IB EconomicsIntroduction

Section 11

The Discipline of Economics

What does economics study?

What methods does economics employ?

What approaches does economics take?

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Economics is the study of how scarce resources are or should be used.

Triple A Interactive Text

What is Economics?3

Economics & the Scientific Method

Keep it simple

Ceteris Paribus (other things equal)

Models are dynamic

Refine theory

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Approaches

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Micro and M

acro

There are many overlapping issues.6

Key Economic Concepts

Scarcity

Utility and Marginal Utility

Opportunity Cost

Public Sector and Public Ownership

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Scarcity

Choices have to be made

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Choices and Utility

In making choices we aim to maximize our utility, our perceived satisfaction from consuming a good or service.

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Marginal Utility

Our perceived satisfaction from consuming one additional good or service

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Marginal Utility of Bungee Jumping

Number of Jumps

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Opportunity Cost

Opportunity cost is the value of the next best alternative forgone as the result of making a decision.

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Private and Public Sectors13

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

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Resources/F

actors of P

roduction

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Resources/F

actors of P

roduction

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Resources/F

actors of P

roduction

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Paym

ents for Resources

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Basic E

conomic Q

uestions

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Market E

conomies

In a market economy the forces of Demand and Supply determine resource allocation.20

Market E

conomies

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Com

mand E

conomiesIn a command

economy the the state determines resource allocation.22

Com

mand E

conomies

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Mixed E

conomies

In a mixed economy the forces of demand and supply and the state determine resource allocation.

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Transition E

conomies

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Free and Economic Goods26

Economic Growth and Economic Development

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Su

stain

ab

le D

eve

lop

me

nt

The environment is preserved for future generations.

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Production Possibility Frontier (Curve) Economic model of total obtainable output

Shows how

•opportunity costs determine economic choices

•economic growth and development can be achieved

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PPC of an economy producing computers and mobile phones

A

All resources are being used efficiently.The economy is allocating more resources to computers than mobile phones.

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PPC of an economy producing computers and mobile phones

B

Resources are not being used efficiently.

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PPC of an economy producing computers and mobile phones

B

Actual Economic Growth

C

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PPC of an economy producing computers and mobile phones

C

Not attainable given present Factors of Production

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PPC of an economy producing computers and mobile phones

E

Shift of production from Computers to Mobile Phones

D34

PPC and Economic Development

Shift of production to Public and Merit Goods e.g. hospital, school etc

Y

X

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Increasing Opportunity Costs Figure 1

AB

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Increasing Opportunity Costs Figure 2

AB

CD

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PPC and Economic Growth and Development

Potential Growth achieved by changes in the quantity and/or quality of Factors of Production

PPC1

PPC2

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Resources

Dan Ariely and Behavior Economics

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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.

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Assessment

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.

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Typical Questions

Questions that ask you illustrate the key concepts of scarcity, opportunity costs and tradeoffs.

1 Explain what is meant by a production possibility curve and use a diagram to help explain concepts of scarcity, choice and opportunity cost.

2 Using a production possibility curve, explain how the discovery of gold would effect an economy.

3 Explain the difference between a movement along an existing production possibility curve (PPC) and an outward shift in a production possible curve.

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Typical Questions

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.

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Diagrams

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.

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