Economics Foundations

Sub-topic
Economics
Goods & services

Needs & wants

Economic good vs.

free good
Scarcity, Opportunity
Cost & Choice

Three Economic
Questions

Four factors of
Production

Production
Possibilities Curve

SL/HL Core Assessment Objectives

AO1 Define Economics
Economics is the study of how individuals and societies, experiencing virtually
limitless wants, choose to allocate limited resources to satisfy those wants.
AO2 Distinguish between goods & services.
Goods are tangible (e.g. fruits, meat and cars), while services are intangible (e.g.
haircuts, car repairs and insurance).
AO2 Distinguish between durable goods and non-durable goods.
Durable goods are manufactured and last about 3 years (e.g. television, table and
washing machine) while non-durable goods are consumed quickly, like food.
AO2 Distinguish between needs & wants.
Needs are things necessary to survival (e.g. food, water and shelter). Wants are things
that are not necessary to survival, but we would like to have them (e.g. laptop and
phone)
AO2 Distinguish between economic goods & free goods.
Free good is so abundant that there is no way to charge for it. An economic good is
any good that has an opportunity cost.
AO1 Define Scarcity
Resources are limited while wants are unlimited; therefore there is a scarcity of goods
and services.
AO1 Define Opportunity Cost
The next best alternative foregone when making a decision.
AO3 Examine the relationship between opportunity cost, scarcity, and choice.
(Include a statement that shows the relationship between each of these concepts.)
Since there is a scarcity of economic goods, there is always an opportunity cost to
making a choice about purchasing them.
AO1 Describe with examples the three economic questions.
1.What should be produced and in what quantities? Ex: Should we produce weapons
or pork? How much deodorant should be produced? (to deal with all of the teenage
boy population)
2.How should things be produced? (Should cars be made on a production line or by
groups of workers manually? Should crops be grown with use of fertilizer or
organically?)
3.Who should things be produced for? (How should the national income be
distributed? Should teachers have higher incomes than nurses?)
AO1 Describe with examples the four factors of production.
The four factors of production are land (natural resources, e.g. coal, oil and fish),
labor (the human aspect, e.g. factory workers, hairdresser and teacher), capital
(manufactured goods, e.g. machinery) and entrepreneurship (a risk taking individual
who organizes the other factors of production).
AO4 Draw a correctly
labeled Production
Possibilities Curve. (Graphing
can be done using omnigraphsketcher)
AO3 Examine the
relationship between the PPC
and scarcity, choice, and
opportunity cost. (Be sure to
explain & show on the diagram
how each of these concepts
relates to the PPC)
Production at a point outside of the PPC curve (e.g. C on diagram) is unattainable
due the scarcity of resources. Hence, a choice must be made as to where on the
PPC goods will be produced (e.g. A or B) and the opportunity cost is the
amount of capital/consumer goods that are foregone in order to produce more
the chosen good. For example, if production originally occurred at point B but

