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--SOCIAL SCIENCE?--
--SOCIAL SCIENCE?--
--'MICROECONOMICS' vs 'MACROECONOMICS'--
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.
--THE PROBLEM OF CHOICE--
--THE PROBLEM OF CHOICE--
"Heard of Black Friday?" "What causes this type of behaviour?"
--UNLIMITED WANTS--
"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, anyone for a flip phone???"
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"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?"
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--LIMITED RESOURCES--
"...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.
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--'FACTORS OF PRODUCTION'--
"These productive resources that an economy possesses can be categorised into 4 factors of production':
1. LAND: This factor refers to the natural resources needed in production and includes, rivers, lakes, coal deposits, timber etc...
2. LABOUR: This factor refers to the human resources, needed in production such as factory workers, and doctors....
3. CAPITAL: This factor refers to man-made aids/tools used in the production process. They are often referred to as 'Capital goods' and when combined with land and labour produce more units of output.
4. ENTREPRENEUR: This human factor carries out two functions. First, the enterprise factor organises the other three factors of production. Second, enterprise involves taking the risk of production, which exists in a free enterprise economy.
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--SCARCITY--
"With UNLIMITED WANTS + LIMITED PRODUCTIVE RESOURCES, we have a situation called 'SCARCITY'.
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"As such we can say that due to scarcity, CHOICES about how these limited resources are used ('ALLOCATED') must inevitably be made."
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"Thus every economy must find ways to answer THREE ECONOMIC QUESTIONS.
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--3 BIG QUESTIONS--
--Q. WHAT TO PRODUCE?--
"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?"
--OPPORTUNITY COST--
"Clearly when deiciding "What to produce" you are simultaneously deciding "What not to produce" right?,
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"Therefore an inevitable consquence of allocating scarce resources to the production of any particular good or service, means that they are not available for the production of other goods. In other words, the cost of producing 'Good A', is not producing 'Good B'.
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"In Economics we refer to the VALUE OF THE NEXT BEST ALTERNATIVE USE OF THE RESOURCE THAT HAS BEEN FORGONE ('Good B') as the OPPORTUNITY COST of the decision to produce the chosen good ('Good A')."
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--HOW TO PRODUCE?--
"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...
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FOR WHOM TO PRODUCE?
"Finally, as we cannot satisfy all wants, decisions have to be taken concerning WHOSE WANTS TO SATISFY, and also WHOSE WANTS TO IGNORE."
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--TASK--
"Think about how the scarce lifejackets and seats on the lifeboats were allocated when the Titanic started to sink, what method was used?", "Who got ignored?"
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"That's right, it was based on age and gender, with 'woman and children' getting priority. But what do you think would happen if it was based on first-come-first-served?" "Who would get their wants satisfied and who would be ignored?"
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"Likely, the fastest and fittest would get to the head of the queue first, leaving the physically weakest at the back. But what about if it was based on the highest bidder?"
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"That's right, its the richest who get the jackets, ad the poorest have to go without, does this sound familiar?"
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"So after all that we can arrive at the following textbook definition of 'economics':
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"Economics is the social science that studies how individuals, businesses, governments, and nations 'decide how to allocate scarce resources to satisfy unlimited wants and needs."
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--THE BIG TASK--
"First watch the clip from the movie Castaway; your task is to use this clip to illustrate all the concepts and decisions detailed above. Below the introduction already done for you..."
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"Economics is a social science that studies how individuals, businesses, and governments make decisions about how to allocate scarce resources to satisfy unlimited wants and needs. We can illustrate the fundamental economic problems faced by everyone using the Castaway clip. Firstly, we have an individual who clearly has 'unlimited wants' in terms of food, shelter, and, in this case, the immediate need for hydration via coconut water; however, he has limited..."
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"This might help a bit!"
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--THINK AHEAD--
"How come you can find Labubu dolls everywhere in HK, as opposed to Squishmallows, who decided that scarce resources should be used to make one over the other?"
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"That's right, it was the CONSUMER that ultimately signalled to producers about what they wanted through price changes. When the price of Labubu's rose, it signalled to producers that demand must be high and consumers want them, and when the price of Squishmallows fell, it signalled to producers that demand must be low and consumers didn't really want them anymore, so, of course, producers responded by reallocating scarce productive resources to producing more Labubu dolls, giving consumers exactly what they wanted, as they could sell more and make more profits."
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"How come these Labubu dolls are made in large batches by massive machines in warehouses in China rather than by hand? Who decided?"
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"That's right, it was the PRODUCER that decided, as they were INCENTIVISED to use the most efficient and cost-saving methods so that they could LOWER THE AVERAGE COSTS OF PRODUCTION, which will in turn mean HIGHER UNIT PROFITS. which they fully expect to KEEP FOR THEMSELVES (after tax, of course)."
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"How come you can only own one of these ugly dolls by paying money for them? Why aren't they free? Who decided?"
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"That's right, it's because we live in a system where producers of goods and services are mainly MOTIVATED by the DESIRE TO EARN A PROFIT and therefore can only be consumed by the people who are both 'willing and able to pay for them."
