Spain 1º Bachillerato Economics

Chapters: 5

1. Economic decisions

Economics, needs, goods and scarcity · Economic decision-making · Economic systems compared · Personal financial decisions and money · Behavioural economics and ethics · Methods of economic analysis

The Problem of Choice: Scarcity and Opportunity Cost – Our wants are unlimited but resources like money, time, land and workers are limited. This is scarcity, and it forces us to choose. The value of the next best option we give up is the opportunity cost. Economists study how people and societies make these choices. Every society must decide what, how and for whom to produce. Market, planned and mixed economies answer these differently, and a welfare state makes sure basic needs of all are met.
Economic Systems: Who Decides What, How and for Whom? – Every society has limited resources and must decide what to produce, how to produce it and for whom. A traditional economy answers by custom, a market economy by prices and private choice, and a command (planned) economy by a government plan. Capitalism is built on private ownership and markets; socialism on shared or state ownership and planning. Real countries are mixed economies: markets make most goods while the government provides public services, rules and support.
Smart Ways to Manage Your Finances – Inflation makes prices rise, so the same money buys less. Money kept in a bank earns interest: simple interest is paid only on the original amount, while compound interest also earns interest on earlier interest, so it grows faster over time. A budget plans income into needs, wants and savings. Savings are kept safe; investments can grow but carry risk, and higher possible returns mean higher risk. Insurance shares risk among many people. Income tax is paid on income above a limit, at rates that rise with income.
Behavioural Economics: How Real People Decide – Traditional economics assumes people are fully rational: they know all options, weigh costs and benefits and always pick what is best for them. Behavioural economics uses psychology and experiments to show how real people decide. Our rationality is bounded by limited time, information and brain power, so we use shortcuts (heuristics) that cause predictable biases: anchoring, availability, herd behaviour, loss aversion, present bias and framing. People also care about fairness and social norms, as the ultimatum game shows. Governments and firms use these ideas in nudges and choice architecture, for example default options. Nudges keep freedom of choice but raise ethical questions about manipulation.

2. Economic reality: microeconomic tools

Exchange and markets · Elasticity · Cost-benefit analysis · Market failures

Demand, Supply and Market Equilibrium – The law of demand says buyers want less when the price rises; the law of supply says sellers offer more. The market price settles at equilibrium, where quantity demanded equals quantity supplied, and shifts in demand or supply move it. Some goods break the usual laws (Giffen, Veblen, panic buying). A price ceiling set below equilibrium causes shortages. Markets can also fail, for example with pollution or public goods like street lights, so the government steps in.
Demand and Price Elasticity of Demand – Demand is the quantity of a good buyers are willing and able to buy at each price in a period. Market demand adds up all buyers' demand at each price. Demand depends on own price, income, prices of related goods, tastes, expectations and number of buyers. A change in own price moves us along the curve; a change in any other factor shifts it. Price elasticity of demand (Ed) = % change in quantity ÷ % change in price; it can also be judged from total expenditure.
Market Failure – A market fails when buying and selling on its own does not give the best result for society. Resources are used in the wrong amounts: too much of some goods (pollution, cigarettes), too little of others (street lights, vaccines, education). Main causes: externalities, public goods, merit and demerit goods, imperfect information, market power and unfair inequality. Governments try to fix it with taxes, subsidies, rules, direct provision and information, but government action can also fail.

3. Economic reality: macroeconomic tools

Macroeconomics and the circular flow · Economic growth and development · Labour economics and unemployment · International trade and integration · The financial system and money creation

