1. IB Economics Introduction Section 1
Section 1 of the IB Economics Course aims to “ introduce the basic terminology and concepts of economics. Students are encouraged to consider what markets and governments can and cannot do. This section of the syllabus gives them an early opportunity to begin to explain economic phenomena through the use of diagrams, data analysis and the evaluation of economic material. This section is intended to make students aware of the role of economics in real-world situations. Even at this initial stage teachers and students should consider the application of economic theories to developing countries, since development economics is integral to the course.” (See IB Economics Course Guide available from IBO website.)
As an introductory unit, Section 1 aims to expose students to some very basic economic ideas many of which will be revisited throughout the course. Given the time constraints of the course, it is best not to spend too much time on this section as teaching concepts in isolation and in a disjoined manner may not result in very deep learning. In particular, issues about development economics are covered again in 3.2, and the whole of Section 5 is devoted to it.
Introduction
Section 1

2. The Discipline of Economics
What does economics study?
What methods does economics employ?
What approaches does economics take?
Asking students about what they think economics is about usually produces answers that focus on money, business and the stock market.
They may be surprised to learn that economics is about making choices in the face of scarcity of resources. A discussion about how they are always making make choices that require them to weigh up the trade offs of their decisions helps them understand the importance of choice.
Image Source: istockphotoes

3. What is Economics?
Economics is the study of how scarce resources are or should be used.
Triple A Interactive Text
You may also add that “Economics is a social science as it is concerned with the study of human behavior. It looks at how humans behave in markets, in firms, and in countries or economies. It also looks at how these economies interact. The 'humans' we are studying may be consumers, workers, decision-makers in firms, or members of the government.”
Triple A Interactive Textbook
An interesting class discussion could center on why economics has had such a bad press at times
For example students might be amused by these comments:
Economics is the “dismal science.” Carlyle, historian of 19th Century.
“I was in search of a one-armed economist, so that the guy could never make a statement and then say: "on the other hand.” Truman, US President
“The First Law of Economists: For every economist, there exists an equal and opposite economist.
The Second Law of Economists: They're both wrong.” Anonymous
A light hearted look at economics is provided by David E. Wildasin at
A more provocative argument was presented by David Brooks in the context of the Global Economic Crisis (GEC) See

4. Economics & the Scientific Method
See a Problem
Make Assumptions
Develop models
Make Predictions
Test the Model
Ceteris Paribus (other things equal)
Refine theory
Students are usually unfamiliar with the idea of modeling within a social science though a reference to weather forecasting can help them understand the importance of modeling and how they can be used to make predictions. Models are used frequently in the hard sciences such as chemistry and physics. Making assumptions to simplify the complexity of economic issues is also another idea that students tend to struggle with. Diploma students deal with these issues in TOK.
This section introduces the Production Possibility Curve (Frontier) and student are usually impressed that such a simple model that makes such sweeping assumptions can still explain a range of economic situations quite effectively.
Ceteris Paribus can be defined as an expression that is used when all other factors except those being studied are held constant.
Models are dynamic
Keep it simple

5. Approaches Economic Activity Macroeconomics
Study of all firms and individuals within an economy
Microeconomics
Interactions between individuals, firms and industries
Normative Economics
Statements based on value judgments
Positive Economics
Factual statements about the economy
Students often need practice in understanding the difference between normative and positive economics. A useful activity is for students to read an news article about about economics and collect examples of each.

6. Focus on segments of the economy
Micro and Macro
Macroeconomics
Focus on
the whole economy
Microeconomics
Focus on segments of the economy
1. There are opportunities throughout the course to observe how Microeconomics and Macroeconomics overlap.
2. An effective way to reinforce the broad differences between Microeconomics and Macroeconomics is to give student questions to sort according to their major focus:
Deciding to enroll in a business school or take a job? Micro
What determines how many people are employed in the economy as a whole? Macro
What determines the salary offered by Citibank? Micro
What determines the overall salary levels paid to workers in a given year? Macro
What determines the cost to a university or college of offering a new course? Micro
What determines the overall level of prices in the economy as a whole? Macro
What government policies should be adopted to make it easier for low-income students to attend college? Macro
What government policies should be adopted to promote full employment and growth in the economy as a whole? Macro
What determines whether Citibank opens a new office in London? Micro
What determines the overall trade in goods, services and financial assets between the Japan and the rest of the world? Macro
There are many overlapping issues.

7. Key Economic Concepts Scarcity Utility and Marginal Utility
Opportunity Cost
Public Sector and Public Ownership

8. Needs and Wants Unlimited
Scarcity
Choices have to be made
Needs and Wants Unlimited
Resources Limited
Scarcity is a central concept of Economics. However the emphasis that many texts place upon scarcity is challenged by Maier and Nelson in Introducing Economics: A Critical Guide for Teaching (2007). They argue that inequality in the way resources are distributed is just as important. They assert that starting the course with a statement like “Resources are unequally distributed in most economies. As a result, individual and households face quite different choices depending on their income and wealth.” These issues are addressed in Section 3.2 and Section 5 that focus on development economies.
On another point the authors suggest that a distinction be made between shortage and inadequacy on the one hand and the economic meaning of scarcity on the other. Shortages are usual temporary and the result of a mismatch between demand and supply. For example there were reports of a shortage of iPads after the product’s launch. This economic situation will be shown diagrammatically in Section 2.1. Inadequacy is a situation where people don't have the resources to meet their basic needs like water or health care as their incomes are low. Scarcity in an economic sense is a situation that is permanent and universal because resources will always be insufficient to meet all possible wants.

