Economics IB SL notes

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YEW CHUNG INTERNATIONAL SECONDARY SCHOOL 2015 - 2016

YEAR 12 ECONOMIICS:

INTRODUCTION

The Basic Economic Problem: Choice and the allocation of resources

COMMAND TERMS: You must know what these terms mean: they are telling you what you

are required to do.

1. DEFINE

-

write a definition and give an example

2. DESCRIBE -

write a definition and give an example

3. DEMONSTRATE -

show, e.g. by drawing a fully labeled graph and explaining

what your graph shows.

4. EXPLAIN

-

define the key concepts; use a fully labeled economic model (and

example) to explain the concept. Refer to your model in your explanation.

5. ANALYSE -

write a detailed explanation of how a particular situation explains

an economic concept.

6. EVALUATE

-

identify the stakeholders (i.e. groups/individuals/sectors/resources that will

be affected), and

-

describe how they will be affected, including the benefits (advantages) and

costs (disadvantages)

-

describe the short-term and the long term affects

-

make relevant, explained suggestions of actions that could be taken

-

give reasons why the economic theory may not accurately apply to, or

explain, the given situation

IMPLICATIONS: these are the likely effects of a certain action /event; things that are likely to happen

as a result of an event or action

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DEFINITIONS OF KEY CONCEPTS

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KEY

CONCEPT

DEFINITION

ECONOMICS Economics is the study of how groups of individuals make decisions about the allocation of resources. It is

the study of how individuals, or groups of individuals, optimize the satisfaction of their unlimited using their limited resources.

Economics uses concepts, ideas, theories and models to explain economic decisions and their implications.

ASSUMPTIONS ( 假設 ) MADE IN

ECONOMICS

With economic theories and models assumptions are made. These assumptions limit the accuracies of these theories and models in applying them to an actual situation.

Assumptions include:

- each consumer/firm has freedom of choice - each consumer/firm has makes rational decisions

- each consumer aims to maximize utility (satisfaction/ benefit to oneself) - each firm has aims to maximize profits

- each consumer/firm makes the best decision/choice

- Ceteris paribus holds i.e. all factors are held constant (do not change)

We need to be aware of the limitations of economic theories and models.

RESOURCES (FACTORS OF PRODUCTION)

Definition: Resources are things used in the production of goods/services.

Resources are the inputs to, or factors of production. There are FOUR categories of resources:

 LAND

 LABOUR

 CAPITAL

 ENTERPRISE

KEY ECONOMIC IDEA: Resources have alternative uses the same resources can be used to produce

different goods.

KEY ECONOMIC IDEA: Resources are relatively scarce: there are not enough resources to satisfy all our

wants. ECONOMIC SCARCITY （缺乏）: THE BASIC ECONOMIC PROBLEM ALLOCATION （分配）OF RESOURCES BECAUSE

- our wants are unlimited relative to our resources, AND - resources have alternative uses. -

each economy must make economic decisions of:

 WHAT TO PRODUCE with the scarce resources available; which output combination will be

produced?

 HOW TO PRODUCE THESE GOODS - what resource combination will be used. E.g. what

methods of production are going to be used?

 WHO will benefit from these goods? Which sectors of the economy will receive these goods?

This is referred to as the ALLOCATION OF RESOURCES, i.e. which use scarce resources will be put to.

Producers allocate resources according to market (price) signals, producing goods that are relatively more profitable.

The BASIC ECONOMIC PROBLEM is WHAT, HOW and FOR WHOM?

ALLOCATION OF RESOURCES and CONSUMER SOVEREIGNTY ( 主權 )

The decisions of what output combination is to be produced and how resources are to be allocated/used is decided by consumers and buyers, i.e. by consumer sovereignty.

Changes in consumers’ choices are indicated to producers through changes in price signals. Goods

consumers desire are relatively more profitable. Producers react by channeling resources into the production of goods consumers desire, in the quantity consumers desire.

ECONOMIC As resources are relatively scarce economic decisions must be made on resource allocation.Opportunity cost

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Evaluation: What are the implications of a reallocation of resources?

More FB will in this industry will rise, and employment in the toberone industry will fall. FB producers’ revenue and profitability will rise.

This graph shows that with new or improved resources and/or technology the

W

The economy produces at point W, i.e. relatively more capital than consumer goods. By going without consumer goods now the economy in the future will be able to produce more of both capital and consumer goods: the PPC

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QUESTION ONE:

1. World wheat prices have increased. On graph 1 show the effect of increasing wheat prices on

pastoral land use in the world. Clearly label the opportunity cost of this changing land use.

