two and maximising only those is
unrealistic, as the economy must factor in resources needed for the countless other products
is creates
...
Say an economy is initially at point F, producing 15 microwave ovens and 12
computers (Figure 1
...
What would be the opportunity cost of moving to a point on
the production possibilities curve, such as point C, where it would be producing 26
microwave ovens and 25 computers?
The opportunity cost of choosing to change the production amount would be the money that
is used in creating more of both of those products, which now can’t be used on other
products
...
1
...
Explain the social scientific method
...
g
...
Make observations of the world and select an economic question
2
...
Make a hypothesis about how the variables are related
4
...
Test hypothesis
6
...
Why is it important to compare the predictions of a hypothesis with real-world
outcomes?
It is vital that predictions be compared to real world outcomes as it is impossible for every
single prediction to be accurate, and thus they should be compared to see where the
assumption went wrong, if it did
...
3
...
They are helpful as they allow
economists to isolate important aspects in the real world and show connections between
variables
...
These models make it easier for economists to answer that ‘why’
question
...
1
...
Consider the statement, ‘If you increase your consumption of calories, you will put
on weight
...
This statement does not account for the fact that while they may increase their consumption
of calories, they may be exercising more as well, meaning their weight will stay constant or
may even decrease
...
Rewritten (1): If you increase your consumption of calories, assuming your activity level
stays the same, you have no underlying medical conditions and you don’t change what you
eat, you will put on weight
...
2
...
Generally, I think this is a realistic assumption, however, there will always
be a percentage of people for whom this doesn’t apply, as it is impossible for everyone to fit
in one box
...
1
...
Which of the following are positive statements and which are normative?
(a) It is raining today
...
Positive
(d) Economics should be concerned with how
to reduce poverty
...
Why do you think it is important to make a distinction between positive and
normative statements in economics?
Both types of statements aid in different processes, and thus should be kept distinct
...
9
Ch
...
9
1
...
Economic growth is simply a change in the quantity of output produced
...
On the other hand,
economic development refers to the raising of living standards and wellbeing of people
within a certain economy
...
2
...
While
economic development cannot occur without somewhat high levels of output, economic
development focuses mainly on the wellbeing of people and the standard of living, which
increases if there is more provision of social services
10
Ch
...
10
1
...
Sustainability involves using resources in ways that overtime, their quantity and quality do
not reduce
...
Consider the following: ‘But just as the speed and scale of China’s rise as an
economic power have no clear parallel in history, so its pollution problem has
shattered all precedents
...
’
(a) In your opinion, is China achieving sustainable development?
In regard to this excerpt, I am in the middle
...
(b) What can you conclude about China’s rapid economic growth and its impacts on
future generations?
This rapid economic growth will undoubtedly result in benefits for future generations
...
11
Ch
...
11
1
...
1
...
3
...
5
...
Public healthcare
National defence
Public education
Road system
Natural disaster control
Tax collection
2
...
The group that argues that there should be
less government intervention states markets are fairly good at allocation resources on their
own, and that increased government intervention results in a waste of resources
...
12
Ch
...
12
1
...
The goal of equity ideally allows people who have little to no income access to
essentials, such as food, healthcare and shelter
...
2
...
Having directly proportional tax rates to
income is not equal amongst everyone, but is equitable
Situation 2: Welfare/pension
• People who don’t make enough to support themselves or people who can’t work will
still receive money from the government in order for them to live and afford the basic
necessities
...
3
...
One side argues that equity and efficiency to not go
hand-in-hand, for example if you increase welfare with people who don’t make enough
money they will stop working altogether, eventually decreasing an economy’s output
...
13