<1.1 WHAT IS  ECONOMICS?>

• First things first, we can all agree that our WANTS ARE UNLIMITED, you may tell yourself otherwise but the fact that you have 5 old phones at home and 200 pairs of trainers tells another story ;)

• Now how is this related to economics you may ask? Well economics only exists because the wants of society are never-ending, and clearly, SOME PEOPLE'S WANTS ARE MORE ABLE TO BE SATISFIED THAN OTHERS, but WHY CAN'T ALL WANTS BE SATISFIED?

• ...the answer to this question is related to the fact that most of these UNLIMITED WANTS require PRODUCTIVE RESOURCES to be used, however, these RESOURCES ARE LIMITED.

• With UNLIMITED WANTS + LIMITED PRODUCTIVE RESOURCES, we have a situation called 'SCARCITY'.

• As such we can say that due to scarcity, CHOICES about how these limited resources are used ('ALLOCATED') must inevitably be made.

• Thus every economy must find ways to answer THREE ECONOMIC QUESTIONS.

THINK-PAIR-SHARE about this question...

"DOES ELON MUSK SUFFER FROM SCARCITY?"

Now, explain using all the terms stated above why, despite being one of the richest men on the planet Elon Musk suffers from scarcity.

"Elon Musk still suffers from scarcity, as in terms of finite resources despite having billions of dollars,........"

"Furthermore in term of unlimited wants, Musk has ambitions to......, there will always be more goals and desires than he has resources to satisfy"

"Moreover the factors of production that his companies rely on such as....., are all scarce and cannot be used for all projects at the same time"

"Therefore in conclusion we can say...."

• Given an economy's FACTOR ENDOWMENTS, what GOODS or SERVICES should be made?

  • • Questions raised include: 

      • • "Should we produce goods or services?", 

        • "What quantities of each?", 

        • "Which ones are the most important?", 

        • "What to give up?"

• As an obvious consequence of allocating scarce resources to the production of any particular good or service, there will inevitably be something that has to be given up ('foregone'). 

• In other words, the cost of producing 'Good A', is not producing 'Good B'.

• In Economics we refer to the VALUE OF THE NEXT BEST ALTERNATIVE USE FORGONE ('Good B') as the OPPORTUNITY COST of the decision.

• In order to SATISFY AS MANY WANTS AS POSSIBLE given the LIMITED RESOURCES, they must be used in the LEAST WASTEFUL (most EFFICIENT) WAY. 

• Questions raised include: "Which production method is best?",  "Labour-intensive or Capital-intensive?", etc...

• Finally, as we cannot satisfy all wants, decisions have to be taken concerning WHOSE WANTS TO SATISFY, and also WHOSE WANTS TO IGNORE. 

• This raises questions such as: 

  • • • "Should we give to the highest bidder?", 

      • "Should we give women and children first?", 

      • "Should we be allowed to keep what we produce?"

• Go to https://onlinevideoconverter.pro/en19/youtube-video-downloader

• Paste in the following youtube url: https://youtu.be/pGQmwJvZHJc.

• Download as a MP4.

• Go to https://clideo.com/add-subtitles-to-video

• Upload the video file, then CREATE SUBTITLES that explain how the following concepts are illustrated in the clip:

  • • • 1) The economic problem

      • 2) Choices

      • 3) Opportunity cost

      • 4) The 3 economic questions

      • 5) Factors of production

• For example. "Due to scarcity all economies are faced with three economic questions....  

• In a FREE-MARKET ECONOMY, the HOUSEHOLDS (You and me) are the main owners of productive resources, and together they will create FIRMS that produce goods and services. Therefore the three economic questions are answered WITHOUT GOVERNMENT INTERVENTION. 

  • • • • WHAT TO PRODUCE?, is determined by CONSUMERS who guide producers about how to allocate their productive resources through their DEMAND and WILLINGNESS TO PAY*.

        • HOW TO PRODUCE?, is determined by PRIVATE-SECTOR FIRM'S desire to MAXIMISE PROFITS*, which is achieved by MINIMISING WASTE and thus using the most appropriate production methods.

