IB ECONOMICS

1.1 What is economics?

 Economics is essentially about scarcity
and choice

 The fundamental problem of economics

is that there is scarcity and that choices
must be made

 We cannot have everything we want as a

result of scarcity

 every choice that must be made between

two or more options has an opportunity
cost

But, What is Economics?

Economics as a social science:
• The social nature of economics
• The basis of the study of economics: microeconomics
and macroeconomics
• Introduction to the nine central concepts: scarcity,
choice, efficiency, equity, economic well-being, sustainability,
change, interdependence, intervention

Learning Objectives…
• Factors of production—land, labour, • Free goods
capital and ​entrepreneurship

• Scarcity

• Unlimited human needs and wants to be

met by limited resources

• Scarcity and sustainability

• Opportunity cost

• The cost of choice

The problem of choice:

1. What/how much to produce, how to produce and for whom to
produce?
2. Means of answering the economic questions
3. Market versus government intervention
4. Economic systems: free market economy, planned economy
and mixed economy​

The Basic Economic Questions

Economics is the social science that studies
how people use scarce resources to satisfy
unlimited needs and wants.
It is a social science because it is about how
people interact and why they behave in certain
ways
The Study of Economics
 Social science, which includes economics,
psychology, sociology, anthropology and
political science, consists of the disciplined
and systematic study of society and its
institutions, and of how and why people
behave as they do, both as individuals and in
groups within society.
What is Social Science?
Social science: The scientific study of society –
of human behaviour and of social interactions.
Economics is one of several social sciences.
Others are sociology, political science, and
anthropology. Economics is considered a social
science because it seeks to explain how society
deals with the problem of scarcity.

What is Social Science?

 WHAT IS ECONOMICS

SCARCITY
LIMITS
TIME
RESOURCES

ECONOMICS
 The world's resources are limited and already
overstretched. Economics is the study of
scarcity and decision-making. Economics is
the scientific study of the ownership, use, and
exchange of scarce resources – often shortened
to the science of scarcity.

So…in short what is Economics

Scarcity is the situation in which available resources,
or factors of production, are finite, whereas wants are
infinite. There are not enough resources to produce
everything that we need and want. The basic
economic problem that arises because people have
unlimited wants but resources are limited. Because
of scarcity, various economic decisions must be made
to allocate resources efficiently.

What is Scarcity?
1. Economics is regarded as a social science 3. As the social sciences have evolved over
because it uses scientific methods to
build theories that can help explain the
behaviour of individuals, groups and
organisations. Economics attempts to
explain economic behaviour, which arises
when scarce resources are exchanged.
2. Economists, like other social scientists,
are not able to undertake controlled
experiments in the way that chemists and
biologists are. Hence, economists have to
employ different methods, based
primarily on observation and deduction
and the construction of abstract models.
the last 100 years or so, they have
become increasingly specialised. This is
true for economics, as witnessed by the
development of many different strands of
investigation including microeconomics
and macroeconomics, pure and applied
economics, international economics,
development economics and industrial
and financial economics. What links
them all is the attempt to understand how
and why exchange takes place, and how
exchange creates benefits and costs for
the participants.
 THE ECONOMICS
CLASSROOM
WHAT IS WRONG WITH THIS
CLASS?

ECONOMICS
 MICROECONOMICS
Microeconomics analyses basic elements in
the economy, including individual agents
and markets, their interactions, and the
outcomes of interactions. Individual agents
may include, for example, households, firms,
buyers, and sellers. For example, firms sell
goods to households, and households
provide labour.

What is Microeconomics?
 MACROECONOMICS
Macroeconomics analyses the economy as a
system where production, consumption,
saving, and investment interact, and factors
affecting it: employment of the resources of
labour, capital, and land, currency inflation,
economic growth, and public policies that
have impact on these elements.