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"In the clip it was the Castaway that made all the decisions about "What to produce?", "How to produce?", and "For whom to produce?". He decided to forgo, starting a fire or catching fish etc... and used his time and labour to get coconut water ("What?"), eventually, through trial and error, decided the most time saving method was to use a sharp stone to drill into the coconut flesh ("How?"), and finally, as he was alone, without dependant, he decided to consume the water himself ("Whom?").
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--DECISION MAKERS--
--THE FREE MARKET--
"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.
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--TASK--
"Using this school as your example, explain how, in a free market system like HK with little government intervention, the decision to allocate scarce productive resources toward the production of an educational service offering A-levels and IBDP was ultimately decided upon."
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"That's right, it was you guys, via your desire (presumably some form of market research was carried out that determined that this is what people actually want). So WHAT TO PRODUCE?, is determined by CONSUMERS who guide producers about how to allocate their productive resources through their DEMAND and WILLINGNESS TO PAY*.
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--TASK--
"Again using your school as the example, who do you think decided on the use of smartboards, wifi, and other teaching aides, including the comfortable lighting and temperatures in the classrooms?" "Who decided on the student-teacher ratio?" "Why is CAT data used to inform decisions?"
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"That's right, it was the school, which has used years of data and expertise to find the optimum class size as well as integrate the latest research-backed technology to make the learning experience as effective as possible, while at the same time being mindful of keeping costs low" So 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."
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--TASK--
"Finally, after providing the service that consumers want in its most efficient form, how do they decide who gets to use them?"
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"That's right, they only allow those who are willing and able to pay the tuition fees; if you can't afford it, you can't study here."
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* Clearly all decisions are made using what is known as the PRICE MECHANISM, which we will discuss later.
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--THE GOVERNMENT--
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.
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"Who do you think decided this?"
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--A MIX OF BOTH--
In a MIXED ECONOMY, 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.
--🤔THINK AHEAD🤔--
Imagine that you and 4 other friends (total 5) went camping, with you limited time per day you could either catch fish or collect coconuts. Assuming that you each have the same levels of output (say 3 fish or 5 coconuts per day). If you sketched a curve to illustrate your daily possible output combinations, what would it look like?
--THE PPC--
--THE PPC--
--DEFINITION--
"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."
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"This model makes some hefty assumptions as it condenses the output of an entire economy into two categories (e.g., capital vs. consumer goods) and then plots the various combinations that the economy can produce given its LIMITED FIXED STOCK OF RESOURCES within a chosen time period. It clearly illustrates 'choice,' 'trade-offs,' and 'opportunity costs.'"
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"Let's start with imagining a simple island economy that can produce either 🍏 or 🍓 on a 'per day' basis..."
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('Insert image of labeled axis')
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"We can start with determining the maximum output that could be produced if 100% of the resources (in this example, 10 laborers) were devoted to the production of each of the goods; in this case, we have either 100 🍏 or 100 🍓 per hour."
('Insert image of axis with extremes)
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"So what about the other 'trade-off combinations' between these two maximums?"
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"If you give up/forgo 🍏, how many additional 🍓 can you produce, and vice versa?" "Well, if the trade-off between the two goods is 'constant,' at say 'one for one', then what would the PPC look like?"
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"Correct! It's a 'straight line' with a 'gradient of one,' 100/100; in other words, the trade-off (aka the opportunity cost) is CONSTANT, ('CONSTANT OPPORTUNITY COST') for every additional +1 🍏, we forgo a -1 🍓, and vice versa."
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"But for this to be the case, 'CLONING' 😶😶😶😶😶😶 would need to be legal as all the workers MUST be equally suitable for producing both products, and the opportunity costs would be identical like the table below."
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"We can see that for every additional apple, a single strawberry must be forgone (for example, a worker can pick 9 apples and 1 strawberry, giving up 1 apple for the strawberry and so on)."
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"...in other words the assumption that creates the constant straight PPC is not realistic, as not all resources/workers are the same in terms of productivity ('imperfect factor mobility')."
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"If now we assume that 'HEIGHT' has the biggest influence on the relative productivity of each labour resource, with taller people being more suitable for 🍏-picking and shorter people being more suitable for 🍓-picking, what do you think would happen to the opportunity cost if we started off with only 🍏and decided to start picking 🍓?"
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"You should realise that with imperfect factor mobility if we decided to increase the output of 🍓 we would naturally use the most suitable workers first (the shortest) but if we continue we will inevitably need to use taller and more inefficient 🍓-pickers, who give up more and more 🍏 to do so (in other words eventually there are INCREASING OPPORTUNITY COSTS) and vice versa."
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"So what does this do to the shape of the PPC?"
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--TASK--
"Below is a table showing the productivities of workers with different heights and corresponding productivity levels. Now, using graph paper PLOT the PPC and explain the shape in terms of increasing opportunity cost!"
(Choose one of the extremes, such as 'only 🍏', then start reallocating the shortest first to 🍓, or vice versa)
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"It should look something like this."
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"Here is a football themed version, it implies that shorter footballers are better dribblers than headers of the balls and vice versa, though in Maradona's case he was quite good at heading handball too."
