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IB MYP HONORS ECONOMICS NOTES
UNIT 7: FUNDAMENTAL ECONOMIC PRINCIPLES
INTRODUCTION
Definition of “Economics”: The study of how we live in a world with limited resources.
*We live in a world of LIMITED RESOURCES and UNLIMITED WANTS.
-This creates SCARCITY (Not enough resources – HUMAN, NATURAL, CAPITAL – for everybody).
*What are wants?: (things we DON’T need to survive)
Money, jobs, vacation, entertainment
*What are needs?: (thing we need to live)
Water, food, shelter, clothing, air
*PEOPLE MUST MAKE CHOICES!
-This leads to “Opportunity Costs” and “Trade offs”
>Opportunity Cost – Giving up what you wanted “next” to get what you chose first. Example – You want to buy a
DVD ($15.00), a gallon of milk ($3.50), a 2 liter drink ($1.50), and a candy bar($1.00). You only have $25.00, so you buy
the milk, drink, and candy bar. What’s the opportunity cost?
>Trade Off – Exchanging money for a good or service
http://study.com/academy/lesson/opportunity-cost-definition-real-world-examples.html
https://www.stchas.edu/faculty/gbowling/survey/MicroeconomicsVsMacroeconomics-Macro.html
HOW ECONOMIES “WORK”
*Producers & Consumers are essential to the economy (making, selling, buying, using):
PRODUCERS:
*What is a producer?: Makes a good or service
-What is a good?: tangible item, like textbook, orange, pencil, t-shirt
-There are CAPITAL and CONSUMER goods
-Capital goods are used to make other goods, such as hammers, nails, machines
-Consumer goods are for a person’s own use, such as a hairbrush, toothbrush, shoes
-What is a service?: intangible – do something for someone else like driver, banker, teacher, mechanic, computer service
-America produces more services than goods
*Producers pay their workers so that the workers can buy goods/services!
Salary: Yearly pay
Wage: Per hour pay
*PROFIT is most important for producers
PRODUCTIVITY
*Means that you produce goods or services for the least amount
-Everybody benefits when resources are used efficiently
-Productivity is measured by the output produced by a certain amount of input. Input < Output (Output > Input)
*To be the MOST productive, companies/factories use “division of labor”: break down production into “specialized” tasks – this creates
an “assembly line”; this is called “mass production”; this means that input < output
*Producers use different types of resources:
1. Human capital: People work
*You can increase your worth as “human capital” by getting more education and training.
2. Capital resources: Goods that make another good, like a machine
3. Natural resources: From the environment
4. Productive resources: Inventions like the assembly line or robotics
WHAT IMPACTS PRODUCTIVITY?
*Specialization
-This happens when a country focuses on goods/services they can produce better than anybody else
-Example: Saudi Arabia produces oil
-This means that all the world relies on that particular country to produce one thing well
-It increases productivity and profit
*Division of Labor
-This is a form of specialization where tasks are broken down into smaller tasks, each performed by an individual worker
-It improves productivity
-This can make seemingly unskilled jobs semi-skilled
*Human Capital
-To increase productivity, companies must be concerned with their ‘human capital’ (workers)
-Companies must provide benefits, training, and motivation
-Workers are rewarded with higher pay, promotions, or other benefits
*Economic Interdependence
-This means the US relies on other countries for goods they don’t produce, and other countries must import things we produce
-Interdependence can be bad because we feel disasters in other countries if affects their output
-Interdependence can be good because we can increase our own productivity and technology
MEASURING PRODUCTIVITY
*An economy GROWS when a nation’s total output of goods and services increases over time.
This includes and is measured by:
-The GROSS DOMESTIC PRODUCT (GDP): Total value of goods and services a country produces – the higher the GDP, the
better the economy
>An indicator of the productivity of a nation.
>It is a “dollar amount” measure of all the goods and services a nation produces in one year.
>It indicates the standard of living of a country.
>A growing GDP is an indicator of an economically growing country (and vice versa).
