1.1 What Is Economics? (DP IB Economics: SL): Flashcards

Two economists can reach different interpretations of the same data because each chooses to focus on different variables.

Human interactions are complex because they are influenced by many variables.

Microeconomics is the study of individual markets and sections of the economy rather than the economy as a whole.

Macroeconomics is the study of economic behaviour and decision-making in the entire economy, rather than an individual market.

False.

Inflation is a macroeconomic issue, because it concerns the average price level across the whole economy rather than a single market.

Microeconomics studies a single market, such as the market for milk.

The nine central concepts are scarcity, choice, efficiency, equity, economic well-being, sustainability, change, interdependence and intervention.

Equity refers to the idea of fairness, a normative concept that can mean different things to different people.

False.

Equity is about fairness (a normative idea), whereas equality describes outcomes being similar for different people or groups.

Sustainability is the ability of the present generation to meet its needs without compromising the ability of future generations to meet their own.

Interdependence is the way economic actors — consumers, firms, workers and governments — interact with each other within and across nations to achieve economic goals.

As an IB key concept, intervention usually refers to government involvement in the workings of markets.

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

The basic economic problem is that resources are scarce while human wants and needs are infinite.

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, although money may be a factor in the decision.

Land refers to the non man-made natural resources that are available for production.

Labour receives wages as its factor income, whereas capital earns interest.

A good is a tangible physical object, whereas a service is an intangible action performed for another person.

A free good is a good that is abundant in supply, so it is not possible to make a profit from supplying it.

An economic good is scarce relative to demand and has a price, whereas a free good is abundant in supply.

False.

A want is a non-essential desire, such as a yacht, whereas a need is essential to human life, such as food or shelter.

Capital is any man-made resource used to produce goods or services, such as tools, machines and buildings.

When a consumer chooses to buy a new phone instead of new jeans, the jeans represent the opportunity cost of that decision.

Choices must be made because resources are scarce relative to infinite wants and needs.

Enterprise involves taking the risks of setting up and running a firm, combining the factors of production to generate profit.

A free good can become an economic good when it becomes scarce, as happened with drinking water due to population growth and pollution.

The three main economic systems are the free market system, the mixed economy and the planned economy.

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

In a free market system, resources are allocated by demand and supply (the price mechanism), with goods going to those who can afford them.

In a planned economy, the government decides what, how and for whom to produce, aiming to ensure everyone has a job and access to goods.

False.

In a free market system, goods and services go to those who can afford them; it is the planned system that aims to provide for everyone.

A mixed economy uses both the price mechanism and the government to decide what to produce.

The Production Possibility Curve (PPC) is an economic model showing the maximum possible output an economy can produce using all its factors of production to make only two goods.

A point on the PPC represents productive efficiency, where all of an economy's resources are fully used.

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

False.

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

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

A point outside the PPC represents unattainable production, given the economy's current level of resources.

A change in the allocation of an economy's existing resources is shown by a movement along the PPC.

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

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

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

False.

The PPC model assumes the state of technology is fixed, because it represents the economy at a particular moment in time.

An outward shift of the PPC represents economic growth, an increase in the economy's productive potential.

An outward shift of the PPC is caused by an increase in the quality or quantity of the available factors of production.

False.

Improving education and training raises the quality of labour and its productivity, shifting the PPC outward.

The 2011 Japanese tsunami reduced Japan's factors of production, shifting its PPC inward and causing economic decline.

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

Households receive income: rent for land, wages for labour, interest for capital, and profit for enterprise.

An injection is money added into the circular flow of income, which increases its size.

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

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

A leakage is money removed from the circular flow of income, which reduces its size.

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

False.

Savings is a leakage (withdrawal), because it removes money from the circular flow of income.

The complex model adds the government, the financial sector and foreign trade (net exports).

Households supply their factors of production to firms and receive income as a reward.

The circular flow model best illustrates interdependence between households, firms, the government, the financial sector and the foreign sector.

False.

When withdrawals exceed injections, real GDP will fall, because more money is leaving the circular flow than entering it.

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

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