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--SHIFTS/PIVOTS IN THE PPC--
OUTWARD SHIFT
These are changes that allow the economy to produce more apples and/or strawberries than before.
--TASK--
"With reference to the factors of production, explain three ways the PPC of the island-economy could grow."
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--EXAMPLE--
"If more workers arrived on the island then potential output of both apples and strawberries should rise causing teh PPC to shift outwards...however
INWARD SHIFT
These are changes that cause the economy to produce fewer apples and/or strawberries than before.
--TASK--
"With reference to the three growth factors, explain their alternatives that would cause output to shrink."
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--EXAMPLE--
"...if some of the current workers decided to build s boat and sial off to find a better place to live then the potential output would fall causing in inward shift."
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UNEVEN OUTWARD SHIFT ('PIVOT')
"So far we have assumed that the changes that shift the PPC outward have an equal impact on the rate of production of both goods, hence the equal gain in output for BOTH quantities;
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[INSERT OUTWARD SHIFT DIAGRAM HERE]
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"...However, it could be the case that the cause of the shift only/predominantly impacts one of the goods relative to the other. For example, if 5 new castaways are washed up, the total production of both increases; however, as they are all very short, do you think the outward shifts for both goods would be the same?"
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--TASK--
"Sketch it!"
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"Did it look like this?"
[INSERT OUTWARD SHIFT WITH MORE FOR STRAWBERRY]
--TASK--
"Under your diagram list at least 3 reasons, including the reason given above as to why strawberry production could increase at a faster rate than apple production."
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--POSITIONS WITHIN THE PPC--
--CIRCULAR FLOW--
--CIRCULAR FLOW--
--TASK--
"Look at the image below, and 'describe' the castaway's circular flow of 'economic activities' in the following order: 'production', 'exchange', and 'consumption'."
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"You should have realised..."
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1️⃣"The owners of the scarce factors of production (called "households"), which in this case are solely owned by the castaway...
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2️⃣"...are employed (combined together) by productive units called 'firms' (which in this case is the castaway acting as both the entrepreneur and labourer)..."
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3️⃣"...to produce a 'good' that consumers want (the castaway acting as the consumer desired coconut water) and..."
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4️⃣"...'exchange' it directly with consumers (in this case, 'the castaway' is both the 'owner', 'producer', and 'consumer'), who consume it to satisfy their immediate wants (hydration)."
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"This cycle of economic activities is clearly specific to a one-man, moneyless barter economy, but the workings of a much more complex economy with money used to facilitate the exchanges, called THE CIRCULAR FLOW OF INCOME MODEL is built on the same premise."
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"Let's look at this more complex model!"
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--TASK--
"Sketch this diagram and label the flows correctly."
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"The version above assumes all money earned (factor payments) is eventually spent on goods and services produced domestically, but as we know, in reality some money is not spent on 'made in HK'. Can you think of where else this money may 'leak' to?"
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"That's right, some money is SAVED, some is given to the government as TAX, and some is spent on goods IMPORTED, this lower quantity of money in circulation results in less economic activity, which shrinks the economy in terms of GDP."
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"...However, as much as money is saved, it will be 'injected' via BORROWING FOR INVESTMENT SPENDING, and as much as money is taxed, it is also collected and 'injected' by the government and used for GOVERNMENT SPENDING. And finally, as much as spending is used to pay for imports, foreigners will 'inject' spending by SPENDING ON MADE-IN-HK EXPORTS, which expands the economy in terms of GDP."
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"The net impact of injections minus leakages determines economic activity and GDP growth or decline."
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--THE CIRCULAR FLOW MODEL--
"In all economies, THREE ECONOMIC ACTIVITIES take place, namely: PRODUCTION, CONSUMPTION, and EXCHANGE."
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"The owners of the FACTORS OF PRODUCTION (called 'HOUSEHOLDS') supply their resources to FIRMS that produce OUTPUT."
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"These factor owners will receive an INCOME which they will, in turn, SPEND (though maybe not 100%) on the output."
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"The overall size of this 'ECONOMIC ACTIVITY' determines the amount of wants that are satisfied. We can model this activity using the CIRCULAR FLOW OF INCOME."
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"Below is a 2-sector 'closed' model, in which all money that is earned is spent, but how realistic is th
--TASK--
"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."
PAST PAPERS
P1 10-MARKERS
P2 4-MARKERS
Explain the impact of the damage to the major buildings in Beirut on Lebanon's productive capacity
Using a production possibilities curve (PPC) diagram, explain how economic growth can be shown.
Using a PPC diagram, explain the effects of the violence in Timor-Leste on production possibilities.
Using a PPC diagram, explain the effects of violence on Timor-Leste’s production possibilities.
Using a PPC diagram, explain the likely effect of HIV/AIDS on Botswana’s production possibilities.
Using a PPC diagram, explain how improving literacy rates will increase production possibilities.
Using a PPC diagram, explain the change in Latvia’s economy from 2008 to 2012.
Using a PPC diagram, explain how free training increases potential economic output.
Using a PPC diagram, explain the change in Latvia’s economy from 2008 to 2012.
--VIDEO RESOURCES--
-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?
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
--TASK--
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."
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