-Per Capita GDP: Value of how much a person produces - the higher the per capita GDP, the better the economy
-The STANDARD OF LIVING: Measures the level of wealth, comfort, goods, and necessities available
>Include factors such as income, the employment rate, poverty rate, housing availability, GDP, inflation, life expectancy,
healthcare, availability of Internet
http://www.nationmaster.com/country-info/stats/Economy/Human-Development-Index
FOUR FACTORS OF PRODUCTION: What’s needed to produce?
1.
2.
3.
4.
Land / Natural Resources: Place to build factory, farming, natural resources
a.
Renewable: Water, Trees, Air, sunlight (always available OR renew in your lifetime)
b.
Non-Renewable: Oil, fossil fuel, gas, metals like copper, gems like diamonds (limited availability OR once used, they’re
gone)
Labor: People who produce goods & services
Capital: Money used to produce goods & services, ALSO goods used to make another product – “capital goods” (bricks,
hammer, nails, sewing machine)
Entrepreneur: Person who starts his/her own business
FOUR BASIC ECONOMIC QUESTIONS FOR PRODUCTION:
1.
2.
3.
4.
What to produce?
How to produce it?
How much to produce?
For WHOM to produce?
*All answers are based on ASSUMPTIONS.
COSTS FOR PRODUCTION:
1.
2.
3.
Fixed Cost: Costs to produce that are set/don’t change with amount produced. Ex. Rent
Variable Cost: Costs that change with amount produced. Ex. Cost of resources/labor
Total Cost = Fixed Cost + Variable Cost
CONSUMERS:
*What are consumers?: People who purchase goods and services
-They make decisions based on the most important factor, PRICE.
-Consumers often have incentives from companies to purchase: SALE, BOGO free
-Consumers face “immediate gratification” temptations – impulse buy
-Consumers have the RIGHT to return many products AND expect quality for products (redress your grievances)
-Consumers will face opportunity costs and trade offs
*Always remember that consumers are protected in our country!
-Consumers have RIGHTS! But, they should be INFORMED!
-Read warnings and labels. Follow the warranty. Solve your economic problems by taking products back if necessary.
-Legislation protects you! Fair Packaging and Labeling Act; Pure Food and Drug Act (LEGISLATIVE BRANCH); Better
Business Bureau; Federal Trade Commission, Food and Drug Administration (EXECUTIVE BRANCH), Criminal and Civil Law
-We have the right to buy what we want (consumer sovereignty) because our economy is called “capitalism” (private property
rights, economic freedom of choice, motivated by profit, voluntary exchange, competition, little government intervention)
*Be aware of FRAUD & SCHEMES! If it’s too good to be true – it is!
-Pyramid schemes, Ponzi schemes, identity theft
-Protect yourself! Do not call list, read before you sign – NO, REALLY!, shred it!, keep personal information and passwords
secret
-Contact the NC Department of State or federal Securities and Exchange Commission
North American Securities Administration Association - http://www.nasaa.org/2815/nasaa-fraud-center/
Investor Education Resources - http://www.secretary.state.nc.us/sec/invedu.aspx
FBI-Common Fraud Schemes - www.fbi.gov/scams-safety/fraud
Internet Crime Complaint Center - http://www.ic3.gov/crimeschemes.aspx
RESPONSIBILITY OF CONSUMERS AND PRODUCERS:
*Recycling!
*Protect the environment!
*Don’t pollute!
*Safety!
THE CIRCULAR FLOW OF ECONOMIC ACTIVITY:
TYPES OF ECONOMIES
*In all economies, decisions must be made about WHAT to produce, HOW to produce, HOW MUCH to produce, and FOR WHOM to
produce (the three economic questions) while dealing with SCARCITY
TRADITIONAL ECONOMY
Characteristics:
1. Agricultural; produces crops, crafts, cloth, pottery
3. Exchange goods by bartering, not cash
2. Offers few goods and are labor intensive
Production is based on tradition, custom, habit (maybe set by leaders or elders?)
