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IB Economics
Introduction
Section 1
1
The Discipline of
Economics
What does economics study?
What methods does
economics employ?
What approaches does
economics take?
2
What is Economics?
3
Economics is the study of how scarce
resources are or should be used.
Triple A Interactive Text
4
Economics & the Scientific
Method
Ceteris Paribus (other
things equal)
See a Problem
Keep it simple
Make
Assumptions
Develop
models
Refine theory
Make
Predictions
Models are
dynamic
Test the
Model
Macroeconomics
Study of all firms
and individuals
within an
economy
5
Normative
Economics
Statements based
on value
judgments
Economic
Activity
Approaches
Microeconomics
Interactions
between
individuals, firms
and industries
Positive
Economics
Factual
statements about
the economy
Focus on
the whole
economy
6
Microeconomics
Focus on
segments of the
economy
There are many overlapping issues.
Micro and Macro
Macroeconomics
Key Economic
Concepts
Scarcity
Utility and Marginal Utility
Opportunity Cost
Public Sector and Public
Ownership
7
8
Scarcity
Choices have
to be made
Needs and
Wants
Unlimited
Resources
Limited
9
Choices and Utility
 In making choices we aim to maximize our
utility, our perceived satisfaction from
consuming a good or service.
10
Marginal Utility

Our perceived satisfaction from consuming one
additional good or service
11
Marginal Utility of Bungee Jumping
Number of Jumps
12
Opportunity Cost
 Opportunity cost is
the value of the next
best alternative
forgone as the result
of making a decision.
13
Private and Public Sectors
Private
Ownership
Public
Ownership
Privately
owned
resources
Government or
state owned
resources
Private gain
motivated by
individual selfinterest
Public sector
provides
benefits to all
individuals
Rationing Systems
1. Answering the Basic
Economic Questions:
•What to produce?
•How to produce?
•For whom to produce?
2. Economic Systems
•Market Economies
•Command Economics
•Mixed Economies
14
Labor
Capital
Enterprise
15
Resources/Factors of
Production
Land
Labor - all human
resources
16
Resources/Factors of
Production
Land - all natural
resources (minerals and
other raw materials)
Enterprise - the skill of
taking risk to provide
goods and services and
make profits.
17
Resources/Factors of
Production
Capital - all man-made
machinery and
equipment
• Wages
Land
Labor
• Interest
• Profit
Capital
Enterprise
Payments for Resources
18
• Rent
What goods
and services
should be
produced?
For whom should
goods and services
be produced?
19
Basic Economic Questions
How should
goods and
services be
produced?
Consumers
determine
what is
produced
Prices determine
who can purchase
20
In a market economy
the forces of Demand
and Supply determine
resource allocation.
Market Economies
Firms decide
how to
produce
Effective Coordination
within the economy
Efficiency
Weakness
Market failure
Competition limited
Inflation & unemployment
Poverty
21
Market Economies
Strengths
Central
planners
determine
what is
produced
Central planners
determine prices
22
In a command
economy the the
state determines
resource allocation.
Command Economies
Central
planners
decide how to
produce
Rapid growth and
development
Reduce poverty
Weakness
Lack of incentives
Inefficiencies
Little choice
No variety
23
Command Economies
Strengths
Consumers
and
government
determine
what is
produced
24
In a mixed economy the
forces of demand and
supply and the state
determine resource
allocation.
Prices determine who
can purchase but
some goods and
services provided by
the government
Mixed Economies
Firms decide
how to produce
25
Price
Liberalization
Removal of
Subsidies
Privatization
Free Trade
Market or
Mixed
Economy
Transition Economies
Command
Economy
26
Free and Economic Goods
Free goods are gifts of
nature supplied without
labor and without limit.
Economic goods are
scarce and their
production involves
opportunity costs
Economic
growth entails
an increase in
a country's
total output of
goods and
services.
Economic
development
entails a
higher
standard of
living.
27
Economic Growth and Economic
Development
28
Sustainable Development
The environment is preserved for future
generations.
Production
Possibility
Frontier (Curve)
Economic model of total
obtainable output
Shows how
29
•opportunity costs determine
economic choices
•economic growth and
development can be achieved
PPC of an economy producing computers and mobile phones
30
A
All resources are
being used
efficiently.
The economy is
allocating more
resources to
computers than
mobile phones.
PPC of an economy producing computers and mobile phones
31
Resources are not
being used
efficiently.
B
PPC of an economy producing computers and mobile phones
32
C
B
Actual Economic
Growth
PPC of an economy producing computers and mobile phones
33
Not attainable given
present Factors of
Production
C
PPC of an economy producing computers and mobile phones
34
D
Shift of production
from Computers to
Mobile Phones
E
PPC and Economic Development
35
Y
Shift of production to
Public and Merit
Goods e.g. hospital,
school etc
X
Increasing Opportunity Costs Figure 1
36
A
B
Increasing Opportunity Costs Figure 2
37
A
B
C
D
PPC and Economic Growth and Development
38
Potential Growth
achieved by changes
in the quantity and/or
quality of Factors of
Production
PPC2
PPC1
39
Resources
Dan Ariely and Behavior Economics
40
Suggested Activities
1. Keep a journal or maintain your own economics blog
and through your writing apply your understanding of
economics to the real world.
2. Get into the habit of reading about economics or
watching the news to see how economic concepts
and theories can help you make sense of major
developments. You can make comments about
articles and events on your blog or in your journal.
This skill forms the basis of the Internal Assessment
in IB Economics.
Assessment
41
As Section 1 aims to introduce you to the concepts and
theories you will meet later in the course, typical
questions that test your understanding will be identified in
the appropriate section. Topics not covered in depth later
in the course include types of economies and the PPF
(PPC).
Section 1 and Section 5 are the only sections that are
identical for both SL and HL students.
Typical Questions
42
Questions that ask you illustrate the key concepts of
scarcity, opportunity costs and tradeoffs.
1
2
3
Explain what is meant by a production possibility curve
and use a diagram to help explain concepts of scarcity,
choice and opportunity cost.
Using a production possibility curve, explain how the
discovery of gold would effect an economy.
Explain the difference between a movement along an
existing production possibility curve (PPC) and an
outward shift in a production possible curve.
Typical Questions
43
Questions that ask you to explain the similarities and
differences between various economies.
4 Explain the differences between free market
economy and a planned economy.
5 Explain the economic consequences of a
transition from a planned economy to a market
economy.
Diagrams
44
Section 1 does not have a great number of associated
diagrams.
However you should know the following:
1.How the PPC illustrates opportunity costs, actual growth
and potential growth in an economy.
2.PPCs curves that can distinguish between growth and
development.