SL
UNIT 1:
MICROECONOMICS
NOTES FOR 2020 IB
SYLLABUS
Delicia Pascall
,Introduction to Economics
Scarcity
= Limited in supply
- Economic goods – have prices to mediate and ration the amount of people who have them
- All goods, services and many resources are relatively scarce
- There aren’t enough resources to produce all desired goods/services
- Free goods (air/sea water) – have no price
- Common resources = wood/timber, coal, oil, energy sources
- The more scarce the product the more expensive it will be
The Basic Economic Problem
Unlimited human wants
Scarcity of resources to produce ALL goods/services that people need/want
Sacrifice - choices have to be made regarding what goods to produce with the limited resources,
so we choose not to produce other goods/services
Resolving The Economic Problem
- What to produce? >> making choices and prioritising Resource allocation
- How to produce? >> making production as efficient as possible
- For whom to produce? >> considering equity in income distribution
Efficiency
= Producing goods/services with minimum amount of resources and not wasting them
Equity
= Fairness in income distribution
- Equity in income distribution helps to eliminate poverty >> everyone can meet basic needs
and have equal job/education opportunities
- Equality in Income Distribution – everybody earns the same amount
Sustainability
= The ability of the present generation to satisfy its needs using resources without limiting this
ability for future generations
Changes
= (theoretically) = how the change in one variable will affect other variables
- E.g. how the change in price affects quantity demanded of a product
Interdependence
= When the actions of a person/firm/government/other stakeholder, will affect others
- Globalisation and international trade >> interdependence between countries/economies
Intervention
,- (from government)
- TAXATION
- Subsidies = providing finance/money
- Price controls
- Legislation and regulation >> e.g. minimum wage law, health and safety legislation
- Economics determines the system resource allocation between competing wants and
consumers
Factors of Production = Resources
- Land >> everything that grows on/in/under the land & sea, e.g. crops, natural resources, water
- Labour >> workers, e.g. engineers
- Capital >> physical capital = equipment, machinery, factories, plants >>
human capital = people and their skills >> financial capital = stocks and shares
- *Management/Enterprise >> brings the other 3 factors together to start a business >> the
reward is profit >> runs the risk of failure money loss
Opportunity Cost
= the value of the next best alternative that must be sacrificed when an economic decision is
made
- Choices and opportunity cost are necessary due to the issue of scarcity
- Free goods = no opportunity cost, free goods provided by the government are still scarce and
have an opportunity cost (requires payment)
- Economic goods = have opportunity cost and are normally paid for
- Natural resources = free but still scarce
Income distribution = the amount of income certain individuals receive will affect how much
output they can/will buy, e.g. between high earner and low earners
Income redistribution = when certain group receives more income
Resource allocation = diverting resources towards production of specific goods
Resource overallocation = diverting too many resources towards production ( inefficient use of
resources, waste of resources)
Resource under-allocation = diverting too little resources towards production (inefficient use of
resources)
Markets vs Government intervention
- Markets are efficient and work well to achieve society’s wellbeing
- Government intervention = changes the allocation of resource from what markets would have
achieved on their own
CETERIS PARIBUS
as the price of a good increases, the quantity of this good supplied also
increases.
Free Market Economy
, - Free market economy = all factors of production belong to a private sector (firms/households)
- Minimal gov intervention
- Main goal >> making profit
- Prices act as a signal for producers/firms, influencing what/how much to produce and how to
reallocate resources
- Prices give signal to consumers, what/how much to consume
- Markets can reach equilibrium without gov intervention; however, this type of equilibrium may
not be the best for society >> market failure
e.g. overproduction and overconsumption of tobacco/alcohol/fast food etc
e.g. underproduction and underconsumption of education/NHS/green energy
- Pure free market economy does not exist in real life >> there is always some government
intervention
Command/Planned Economy
= all factors of production belong to the government/private sector
- The government decides what/how/for whom to produce
- Central government planning >> leads to misallocation of resources >> shortages and
surpluses of products
- No incentive to produce for firms or to work efficiently for workers >> no rewards in the form
of profits for firms and higher wages for workers (equality in wages)
Criteria Free market economy Planned economy (based on Mixed Economy (based on
(based on prices) commands) prices and commands)
Resource ownership Private sector Public sector Public and private sectors
Economic decision making Private sector Public sector Public and private sectors
Rationing system Price rationing Non-price rationing Price rationing and non-price
rationing
Positive and Normative Economics
- Positive economics
= this type of economic statement is based on factual evidence/economic theories and models
- The role of positive economics:
- The use of logic (reasoning) >> making statements each of which is true when previous
statements are true
- The use of hypothesis >> an educated guess based on cause-and-effect relationship.
(IF…THEN…), it is prediction which can be proved
- The ceteris paribus assumption >> other things equal
- The use of empirical evidence >> real world information, observations and data
- The use of theories >> based on more than two variables. Example – Diminishing
marginal utility
- The use of laws >> explains the relationship between the two variables only
- The use of models to test theories.
