IB Economics Basic (1/3)

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  • Created by: Jack Yiu
  • Created on: 11-04-11 05:07

1. Basic Economic Problem

 Resources in our world are finite and humanities' wants/demands are infinite, which leads to choices being made. There are 3 Questions:

What should be Produced: What to produce and in what quantities 

How should it be Produced: Different methods of producing goods, each have their own pros and cons.

Who should things be produced for: Those that have high disposable income or those without, similarly how income should be distributed, will certain occupations have higher wages than others?

Rational Systems or Allocation Systems would need to be able to answer these questions, there are two main types: Free market system and Command/Planned economy. However, in reality, all economies are mixed economies.

Positive and normative concepts 

Positive statement is a statement could be PROVED right or wrong

Normative statement is a statement that expresses its own opinion and cannot be proved right or wrong

Ceteris paribus 

Ceteris Paribus basically means that it is assuming that all other variables are kept constant, except for the designated variables.

Scarcity, choice and utility:

There are infinite demands and finite/limited resources, this means that people will have to make a choice on how to allocate the resource, who to produce for, how to produce it. People/firms/individuals will be making decisions with the pure aim of maximizing the utility.

Utility is defined as the ability of a good or service to satisfy one or more needs or wants of a consumer.

Factor of Production

Factors of Production are basically the four resources that allow an economy to produce its output.

These include Land, Labour, Capital and Management/Entrepreneurship.

  1. Land includes the area where the firm operates in (If it requires one), or it can be the natural resources from earth.
  2. Labour is the human factor, it is the physical and mental contribution to the production.
  3. Capital is the investment in physical and human capital, physical capital would be the machinery, factories, machines and tools etc. While Human capital would be investment in healthcare or education, these along with improvement in infrastructure leads to significant economic growth in the long run.
  4. Management organizes the other factors of production to produce goods and services, they also use their personal money and money from investors to buy the factors of production and make a profit. They take a risk as profit is never guaranteed, as such they are rewarded with profit, instead of having only a 'wage'.

Application of Factors of Production

Land: Shop area in IFC or in the streets, or the area of the sea where an oil refinery…


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