Summary of chapter 1-14 for the course Economics for IB and goes into understanding how consumer and producer actions shape market dynamics, influencing prices, quantities, and societal well-being. It shows the reasons behind shifts in behavior and their consequences, along with the interventions o...
Chapter 1 thinking like an economist
Economics: the study of how people make choices under conditions of scarcity and of the
results of those choices for society.
Scarcity principle (no free lunch principle): Although we have boundless needs and wants,
the resources available to us are limited, so having more of 1 good thing usually means having
less of another.
Cost benefit principle: an individual should take an action if, and only if, the benefits from
taking that action or at least as great as the extra costs. The person making the decision is a
rational person, which means that someone has well defined goals and fulfills these goals as
best as she can.
Economics surplus: the economic surplus from taking any actions is the benefit of taking that
action minus its cost. The cost benefit principle suggest that we take only those actions that
create additional economic surplus.
Opportunity cost: the opportunity cost of an activity is the value of the next best alternative
that must be forgone in order to undertake the activity / the value of what you must sacrifice /
recognizing precisely what taking a given action prevents us from doing.
Four important decision pitfalls
o Measuring costs and benefits as proportions rather than absolute money amounts:
Many decision makers treat a change in costs or benefits as insignificant if it's
constitutes only a small portion of the original amounts, therefore absolute money
amounts should be used to measure costs and benefits instead of proportions. (laptop /
game example).
o Ignoring opportunity costs
o Failure to ignore sunk costs: a cost that is beyond recovery at the moment a decision
must be made (Money spent on a nontransferable airline ticket for example). When
deciding whether to perform an action, it is important to ignore sunk costs.
o Failure to understand the average marginal distinction:
• Marginal cost: the increase in total costs that result from carrying out one
additional unit of activity.
• Marginal benefits: the increase in total benefits that results from carrying out
one additional unit of an activity.
The cost benefit rule is to keep increasing the level as long as the marginal benefits of
activity exceeds its marginal costs. A common mistake is to conclude that the activity
should be increased if its average benefit exceeds its average costs.
Average cost: the total cost of undertaking n units of activity divided by n.
Average benefit: the total benefit of undertaking n units of an activity of divided by n.
Economics: micro and macro
Microeconomics: this study of an individual's choice under scarcity, and its implications for
the behavior of prices and quantities in individual markets.
Macroeconomics: the study of the performance of national economies and policy that
governments use to try to improve that performance.
,Chapter 2: markets, specialization and economic efficiency
Absolute advantage: one version has an absolute advantage over another if the hours spent
on performing a task earns more than the other person can earn in an hour at the task.
Comparative advantage: one person has a comparative advantage over another in its task if
his or her opportunity cost of performing a task is lower than the other person's opportunity
costs.
Gains from exchange are possible if trading partners have comparative advantages in
producing different goods and services. Maximum production is achieved if each person
specializes in producing the good or service in which he or she has the lowest opportunity
costs. Comparative advantage makes specialization worthwhile even if one trading partner is
more productive than others.
The principle of comparative advantage: everyone does best when each person concentrates
on activities for which his or her opportunity cost is lowest.
Comparative advantage and production possibilities
Production possibilities curve: a graph that describes the
maximum amount of one good that can be produced for every
possible level of production of the other good.
o Attainable point: any combination of goods that can be
produced using currently available resources.
o Unattainable point: any combination of goods that cannot
be produced using currently available resources.
o Inefficient point: any combination of goods for which
currently available resources enable an increase in the
production of 1 good without a reduction in the production
of the other
o Efficient point: any combination of goods for which currently available resources do
not allow an increase in the production of 1 good without a reduction in the production
of the other.
The slope of the PPF shows the opportunity cost of producing an additional unit of the good
measured along the horizontal axis, the principle of increasing opportunity costs tells us that
the slope of the PPF becomes steeper as we move downwards to the right. The greater the
differences among individual opportunity costs, the more bow shaped the PPF, the greater
will be the potential gains from specializations.
The principle of increasing opportunity costs: in expanding the production of any product,
first employ those resources with the lowest opportunity cost, and only afterwards turn to
researchers with higher opportunity costs.
Factors that shift the economy’s PPF
o Investment in new factories and equipment which results in increased productivity.
o Population growth, however, this also increases the number of mouths to feed.
o Improvements in knowledge and technology
Adam Smith: Degree of specialization depends on the population density, the more people the
more room for specialization. Other reasons for limited specialization maybe laws and
customs and the size of the market.
Too much specialization also has costs, people are not able to have variety in their work.
Comparative advantage and the gains from international trades
Nations can benefit from exchange, even though one trading partner may be more productive
than the other in absolute terms. The greater the difference between domestic opportunity cost
, and world opportunity costs, the more a nation benefits from exchange with other nations. But
expansion in exchange does not guarantee that each individual citizen will do better. In
particular, unskilled workers in high wage countries may be hurt in the short term by the
reduction of barriers to trade with low wage nations.
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