Results: These economies do not grow and are not efficient
Note: These economies are usually not found today; only in severely underdeveloped countries
*The three economic questions are answered by: tradition
COMMAND
Characteristics:
1. All businesses are owned and operated by the government
5. No ownership of private property
2. Production is to benefit ALL citizens
6. People work their fair share willingly
3. Cooperation replaces competition between businesses (no profit motive)
4. The government provides everyone equally with what they need
Production is based on what the government wants.
Results: All people work together and take an equal share in productivity. Typically not as productive as a market economy
Note: Communism is a type of Command Economy. In Communism, workers control production through the rule of government.
Communism was created by Karl Marx and Friedrich Engels, who wrote The Communist Manifesto.
*The three economic questions are answered by: government
MARKET ECONOMY (Capitalism, Free Enterprise)
Characteristics:
1. Work for your own self-interest
2. Full employment
3. Motivation by profit
4. Productive economies encourage competition
5. Workers compete against each other for wages
6. Division of labor & specialization increases productivity
7. Supply & Demand set prices - Prices are the strongest incentive in making economic choices
8. Private Property Rights (to land, buildings, equipment, patents, copyrights, licenses)
9. Consumer sovereignty & voluntary exchange (the ability of consumers to have freedom of choices in the economy)
10. Little to no government involvement (LAISSEZ-FAIRE)
GOALS OF THE FREE ENTERPRISE SYSTEM
I. Provide the opportunity for everyone to be as happy as possible in their economic choices by completely pursuing their selfinterests.
a. People must have economic freedoms
b. Voluntary exchange describes economic freedom because people can choose how much to consume and how much to
save
c. People can choose to work for wages and spend wages how they wish
d. People also can use their wages on leisure time/activities
II. Full Employment: Almost anyone who looks for work finds it easily at the accepted wage rate for that kind of work
a. It doesn’t mean “no unemployment”
b. All economies will have some unemployment
III. Allow businesses to make as much profit as possible
a. Producers produce at the lowest cost possible and pay out to workers at the lowest cost possible (Called efficiency or
productivity)
b. Characterized by division of labor and specialization
Production is based on the choices of private businesses and individuals
Results: These economies are theorized to increase in productivity & wealth
The Role of Government in Market Economies:
Adam Smith argued that prices must be set by freedom of choice between producers & consumers, not government. The French term
“laissez-faire” means “let them do” or government doesn’t interfere in the economy. Smith also believed that capitalism would meet
society’s needs through its “invisible hand” or the invisible force of freedoms of producers and consumers.
Note: Also called “capitalism.” This term was used by Adam Smith, who wrote the book, The Wealth of Nations in 1776 to explain how a
Market Economy would increase productivity & wealth.
Also called “the free enterprise system.” This means everyone is free to enter any enterprise (business).
*The three economic questions are answered by: the market
MIXED ECONOMY
Characteristics:
1. Possesses characteristics of both Market and Command Economies
2. The government is somewhat involved in regulating the economy
Production is based on both choices of citizens and government regulations
Results: Government regulated “fairness” of the struggle between consumers & producers
Note: Socialism in one form of a Mixed Economy. In Socialism, the government owns utilities (phone, electricity, transportation) and
major businesses (banking), but citizens can own and operate private businesses.
The United States has a mixed economy (or mixed-market or capitalism or free enterprise)! The government sets regulations to protect
both producers and consumers.
*The three economic questions are answered by: market & government
HOWEVER, sometimes capitalism doesn’t work to balance itself. To help solve this problem, economist John Keynes developed the
“Keynesian Theory.”
It says that fiscal policy (or government spending and taxing) and deficit spending (spending of borrowed money by the government to combat
recession) can balance the economy.
MARKET
Is progress stressed?
How is choice of jobs
determined?
What motivates workers to
produce?
How to produce? (degree of
specialization)
Who/What determines how
products will be produced?
For whom are products
produced?
What are the basic values of this
system?
COMMAND
TRADITIONAL