1.1 What is Economics? (DP IB Economics: HL): Flashcards

The study of the entire economy, including economic growth, inflation, unemployment, external trade and overall government policy.

Microeconomics studies individual markets, while macroeconomics studies the entire economy.

Efficiency is a quantifiable concept determined by the ratio of useful output to total input.

Choice arises because resources are scarce, so not all needs and wants can be satisfied, which gives rise to opportunity cost.

Allocative efficiency refers to making the best possible use of scarce resources to produce the combination of goods and services that is optimum for society.

False.

Correlation does not imply causation; for example, ice cream sales and car thefts rise together, yet neither causes the other.

Interdependence is the way economic actors interact within and across nations to achieve economic goals, with greater interaction creating greater interdependence.

To think like an economist involves identifying which variables will be studied and which ones will be excluded.

Change is the idea that the economic world is continuously changing, so economics focuses not on the level of variables but on their change from one situation to another.

Studying topics within concepts deepens critical-thinking skills; for example, globalisation makes more sense within the concept of interdependence.

A social science studies societies and the human interactions within them, and includes subjects such as psychology, politics, geography and business studies.

Macroeconomics examines the government's role in achieving economic growth, price stability, low unemployment and a stable current account balance.

Sustainability limits harmful environmental outcomes involving resource depletion that negatively affect future generations.

Factors of production are the resources used to produce goods and services: land, labour, capital and enterprise.

Enterprise involves taking risks in setting up or running a firm; the entrepreneur combines the factors of production to produce goods or services with the aim of making profit.

The factor income earned by owners of land is rent.

The factor income earned by capital is interest.

The basic economic problem is that resources are scarce: finite resources exist in relation to the infinite wants and needs that humans have.

False.

Needs are essential to human life, such as food and shelter, whereas wants are non-essential desires, such as a yacht.

Opportunity cost is the loss of the next best alternative when making a decision.

False.

Opportunity cost is the loss of the next best alternative, not a monetary amount, though money may be one factor in the decision.

An economic good is one that is scarce relative to the demand for it, which makes it valuable; anything with a price tag is an economic good.

A free good is abundant in supply, so it is not possible to make a profit from supplying it, for example sunlight or air.

Drinking water has become an economic good because population growth and pollution have made it scarce, so it is no longer abundant.

Every economic system must answer what to produce, how to produce it and who to produce it for.

In a market system, the price mechanism of demand and supply decides what to produce.

In a planned economy, the government decides what to produce.

The PPC is an economic model showing the maximum possible output a country can produce if it uses all its factors of production to make only two goods or services.

Capital goods are assets that help a firm or nation produce output, such as a robotic arm in a car factory.

Consumer goods are end products that have no future productive use, such as a watch.

A point inside the PPC represents inefficiency, where the economy is not using all its resources fully.

False.

A point outside the curve is unattainable with current resources; only points on or inside the curve are attainable.

Producing at any point on the curve represents productive efficiency.

The PPC assumes only two goods are produced, scarcity of resources exists, production is efficient and the state of technology is fixed.

Constant opportunity cost occurs when factors of production can be switched between two goods without loss, so one unit given up yields one unit gained.

Increasing opportunity cost occurs when factors of production cannot be perfectly switched, so one unit given up yields less than one unit gained.

True.

An outward shift shows an increase in the productive potential of the economy, which is economic growth.

The PPC shifts outwards when there is an increase in the quality or quantity of the available factors of production.

An improvement in the quality of labour through training and education shifts the PPC outwards.

A movement along the PPC reallocates existing resources, whereas a shift of the PPC changes the economy's overall productive potential.

The circular flow of income is an economic model that illustrates the money flows in an economy.

The simple circular flow shows the money flows between households and firms.

Households receive income in the form of rent, wages, interest and profit.

Households receive wages for supplying labour to firms.

An injection adds money into the circular flow of income and increases its size; the injections are government spending, investment and exports.

A leakage removes money from the circular flow of income and reduces its size; the leakages are savings, taxation and imports.

The three injections are government spending (G), investment (I) and exports (X).

The three leakages are savings (S), taxation (T) and imports (M).

False.

Savings are a leakage (withdrawal); the injections are government spending, investment and exports.

When injections are greater than withdrawals, the economy experiences economic growth.

True.

When withdrawals exceed injections, the size of the circular flow shrinks and real GDP falls.

It connects to interdependence between households, firms, the government, the financial sector and the foreign sector.

A rise in interest rates increases savings (a withdrawal) and reduces consumption and investment.