Circular Flow of Income and the Three Methods of Measuring National Income – In a two-sector economy households give factor services to firms and get factor payments (rent, wages, interest, profit); they spend this income on the firms' goods. Money moves in a circle opposite to the real flow of goods and services. Because the same money passes three points, national income can be measured three ways: value added by producers (product method), incomes paid to factors (income method) and spending on final goods (expenditure method). All three give the same total.
Development – Development means different things to different people: more income, but also equality, freedom, security and respect. Countries are compared by per capita income, but averages hide inequality, so we also look at health and education. The Human Development Index combines these. Development must also be sustainable, so resources last for future generations.
Unemployment: Meaning, Rate, Types, Costs and Cures – A person is unemployed when they have no job, are able to work, and are actively looking for work. The labour force is everyone who is employed plus everyone who is unemployed. The unemployment rate is the unemployed divided by the labour force, times 100. Economists sort unemployment by its cause: frictional (moving between jobs), structural (skills or places no longer match the jobs), cyclical (a slump in total demand) and seasonal (work only in some months). Unemployment costs the person income, costs the country lost output and tax, and can harm health and society. Governments fight it with spending and interest-rate policy for cyclical unemployment and with training, information and mobility for the other types. Some unemployment always remains; the lowest sustainable level is called the natural rate.
International Trade – International trade is buying and selling goods and services across the boundaries of countries. Selling abroad is export; buying from abroad is import. It helps nations (foreign exchange, growth, jobs) and firms (profit, new markets). Exports and imports follow fixed steps and need many documents, such as the letter of credit and bill of lading. The WTO (1995) makes trade rules and works to cut trade barriers.
International Trade: Basis, Balance, WTO and Ports – International trade is the exchange of goods and services between countries. It began with barter, grew along routes like the Silk Route, passed through the cruel slave trade and colonial trade, and expanded with industry. Countries trade because they differ in resources, population, development, foreign investment and transport. Balance of trade compares exports and imports. Trade can be bilateral or multilateral; free trade lowers barriers, while dumping sells goods abroad below cost. The WTO sets global rules, regional blocs group neighbours, and ports of many types act as gateways.
Money and Credit – Money is a medium of exchange that removes the need for a double coincidence of wants. Banks take deposits and give loans. Credit can help people grow, or trap them in debt, depending on its terms. Formal loans from banks and cooperatives are cheaper and regulated; informal loans from moneylenders are costly. Self-Help Groups bring cheap credit to poor women.

4. Economic policies

Positive and normative economics; state intervention · Fiscal and monetary policy

Fiscal Policy – Fiscal policy is how a government uses its spending (G) and taxes (T) to steer the whole economy. The budget compares the two: if spending is bigger than tax revenue the budget is in deficit and the government borrows; if tax is bigger, it is in surplus. In a slump the government can use expansionary policy (spend more or cut taxes) to raise total demand, output and jobs. When demand is too strong and inflation is high it can use contractionary policy (spend less or raise taxes). Because money is re-spent, a change in G has a bigger final effect on demand: the multiplier. Some changes happen by themselves (automatic stabilisers, such as falling tax receipts and rising benefits in a recession); others are chosen (discretionary). Fiscal policy has limits: time lags, rising public debt, higher interest rates (crowding out) and political pressure. It works alongside monetary policy, which is run by the central bank through interest rates.

5. Challenges for the Spanish economy in a global context

Globalisation: causes, opportunities and risks · The new economy and digital revolution · Democracy and the welfare state · Degrowth theories · The SDGs and current economic challenges

The Making of a Global World – People, goods, ideas and germs have moved across the world for thousands of years: on the silk routes, with food crops like potato and maize, and with diseases like smallpox. Between 1815 and 1914 the world economy grew through three flows: goods, labour and capital, helped by railways, steamships and refrigerated ships. Colonies paid a price: rinderpest in Africa and indentured labour from India. After the First World War came mass production in the USA and then the Great Depression of 1929, which hit India's farmers hard. After 1945, the Bretton Woods system, the IMF and the World Bank rebuilt the world economy.
The Welfare State and Social Security – A welfare state is a state that protects people against the big risks of life: illness, job loss, old age, disability and poverty. It does this with a safety net made of three parts. Social insurance is paid from contributions taken from wages. Social assistance is paid from taxes to people in need. Public services such as schools and hospitals are open to everyone. Countries mix these parts in different ways: liberal (low tax, small help), conservative (help linked to your job) and social-democratic (high tax, help for all). Today welfare states face ageing populations, rising costs, global competition and many informal workers.
Environment and Sustainable Development – The environment gives us resources, soaks up our waste, supports life and gives beauty. When we take resources faster than nature renews them, or throw waste faster than it can absorb, we cross its carrying capacity and face an environmental crisis. India faces land degradation, air and water pollution, forest and biodiversity loss. Burning fossil fuels traps heat and causes global warming; CFCs thin the ozone layer. Sustainable development meets today's needs without harming the ability of future generations to meet theirs, using clean energy, less waste and traditional knowledge.