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Summary Principles of Economics Chapters: 1,2,3,6,12 | IB Year 1 | Hva
Good in-depth summary made by first year student, .
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Voorbeeld 3 van de 30 pagina's
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Chapter 1 What is Economics?The Economy and Economic Systems
Individuals purchase final goods and services for final consumption and also provide the inputs into
production (Land, labour and capital).
We refer to these individuals collectively as households.
The organizations which buy these factors and use them to produce goods and services are referred
to collectively as firms.
- Economic activity; The amount of interaction between households and firms (The amount of
buying and selling which takes place). The more buying and selling there is, the higher the
level of economic activity.
- Economy; Households and firms in a particular geographic region.
The Economic Plan
3 questions that any economy has to face:
What goods and services should be produced?
How Should these goods and services be produced?
Who should get the goods and services that have been produced?
To satisfy these questions, economies have resources at their disposal which are classified as land,
labour and capital.
- Land; All the natural resources of the earth. This includes mineral deposits such as iron ore,
coal, gold and copper; oil and gas; fish in the sea; and all the food and raw materials
produced from the land.
- Labour; The human effort both mental and physical that goes into production. A worker in a
factory producing precision tools, an investment banker, an unpaid career, a road sweeper, a
teacher; these are all forms of labor.
- Capital; The equipment and structures used to produce goods and services. Capital goods
include machinery in factories, buildings, tractors, computers, cooking ovens; anything
where the good is not used for its own sake but for the contribution it makes to production.
Scarcity and Choice
Our needs are the necessities which enable us to survive; food & water, clothing, shelter and proper
healthcare.
Our wants are the things which we believe make for a more comfortable and enjoyable life;
vacations, different styles of clothes, smartphones, leisure activities, the furniture and items we have
in our houses, etc.
,Our demand for these wants and needs is generally greater than our ability to satisfy them.
- Scarcity; the limited nature of society’s resources. Society has limited resources and
therefore cannot give every member everything he or she wants, a society cannot give every
individual the highest standard of living to which he or she might aspire.
The textbook definition of economics; the study of how society makes choices in managing its scarce
resources and the consequences of this decision making.
- Economics; The study of how society manages its scarce resources.
How people make Decisions
People Face Trade-offs
Making decisions requires trading off the benefits of one action against those of another.
An important principle in economics is efficiency, which deals with ways in which society gets the
most it can (depending how this is defined) from its scarce resources.
- Equity; the extent to which the benefits of outcomes are distributed fairly among society’s
members.
Efficiency refers to the size of the economic cake, and equity refers to how the cake is divided.
Acknowledging and understanding the consequences of trade-offs is important because people are
likely to make more informed decisions if they understand the options that they have available.
Opportunity Cost
Because people face trade-offs, making decisions requires comparing the cost and benefits of
alternative courses of action.
- Opportunity cost; the measure of the options sacrificed in making a decision. The value of
the opportunity you didn’t do.
Thinking at the Margin
Decisions in life are rarely straightforward and usually involve weighing up costs and benefits. Having
a framework or principle on which to base decision-making can help if we want to maximize or
minimize costs and benefits.
- Marginal changes; describes small incremental adjustments to an existing plan of action.
- Economic agents; an individual, firm or organization that gas an impact in some way on an
economy.
Marginal analysis is based around an assumption that economic agents are seeking to maximize or
minimize outcomes when making decisions. Consumers may be assumed to seek to maximize the
satisfaction they gain from their incomes, and firms to maximize profits and minimize costs.
Maximizing and minimizing behavior is based on a further assumption that economic agents behave
rationally. Thinking at the margin means that decision makers choose a course of action such that
marginal costs is equal to the marginal benefit.
If a decision results in greater marginal benefits than marginal costs it is worth making that decision
and continuing up to the point where the marginal cost of the decision is equal to the marginal
benefit.
, - “Marginalist school”; The assumptions of rational economic behavior have a number of
implications which have been subject to criticism. (Work of William Stanley Jevons, Carl
Menger, David Ricardo and Jeremy Bentham.)
In studying economic models which rely on the assumptions of rational behavior it is important to
remember that if these assumptions are relaxed, outcomes might be very different.
People respond to Incentives
Behavior may change when the costs or benefits change > People responding to incentives.
How people interact
Trade can make everyone better off
Trade allows individuals, firms and countries to specialize in the activities they do best. With the
income that they receive from specialization they can trade with others who are also specializing and
can improve their standard of living as a result.
Markets can be a good way to organize Economic activity
The economic problem highlights three questions that any society has to answer. “What goods and
services should be produced?”, “How are they to be produced?” and “Who will get what is
produced?” > This is determined by the economic system.
- Economic system; the way in which resources are organized and allocated to provide for the
needs of an economy’s citizens.
In many countries of the world, a capitalist economic system, based on markets, is the primary way
in which the three questions are addressed.
- Capitalist economic system; incorporates the principles of the private ownership of factors
of production to produce goods and services which are exchanged through a price
mechanism and where production. Is operated primarily for profit.
We can measure the standard of living in terms of the income that people earn which allows them to
purchase the goods and services they need to survive and enjoy life.
Whilst capitalist systems have increased living standards for many it is not the case that everyone in
society benefits equally. Capitalism has meant that some people and countries become very rich, but
others remain poor.
Positive
The existence of the profit motive provides an incentive for entrepreneurs to take risks to organize
factors of production and this dynamism in capitalist systems leads to developments in technology
and capital efficiency. This helps generate profits for the individuals and firms concerned, but also
increase knowledge and information in society as a whole which further contributes to economic
development.
- Profit provide incentive for entrepreneur to take risks, this leads to technology development
and capital efficiency
- This helps generate profits, increase knowledge and information in society > contributes to
economic development
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