- Normative economics = this type of economic statement is based on opinions, beliefs or value
judgements >> debatable (what should happen, good/bad, right/wrong)
Production Possibility Curve – PPC
UNIT 1:
MICROECONOMICS
NOTES FOR 2020 IB
SYLLABUS
Delicia Pascall
,Introduction to Economics
Scarcity
= Limited in supply
- Economic goods – have prices to mediate and ration the amount of people who have them
- All goods, services and many resources are relatively scarce
- There aren’t enough resources to produce all desired goods/services
- Free goods (air/sea water) – have no price
- Common resources = wood/timber, coal, oil, energy sources
- The more scarce the product the more expensive it will be
The Basic Economic Problem
Unlimited human wants
Scarcity of resources to produce ALL goods/services that people need/want
Sacrifice - choices have to be made regarding what goods to produce with the limited resources,
so we choose not to produce other goods/services
Resolving The Economic Problem
- What to produce? >> making choices and prioritising Resource allocation
- How to produce? >> making production as efficient as possible
- For whom to produce? >> considering equity in income distribution
Efficiency
= Producing goods/services with minimum amount of resources and not wasting them
Equity
= Fairness in income distribution
- Equity in income distribution helps to eliminate poverty >> everyone can meet basic needs
and have equal job/education opportunities
- Equality in Income Distribution – everybody earns the same amount
Sustainability
= The ability of the present generation to satisfy its needs using resources without limiting this
ability for future generations
Changes
= (theoretically) = how the change in one variable will affect other variables
- E.g. how the change in price affects quantity demanded of a product
Interdependence
= When the actions of a person/firm/government/other stakeholder, will affect others
- Globalisation and international trade >> interdependence between countries/economies
Intervention
,- (from government)
- TAXATION
- Subsidies = providing finance/money
- Price controls
- Legislation and regulation >> e.g. minimum wage law, health and safety legislation
- Economics determines the system resource allocation between competing wants and
consumers
Factors of Production = Resources
- Land >> everything that grows on/in/under the land & sea, e.g. crops, natural resources, water
- Labour >> workers, e.g. engineers
- Capital >> physical capital = equipment, machinery, factories, plants >>
human capital = people and their skills >> financial capital = stocks and shares
- *Management/Enterprise >> brings the other 3 factors together to start a business >> the
reward is profit >> runs the risk of failure money loss
Opportunity Cost
= the value of the next best alternative that must be sacrificed when an economic decision is
made
- Choices and opportunity cost are necessary due to the issue of scarcity
- Free goods = no opportunity cost, free goods provided by the government are still scarce and
have an opportunity cost (requires payment)
- Economic goods = have opportunity cost and are normally paid for
- Natural resources = free but still scarce
Income distribution = the amount of income certain individuals receive will affect how much
output they can/will buy, e.g. between high earner and low earners
Income redistribution = when certain group receives more income
Resource allocation = diverting resources towards production of specific goods
Resource overallocation = diverting too many resources towards production ( inefficient use of
resources, waste of resources)
Resource under-allocation = diverting too little resources towards production (inefficient use of
resources)
Markets vs Government intervention
- Markets are efficient and work well to achieve society’s wellbeing
- Government intervention = changes the allocation of resource from what markets would have
achieved on their own
CETERIS PARIBUS
as the price of a good increases, the quantity of this good supplied also
increases.
Free Market Economy
, - Free market economy = all factors of production belong to a private sector (firms/households)
- Minimal gov intervention
- Main goal >> making profit
- Prices act as a signal for producers/firms, influencing what/how much to produce and how to
reallocate resources
- Prices give signal to consumers, what/how much to consume
- Markets can reach equilibrium without gov intervention; however, this type of equilibrium may
not be the best for society >> market failure
e.g. overproduction and overconsumption of tobacco/alcohol/fast food etc
e.g. underproduction and underconsumption of education/NHS/green energy
- Pure free market economy does not exist in real life >> there is always some government
intervention
Command/Planned Economy
= all factors of production belong to the government/private sector
- The government decides what/how/for whom to produce
- Central government planning >> leads to misallocation of resources >> shortages and
surpluses of products
- No incentive to produce for firms or to work efficiently for workers >> no rewards in the form
of profits for firms and higher wages for workers (equality in wages)
Criteria Free market economy Planned economy (based on Mixed Economy (based on
(based on prices) commands) prices and commands)
Resource ownership Private sector Public sector Public and private sectors
Economic decision making Private sector Public sector Public and private sectors
Rationing system Price rationing Non-price rationing Price rationing and non-price
rationing
Positive and Normative Economics
- Positive economics
= this type of economic statement is based on factual evidence/economic theories and models
- The role of positive economics:
- The use of logic (reasoning) >> making statements each of which is true when previous
statements are true
- The use of hypothesis >> an educated guess based on cause-and-effect relationship.
(IF…THEN…), it is prediction which can be proved
- The ceteris paribus assumption >> other things equal
- The use of empirical evidence >> real world information, observations and data
- The use of theories >> based on more than two variables. Example – Diminishing
marginal utility
- The use of laws >> explains the relationship between the two variables only
- The use of models to test theories.
- Normative economics = this type of economic statement is based on opinions, beliefs or value
judgements >> debatable (what should happen, good/bad, right/wrong)
Production Possibility Curve – PPC