What is Macroeconomics?
Microeconomics vs Macroeconomics
 WELL-BEING
Well-being (economic well-being): In contrast to equality,
which describes situations where economic outcomes are
similar for different people or different social groups,
equity refers to the concept or idea of fairness. Fairness is
a normative concept, as it means different things to
different people. In economics, inequity is often
interpreted to refer to inequality, which may apply to the
distribution of income, wealth or human opportunity.
Irrespective of economic system, inequity or inequality
remain significant issues both within and between
societies. The degree to which markets versus
governments should, or are able to, create greater equity or
equality in an economy is an area of much debate.
CENTRAL CONCEPTS
INTERDEPENDENCE
Interdependence: Individuals, communities and
nations are not self-sufficient. Consumers, companies,
households, workers, and governments, all economic
actors, interact with each other within and,
increasingly, across nations in order to achieve
economic goals. The greater the level of interaction,
the greater will be the degree of interdependence. In a
highly interdependent economic world, decisions by
certain economic actors are likely to generate many,
and often unintended, economic consequences for
other actors. A consideration of possible economic
consequences of interdependence is essential
when conducting economic analysis.
 SCARCITY
Scarcity: The central concept in economics, scarcity
refers to the limited availability of economic resources
relative to society’s unlimited demand for goods
and services. Thus, economics is the study of how to make
the best possible use of scarce or limited resources to
satisfy unlimited human needs and wants.
SCARCITY –  FACTORS OF PRODUCTION ARE
FINITE AND WANTS INFINITE
CENTRAL CONCEPTS
CHOICE
Choice: Since resources are scarce, economics is a
study of choices. It is clear that not all needs and wants
can be satisfied; this necessitates choice and gives rise
to the idea of opportunity cost. Economic decision-
makers continually make choices between competing
alternatives, and economics studies the consequences
of these choices, both present and future.
Scarcity
 CHANGE
Change: An understanding of the concept of change is
essential in economics. The economic world is in a
continual state of flux and economists must be aware
of this and adapt their thinking accordingly. The concept
of change is important both in economic theory and the
empirical world that economics studies. In economic
theory, economics focuses not on the level of the variables
it investigates, but on their change from one situation to
another. Empirically, the world that is studied by
economists is always subject to continuous and profound
change at institutional, structural, technological, economic
and social levels.
CENTRAL CONCEPTS
SUSTAINABILITY
Sustainability: Sustainability in economics refers to
the ability of the present generation to meet its needs
without compromising the ability of future generations
to meet their own needs. It refers to limiting the degree
to which the current generation’s economic activities
create harmful environmental outcomes involving
resource depletion or degradation that will negatively
affect future generations. Sustainability is proving
increasingly important in all economic analysis as
planetary boundaries are pushed to the limit.
 INTERVENTION
Intervention: Intervention in economics usually refers to
government involvement in the workings of markets.
While markets are considered the most
efficient mechanism to organize economic activity, it is
recognized that they may fail to​ achieve certain societal
goals, such as equity, economic well-being,
or sustainability. Failure to achieve such goals may be
considered sufficient reason for government intervention.
In the real world, there is often disagreement among
economists and policymakers on the need for, and extent
of, government intervention. There is a considerable
debate about the merits of intervention versus the free
market.
CENTRAL CONCEPTS
EQUITY
Equity: In contrast to equality, which describes
situations where economic outcomes are similar for
different people or different social groups, equity refers
to the concept or idea of fairness. Fairness is a
normative concept, as it means different things to
different people. In economics, inequity is often
interpreted to refer to inequality, which may apply to
the distribution of income, wealth or human
opportunity. Irrespective of economic system, inequity
or inequality remain significant issues both within and
between societies. The degree to which markets versus
governments should, or are able to, create greater
equity or equality in an economy is an area of much
debate.
Needs, wants and resources.
Our needs and wants are very different. We need some things just to stay alive – including water, food and warmth. But our wants are
never-ending (infinite). We may want a PlayStation 5 for Christmas. Do we actually need it to stay alive? Most people would say no – it
is simply a luxury that would be nice to have. Imagine you get a PlayStation for Christmas – what will you want for your birthday? An
iPhone, perhaps. The cycle of wants continues, once you get one thing, you move straight on to wanting another. In contrast, the
resources used to produce these goods and services are in limited supply (finite). Collectively, resources are called factors of
production. Resources can be divided into four groups:
LAND LABOUR
Land is the natural resources available for production. Some Labour is the human input into the production process. Not all
nations have a large amount of a particular natural resource, labour is of the same quality. Every person has different skills
and so are able to specialise in the extraction and production and qualifications – we call this human capital. When people
of it – for example North Sea oil and gas in Britain and have more human capital, they are likely to be more
Norway. productive. This means they can produce more in the same
period of time.
CAPITAL ENTERPRISE
The term capital means investment in goods that are Enterprise is the idea of having ideas and taking risks in setting
used to produce other goods in the future. Examples up or running a business. An entrepreneur is someone involved
include machinery, plant and equipment, new in taking those risks, perhaps by putting in their money, or
technology, factories and buildings. having the ideas and the drive to set up or run the business. The
reward for being an entrepreneur is profit.
Factors of Production
 The main purpose of economic activity is to produce goods and
services to satisfy consumers’ needs and wants. This means that firms
produce to satisfy people’s need for consumption, both as a means of
survival, and also to meet their growing demands for an improved
lifestyle or standard of living.

Economic Activity
 Goods are items that you can touch (tangible) – you can take them
home and use them. An example of a good is a pen or a packet of
crisps. A service is something that someone provides for you; you
cannot touch it (intangible). Examples include tourism and banking.

The production of nearly all goods and services uses up scarce

resources. Production takes place in one of three sectors.