        • FOR WHOM TO PRODUCE?, is determined by PRICE RATIONING, which only allows those consumers WILLING & ABLE TO PAY* THE MARKET PRICE to get to consumer the good.

* Clearly all decisions are made using what is known as the PRICE MECHANISM, which we will discuss later.

• In a PLANNED ECONOMY, the government is the main owner of productive resources, and as such all three economic questions are ANSWERED BY THE GOVERNMENT.

  • • WHAT & HOW TO PRODUCE, is determined solely by THE GOVERNMENT, who base their decisions on CENTRALISED DECISION MAKERS.

    • FOR WHOM TO PRODUCE, is determined using NON-PRICE RATIONING methods, again determined by GOVERNMENT PLANNERS.

• As the name suggests this type of economic system involves aspects of BOTH a FREE MARKET and a PLANNED system.

• Those productive resources controlled by the government are part of the PUBLIC SECTOR, while those owned by private owners are part of the PRIVATE SECTOR.

• The PRODUCTION POSSIBILITY CURVE (PPC) (Also known as the PRODUCTION POSSIBILITY FRONTIER (PPF)), is a very basic economic model used to illustrate the economic concepts of FACTOR Of PRODUCTION, SCARCITY, CHOICE, and OPPORTUNITY COST.

From what we know so far can you IDENTIFY the FACTORS OF PRODUCTION for this new economy?

• So far we have assumed that each person possesses equal productivities in both goods, and thus the OPPORTUNITY COSTS are CONSTANT, in our example for every fish caught the opportunity cost for each worker is 1.5 coconuts and for every coconut picked the opportunity cost for each worker is 2/3 of a fish. 

• This constant slope results in a STRAIGHT LINE PPC. 

• However, in reality factors of production, are not equally productive and we have some workers who are better climbers and collectors of coconuts and other workers who are better fishermen. 

• Thus if we were to produce more and more of say coconuts we would eventually have to employ those who are poor climbers but good fisherman

• 
  

• and greater production of one good results in changing amounts of goods forgone, hence OPPORTUNITY COSTS are NOT THE SAME.

• Indeed when you ask a

Now that you have a PPC drawn, indicate the following on your diagram from 'TASK 3', 

• An OUTPUT COMBINATION that is currently unattainable.

• An OUTPUT COMBINATION when some workers are sick.

• A PPC curve when NEW WORKERS arrive on the island

• A PPC curve when some of the TOOLS BREAK.

• Complete the past paper 3 question below. 

Sketch the 2-sector Circular flow of income and explain how each of the flows are interconnected, then briefly explain why it is likely that incomes will be unequal in this type of market system.

As mentioned above, economics studies decision-making: 

• MICROECONOMICS studies the behavior of INDIVIDUALS and FIRMS in making decisions regarding the allocation of scarce resources.

• MACROECONOMICS studies the performance, structure, behavior, and decision-making of an ECONOMY AS A WHOLE. 

-WHY IS ECONOMICS CLASSIFIED AS A SOCIAL SCIENCE? EXTRA LINK

• -WHAT IS THE DIFFERENCE BETWEEN MICROECONOMICS & MACROECONOMICS?

• -WHAT ARE THE 9 CENTRAL CONCEPTS OF THE IB ECONOMICS COURSE? IBGURU

• -WHAT ARE THE ASSUMPTIONS OF THE PPC MODEL?

• -WHY DOES THE PPC ACTUALLY CURVE?

• -WHAT CONCEPTS DOES THE PPC ILLUSTRATE?

• LINK 1 LINK2, LINK 3 LIN4 4 LINK5

• KHAN ACADEMY PPC 1: HOW IS IT CONSTRUCTED?

• KHAN ACADEMY PPC 2: HOW DOES IT ILLUSTRATE OPPORTUNITY COST?.

• KHAN ACADEMY PPC 3: HOW DOES IT ILLUSTRATE INCREASING OPPORTUNITY COST

• KHAN ACADEMY PPC 4:: HOW DOES IT ILLUSTRATE INCREASING, DECREASING & CONSTANT OPP COST

• KHAN ACADEMY PPC 5: HOW DOES THE PPC MODEL GROWTH?

• HOW TO WRITE A 10-MARK, PPC-RELATED QUESTION