HL Economics Notes

HL Economics (to note: 12/3 test UP TO DEMAND, not including circular flow of income; 3. ) 1.1 Factors of Production -Capital (physical capital; man-made factor of production used to product goods and services, eg. buildings (factories), machinery, semi-finished goods) (human capital; education and training) (natural capital; everything included in land + other naturally occurring resources like air, soil quality, ozone layer, climate) (financial capital; investments in financial instruments like stocks and bonds) -Entrepreneurship (organises the other 3 factors of production, risk-taking and decision-making) -Land (natural resources) -Labour (physical and mental human effort) (CELL) *money is not a factor of production Why are resources also called factors of production? -they are necessary for production to take place. 1.12 Scarcity, Choice and Opportunity cost > Opportunity cost is the highest valued alternative forgone Eg. If a piece of state land was used to build a hospital, the opportunity cost might be a school. Free and Economic Goods >free goods are goods that are not scarce (can be consumed in as much quantity as needed without reducing its availability to others) & has zero opportunity cost. >economic goods are goods that are scarce, because they are naturally occurring resources or because they are produced by scarce resources, and have an opportunity cost.

1.2 The three basic economic questions: resource allocation & output / income distribution Basic economic questions: >WHAT to produce (decision on the type of goods to produce) >HOW to produce (concern with the method of production, aim to choose the most efficient method of production to make fullest use of scarce resources) >FOR WHOM to produce (concern with the distribution* of output) *distribution: ability to pay VS needs/equity Market VS Government Intervention >Free Market Economy >Command Economy >Mixed Economy 2. Production Possibilities Curve Model PPC -> shows all combinations of 2 goods that can be produced by an economy using -available resources -available technology (fully utilised) Assumption? -full employment of all resources -all resources are efficiently used (used to full potential) (productive efficiency)

3. Circular flow of income NOT TESTED IN UPCOMING 12/3 WA1 Sectors 1. Households 2. Firms 3. Government 4. Foreign/Trade Sector CFY (circular flow of income) -real flow; flow of goods and services -money flow 1. Households: owners of factors of production 2. Firms: buy the factors of