2. Identify the economic concept this relates to : opportunity cost Graph 1:

Wheat

Other agricultural products

3. Explain how the increasing wheat price would

cause this change in resource allocation.

(Because the price of the wheat is

getting expensive, people have less

demand in wheat, demand for other

agricultural products would increase.

Firms would transfer the resources to other agricultural products’ production.)

When the price of

wheat increase, this

signals

to farmers that wheat production is

relatively more profitable

. Farmers

will take resources out of the production of other crops and

reallocate

them to the production of

wheat.

4. Label as point ‘F’ on Graph 1 an output combination that is currently unattainable.

5. Explain why this output combination is unattainable, using the concept of economic scarcity.

(Firms can’t produce at any point beyond the PPC, there are not enough resources for them to produce.)

This output combination is not possible as there are

not enough resources

available, given the

current state

of technology

, i.e. resources are

relatively scarce.

QUESTION TWO:

Graph 2:

Timber

4 F

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C Opportunity coast

Wind turbines

The economy is producing the output combination represented by the point ‘C’.

1. On Graph2, illustrate the effect of an increase in the price of electricity. Use labels, dotted lines and arrows.

2. Explain how the increasing electricity prices would cause this change.

Less forestry production will occur: this may lead to unemployment in this industry. Forestry firms’ lose revenue

3. Evaluate the effects of this change in resource allocation. More sales and revenue,

More profitable, More employment.

QUESTION THREE:

In 2012 the demand for smart phones in Asia increased considerably leading to an increase in the price of smart phones.

Graph 3:

Smart phones

A

Clothing

1. On Graph3, point A represent e the 2012 position of the Asian economy.

5 B

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Labe a new point, ‘B’, to illustrate the effects of an increase in the price of smart phones. Use labels, dotted lines and arrows.

2. Explain how the increasing smart phone prices would act as a price signal to determine the allocation of resources.

The production of smart phone will increase with no opportunity cost because at output A the resource under-utilized.

3. Describe how point A could illustrate an increase in production with no opportunity cost.

Because the working efficiency and the using of resources is not maximum, the point A is not on the product possibility curve. So increase in production of A is means to increase the workers’ efficiency and the using of resources instead of increasing the whole resources. So there is not opportunity cost which is give up one goods to produce the other in this increase in production,

QUESTION FOUR:

Graph 4:

Milk (units)

10

Opportunity cost 5

10 20 30 40 Mountain bikes (units) The above graph shows an economy that is productively efficient.

1. On Graph 4, show the effect of increasing mountain bike production from 10 to 30 units. Use labels, dotted lines and arrows. 2. On graph 4, show the effect of an increase in the number of milk-producing cows.

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3. Describe how the production possibility curve illustrates scarcity.

If the economy is producing at an output combination that is productively efficient, it can only increase the output of one good (e.g. mountain bikes) by giving up some output of the other good (e.g. milk). There is an opportunity cost involved, as there aren’t enough resources to maintain the production of milk, i.e. there is economic scarcity.

4. If consumer demand for mountain bikes increased, describe why some producers might exit the market for milk and enter the market for mountain bikes. Describe the implications of this change.

QUESTION FIVE:

Graph 5:

Consumer goods

Capital goods 1. Label a point A on Graph 5 above

to illustrate productive inefficiency. 2. Use the above production

possibility curve to explain the economic concept of choice.

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3. Use the above production possibility curve to explain the concept of economic savings.

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HOMEWORK:

1. The choice between military products and provision of healthcare faces several countries in the world today, and illustrates the concept of ‘opportunity cost’. Explain the nature of this concept using a production possibility curve.

2. Use production possibility curve to explain the difference between actual economic growth and potential economic growth.

3. Syria has been in civil war for at least the last two years. Explain, using a production possibility curve, what is likely to have happened to Syria’s economic growth.

4. The choice between military products and the provision of healthcare faces several countries in the world today. A. Explain the concept of economic development, using a production possibility curve and the choice of producing military products or the provision of healthcare.

B. What are the implications of Syria producing relatively more weapons than other goods. Ideas to consider: What will this mean for e.g. stock of resources (future output

capacity); resource use; firms (revenue/sales; costs of production; business confidence and investment expenditure) households (employment; incomes; expenditure; savings; economic confidence); government (revenue/expenditure)

5. List the 10 most important things about a country that you would take into account if you were choosing to live in another country. Identify how these could be measured so that you could more accurately compare countries..

6.