Yukihiro Murakami
Economics –Foundations
Sub-topic
Economics
Goods & services
Needs & wants
Economic good vs.
free good
Scarcity,
Opportunity Cost &
Choice
Three Economic
Questions
SL/HL Core – Assessment Objectives
AO1 – Define “Economics”
Economics is the study of how scare resources are allocated to fulfill the infinite wants
of consumers.
AO2 – Distinguish between goods & services.
Goods are sold or traded for other goods/services (or money) and can either last forever
or just for a while and are tangible (can be touched). (Furniture/food) Services are
intangible, thus cannot be touched and do not last forever.
AO2 – Distinguish between durable goods and non-durable goods.
Durable goods last for a decent amount of time or forever, but non-durable goods
usually have an expiration date.
AO2 – Distinguish between needs & wants.
Needs are inevitable goods for human survival (food/water/shelter/etc.) and wants are
goods/services that humans long for after having all their essential needs met.
AO2 – Distinguish between economic goods & free goods.
Free goods are goods that are available for free for everyone usually for its sufficiency
in the community. (air, water) Economic goods’ resources are scarce in relation to its
demand, thus it is usually traded for goods with monetary values or money.
AO1 – Define “Scarcity”
Scarcity is the limited availability of economic resources relative to society’s unlimited
demand for goods and services.
AO1 – Define “Opportunity Cost”
Opportunity Cost is the cost of an economic decision in terms of the next best
alternative foregone.
AO3 – Examine the relationship between opportunity cost, scarcity, and choice.
People are usually required to choose between two or more objects because of the
finite resources that make up the object: scarcity. The opportunity cost of choosing a
product is to be able to buy the other one.
AO1 – Describe with examples the three economic questions.
- What should be produce and in what quantities?
Because there are scarce resources, this has to be decided for all economic
resources
- How should things be produced?
Machinery or manual?
- Who should things be produced for?
Think about the people that can afford them. The more the better.
Four factors of
Production
AO1 – Describe with examples the four factors of production.
- Land
Natural Resources (trees, raw materials)
- Labor
Human Resources. (mental/physical contribution)
- Capital
Physical – Stock of manufactured resources
Human – Better economic activity
- Entrepreneurship
Organizing/Risk taking of production.
Utility
AO1 – Define “Utility”
The usefulness and the pleasure that the consumer receives when they consume a
product.
AO1 – Define the term “Marginal”
One more unit.
Margin
Production
Possibilities Curve
AO4 – Draw a correctly labeled Production Possibilities Curve.
AO3 – Examine the relationship between the PPC and scarcity, choice, and
Yukihiro Murakami
Microeconomics vs.
Macroeconomics
Positive vs.
Normative Econ
Ceteris Paribus
Circular Flow Model
Public vs. Private
Sectors
Rationing Systems
opportunity cost.
PPC graphs show how efficiency is an important role considering the scarce resources.
We cannot go beyond the potential line, because of the scarce resources.
Manufacturers’ choices come from supply and demand, and create more of the
product that is being demanded. The opportunity cost of creating one product,
is being able to produce the other.
AO1 – Define “potential output,” and relate to PPC
Products that could be produced if all resources were used efficiently, any point on the
AO1 – Define “potential growth,” and relate to PPC
Increase in the economy’s capacity to increase, dot on the outside the PPC line. The
whole line shifts outward.
AO2 – Distinguish between potential output and actual output, and relate to PPC.
Potential output is what the economy should/could be doing, and actual output is what
the economy is actually doing. Potential output is on the PPC line while the
actual output is inside the PPC line.
AO2 – Distinguish between potential growth and actual growth, and relate to
PPC.
Potential growth occurs only when there is an increase in the quality/quantity of the
factors of production and actual growth occurs when all the resources are not
wasted and are used efficiently. Potential growth moves from PPC line to
outwards and actual growth moves from the inside of the PPC line towards the
PPC line.
AO2 – Distinguish between Microeconomics and Macroeconomics.
Microeconomics refers to smaller scales such as private companies and firms.
Macroeconomics refers to larger scales such as the whole economy’s economic status.
AO2 – Distinguish between Positive and Normative Economics with examples.
Positive economics is a statement that can be supported by facts and evidences. (Men
drink more beer than women) Normative economics is a statement that cannot be
supported by facts or evidence. Usually one’s opinion. (The gasoline price is too high
in the United States.)
AO1 – Define “Ceteris Paribus”
Ceteris Paribus: Changing one of the variables in a theoretical testing model to see
what the outcome will be. All other things being equal.
AO1 – Explain the reason Ceteris Paribus is used in economic models.
When economists want to test the effect of one variable to another, he does so by
changing one of the factors and leaving the other untouched.
AO4 – Draw a correctly labeled Circular Flow Model.
AO2 – Explain the Circular Flow Model.
The households supply the four factors of production to the firms/companies. The
firms provide Rent, Wages, interest, and profit back to the households. (factors market)
The households pay expenditure, or give something with monetary value to the firms.
The firms supply the households with goods and services. (products market
AO3 – Distinguish between the public sector and the private sector with examples.
Public sector: Owned by and cared by the government. (Infrastructure) Police stations,
fire fighters, etc. In a command economy, everything is in the public sector.
Private sector: Owned by private firms and companies. (Products) Only for free or
mixed markets.
AO2 – Distinguish between a planned economy and a free-market economy.
In a planned economy, the basic economic problems are taken care of by the
government. In short, the government owns everything. In a market economy,
the government does not control anything and the decisions are left for the
people. People make the decision on the basic economics problem.
AO3 – Compare and contrast the advantages and disadvantages of planned and
free-market economies.
P Advantages
P Disadvantages
F Advantages
F Disadvantages
- Secure jobs.
- No incentives
- Lots of
- Unsecure jobs.
- Retirement
to work.
incentives to
- One company
plan laid out.
- Long queues to work.
may be too
- Medical plan
buy a product.
- People have
strong resulting
for everyone.
- No choices.
their choice on
in a monopoly.
what they want
to do.
Yukihiro Murakami
Growth vs.
Development
AO2 – Distinguish between economic growth and economic development.
Economic growth is when there is an increase in the level of real national income
between one year and another. Economic development is a measure of welfare and
well-being. Measures in GDP, but also in other nonmonetary terms such as education
indicators, health indicators, and social indicators.
AO1 – Define “sustainable development”
Sustainable development: Development that meets the needs of the present without
compromising the ability of future generations to meet heir own needs.
Yukihiro Murakami