Production of goods and services

PRIMARY
Where ths extraction of Raw
Material takes place.
e.g. Mining, farming, fishing, oil
extraction (e.g. mining)
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SECONDARY TERTIARY
Where raw materials are The service sector.
manufactured into goods.
e.g. banking, tourism, education,
e.g. car manufacturing, furniture retail.
manufacturing, manufacture of
electronic goods, (e.g. computers
and mobile phones)
Resources
 The basic economic problem: as a result of scarcity choices must be
made.
The basic economic problem occurs because resources are scarce – but our wants are infinite. As resources are scarce and our
wants are never-ending, we have to allocate resources. When we allocate resources, we ask the following questions:
What goods and services should we produce?
How should the economy use its resources to operate schools or hospitals?
What mix of goods will it produce?
What is the best way to produce goods and services?
What is the best use of scarce resources?
Who is to receive goods and services?
When allocating resources, individuals, firms and governments must all make decisions about what, how, and for whom.

Choices
Scarcity, Choice, Opportunity Cost
 EVERY ECONOMIC CHOICE HAS AN ASSOCIATED
OPPORTUNITY COST
Opportunity costs and choices.

We already know that resources are scarce and we have infinite wants. This creates a problem; if we cannot have everything
we want, we have to make choices. I really want to go on holiday and I would like a new car. I do not have the money to do
both, so I must decide which I would like to do the most. If I choose to go on holiday, it means I cannot buy a new car. I can
therefore say that the opportunity cost of going on holiday is buying a car. This means that when I have chosen the holiday,
the next best alternative is the car.
Thus, because we cannot have everything we want as a result of scarcity, every choice that must be made between two or
more options has an opportunity cost.
Opportunity cost – the next best alternative foregone when making a choice – what we give up when we make a
choice.

Opportunity costs and choices.

Scarcity, Choice, Opportunity Cost
A free good is a good that is not scarce, and therefore is available without limit. A free good is
available in as great a quantity as desired with zero opportunity cost to society. A good that is
made available at zero price is not necessarily a free good.

Examples of free goods:

Air. Oxygen is something we need and we can simply breathe it in. There is no element of
rivalry (e.g. if I breathe, there is still enough air for you to breath too).
Sunlight. Sunlight is available to all. Unless your neighbour grows a tall tree that shade your
garden.

Free Goods
ECONOMIC QUESTIONS THAT MUST BE ANSWERED BY ANY ECONOMIC SYSTEM
Scarcity makes every economy in the world, regardless of how it is organised, to answer three basic questions – What to produce? How
to produce? For whom to produce? The first two questions are about resource allocation.
For example, if ‘a what to produce?’ choice involves choosing
WHAT TO PRODUCE a certain amount of education services (schools, universities,
etc.) and a certain amount of health care (medical centres,
All economies must choose the combinations and quantities
hospitals, etc.), this means a decision is made to allocate some
of the particular goods and services that they produce.
resources to the production of education and some to the
production of health services. At the same time, a choice needs
HOW TO PRODUCE to be made about how to produce these services. Which factors
All economies must choose how to use the resources of production (e.g., labour – doctors, nurses, dentists, teachers,
they have to produce goods and services. Different professors, and capital – buildings, information systems,
combinations of the factors of production can be used to equipment) and in what quantities (for example, how much
produce goods and services (for example, relatively labour, how much capital equipment and what type of capital
more human labour with fewer machines, or relatively equipment, etc.) should be used to deliver health care and how
more machines with less labour), by using different skill much to deliver education services.
levels of labour, and by using different technologies.
Resource allocation refers to assigning an economy’s
available resources, i.e., the factors of production, to
certain uses which have to be chosen among the many
possible alternatives available.
Bearing in mind that resources are scare relative to needs and wants, if a decision is made to change the amounts of services produced,
such as more education and less health care, this involves a reallocation of resources. Sometimes, economies do not produce the best
amount of goods and services relative to what is socially desirable. For example, if too many cigarettes or alcohol are being produced,
then there is an overallocation of resources in production of cigarettes or alcohol. If too few socially desirable goods or services are
being produced, such as health care or education, then there is an underallocation of resources in producing these services. The third
and final question, ‘for whom to produce’ is about the distribution of output, i.e., how much output different individuals or different
groups in the economy receive.

FOR WHOM TO PRODUCE

All economies must choose how goods and services are to
be distributed among the population. Some may argue that
everyone get an equal amount of these, while others would
argue that some people should get more than others
(equality versus inequality versus equity). Further
arguments can be made that some goods and services such
as healthcare and education should be distributed more
equally among the population than other goods and services
such as handguns and assault rifles.
PHILIPP FRANK CHRIS
JOHNSON I.M. PEI GEHRY STAFFORD ZAHA HADID

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5 PHOTOS AND CAPTIONS

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 Step FOUR STEPS IN A CIRCULAR
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 OUR SWEET SPOT
This center area is where we are at our best. When we
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When you need these key focus areas attended to, don’t
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Focus Area Focus Area You can depend on us to meet and excede all your
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 OUR CLIENTS BY PERCENTAGE
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40% 60%

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 2012 SALES
35% - Russia

30% - Brazil

20% - Germany

15% - China

OUR KEY MARKETS

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SECTION 2
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 PROJECT TITLE

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A CASE STUDY
 THE ECONOMICS
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