Utility
Margin
Microeconomics vs.
Macroeconomics

Positive vs.
Normative Econ

Ceteris Paribus

Circular Flow Model

it was decided that more capital goods ought to be produced than consumer
goods and production was shifted to point A, the opportunity cost would be the
consumer goods that were not produced in order to produce more capital
goods.
AO1 Define potential output, and relate to PPC (Relate to PPC means show it
on the PPC graph and explain its position on the graph in words)
Any point on the PPC curve shows potential output (e.g. A or B) and can be a goal for
the country at which to produce. For example if production is currently
occurring at point D, point B is the potential output at which the country could
be producing.
AO1 Define potential growth, and relate to PPC
Potential growth is an outward shift of the PPC curve for example, movement from
PPC1 to PPC2.
AO2 Distinguish between potential output and actual output, and relate to PPC.
Potential output is the amount of output that could be produced (e.g. point B) while
actual output is the amount at which production actually occurs. This is
because while a country may be producing as close to the PPC as possible (e.g.
point D) it is impossible to have a level of actual output on the PPC, since not
all the resources can be used at the height of their capacity in real life (e.g.
there will always be a certain level of unemployment in a country).
AO2 Distinguish between potential growth and actual growth, and relate to
PPC.
Potential growth involves an outward shift of the PPC curve (e.g. from PPC1 to
PPC2) while actual growth involves an outward shift of the actual output
within the original PPC curve (e.g. a shift from point E to point D).
AO1 Define Utility
Utility is the measure of usefulness and pleasure.
AO1 Define the term Marginal
Marginal is the concept of having one more or one less unit of something.
AO2 Distinguish between Microeconomics and Macroeconomics.
Microeconomics deals with smaller, discrete economic agents and their reactions to
changing events, while Macroeconomics takes a wider view and considers such things
as measuring all the economic activity in the economy, inflation, unemployment and
the distribution of income in the whole economy.
AO2 Distinguish between Positive and Normative Economics with examples.
Positive Economics deals with areas of the subject that are capable of being proven to
be correct or not (e.g. the GDP per capita of a country), while Normative Economics
deals with areas of the subject that are open to personal opinion and belief (e.g.
whether or not it would be beneficial for Greece to leave the EU).
AO1 Define Ceteris Paribus
Ceteris Paribus is Latin for all other things being equal.
AO1 Explain the reason Ceteris Paribus is used in economic models.
Ceteris Paribus is used in economic models because when economists want to test the
effect of one variable on another they need to be able to isolate the effect of the one
variable by assuming that there is no change in any of the other variables.
AO4 Draw a correctly labeled Circular Flow Model.
AO2 Explain the
Circular Flow Model.
Households receive
goods and services in
exchange for the factors
of production they
provide businesses
through the factor
market. Also, in return
for the factors of
production the
businesses have to pay
the costs of the factors
of production to the
households, who through consumption expenditure provide revenue through the

Public vs. Private

Sectors
Rationing Systems

Growth vs.
Development

product market. In this way both households and businesses gain something in
exchange for something else.
AO3 Distinguish between the public sector and the private sector with examples.
The private sector is the part of production in economy that is owned by private
individuals, while the public sector is the state-owned sector of the economy that
provides goods and services.
AO2 Distinguish between a planned economy and a free-market economy.
In a planned economy decision as to what to produce, how to produce and who to
produce for are made by a central body, the government, while in a free-market
economy all production is in private hands and demand and supply are left free to set
wages and prices in the economy.
AO3 Compare and contrast the advantages and disadvantages of planned and
free-market economies.
A free-market economys advantages include efficiency (competition forces all
companies to either become more efficient or be overtaken), choice (companies
will produce according to customer wants) and innovation (companies will
always want to beat the competitors by introducing something new). A planned
economys disadvantages are the opposite of the free-market economys
advantages, so there will be lower efficiency, less choice and little motivation
for innovation.
However a planned economys advantages are that merit goods (healthcare, education
etc.) will be provided while demerit goods (cigarettes, drugs etc.) will not be
produced in excess. Also, the effect of the economy on the environment will be
taken into account, unlike in a free-market economy, where competition could
drive companies to being wasteful und inconsiderate of the environment. The
distribution of income will not be unequal as in a free-market economy.
On the other hand, this equal distribution of income in a planned economy may
decrease the motivation of workers and productivity could decrease as a result
of this.
All in all, both a free-market economy and planned economy have both disadvantages
and advantages.
AO2 Distinguish between economic growth and economic development.
Economic growth is a positive concept as it measures the increase in a countrys
capacity to produce (e.g. GDP) caused by an increase in the quality/quantity of
resources. Economic development, on the other hand, is a normative concept as it
measures the change in living standards of a country (e.g. HDI).
AO1 Define sustainable development
Sustainable development is development, which meets the needs of the present without
compromising the ability of future generations to meet their own needs.