9. Choices and Utility
In making choices we aim to maximize our utility, our perceived satisfaction from consuming a good or service.
Image Source: Wikimedia Commons
People who Bungee jump and engage in other extreme sports are obviously obtaining utility of some sort to the puzzlement of the majority of us.
The question of choice raises a host of interesting topics including advertising which so effectively targets teenagers. Though it is easily understood that we have to make choices why we make particular choices and the role advertising plays is a topic not directly addressed by the IB Economics Course. On a related note, Behavioral Economics is a new branch of enquiry and one that challenges the assumption that economic choices are rational. Dan Ariely from Duke University has been a leading proponent of the irrationality of economic behavior. He has a number of video podcast that address this topic. (

10. Marginal Utility
Our perceived satisfaction from consuming one additional good or service
The concept of marginal utility is the first example of marginal analysis presented to students. Later HL students will study Marginal Cost and Marginal Revenue, concepts central to Theory of the Firm (HL Section 2.3).
This is not an easy concept to understand and students need to be exposed to the idea repeatedly. One way to approach it is to emphasis that we often make decisions about doing a little more of something or doing a little less. Working a little longer or working a little less. Studying longer or studying less. By focusing on the benefit we can get from doing a little more or for a firm from producing more we have a useful tool to help make the decision. By analyzing both the benefits and the costs we can make a more informed decision.
Marginal analysis is one of the 10 principles of economics, as outlined by Harvard economist Gregory Mankiw in his "Principles of Economics," one of the most popular economics textbooks. According to Mankiw, one principle that governs how people make decisions is that rational individuals think at the margin. A person, for example, may weigh such decisions as whether to take a vacation, work additional hours or even have one more glass of wine with dinner. Mankiw and other economists contend that rational decision makers take an action only if the additional satisfaction or benefit---known as the marginal benefit---exceeds the added, or marginal, cost of doing so.
(See for a further discussion of marginal analysis.)

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.
Image source: Istockphoto
This is a central concept of economics and it will be referred to many times in the course. This will be explained diagrammatically later in the presentation. It is of great value when evaluating government spending.

13. Private and Public Sectors
Private Ownership
Privately owned resources
Private gain motivated by individual self-interest
Public Ownership
Government or state owned resources
Public sector provides benefits to all individuals
Government involvement in the economy will be addressed in the context of market failure Section 2.3 (SL) and Section 2.4(HL) and Section 3 Macroeconomics.

14. 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

15. Resources/Factors of Production
Land
Labor
Capital
Enterprise
All images from Creative Commons

16. Resources/Factors of Production
Land - all natural resources (minerals and other raw materials)
Labor - all human resources
All images from Creative Commons
Definitions: Triple A

17. Resources/Factors of Production
Capital - all man-made machinery and equipment
Enterprise - the skill of taking risk to provide goods and services and make profits.
Definitions from Triple A Interactive Textbook
Students need to understand that entrepreneurship is related to management but not identical. Entrepreneurs take risks because the future is unknown. Entrepreneurs have both the ability and the willingness to take risks and gather other factors of production to achieve some goal.
All images from Creative Commons

18. Payments for Resources
Rent
Land
Wages
Labor
Interest
Capital
Profit
Enterprise

19. Basic Economic Questions
For whom should goods and services be produced?
What goods and services should be produced?
How should goods and services be produced?
Basic Economic Questions
The key economic questions that need to be answered by all economic systems.
What goods and services to produce? These are usually decisions made by both governments and the private sector. While the government aims to provide for the public good, markets and the forces of supply and demand shape a firm’s decision about what to produce.
How should goods and services be produced? Cost is the key determinant on how firms will answer this question. Obviously the more efficient a firm can be the more it can reduce its costs and the greater its potential for profit. HL students will study these issues in Section 2.3 Theory of the Firm.
For whom to produce?
Actors in an economic system exchange factors of production for income which is then used to purchase goods and services.

20. Prices determine who can purchase
Consumers determine what is produced
Firms decide how to produce
Market Economies
It should be pointed out that there are no totally free market economies in existence.
In a market economy the forces of Demand and Supply determine resource allocation.

21. Market Economies Strengths Weakness
Market failure
Competition limited
Inflation & unemployment
Poverty
Strengths
Effective Coordination within the economy
Efficiency
All of these strengths and weakness will be explored in more detail throughout the course.

22. Central planners determine prices
Central planners determine what is produced
Central planners decide how to produce
Command Economies
There are very few planned economies left in the world.
In a command economy the the state determines resource allocation.

23. Command Economies Strengths Weakness Rapid growth and development
Lack of incentives
Inefficiencies
Little choice
No variety
Strengths
Rapid growth and development
Reduce poverty

24. Prices determine who can purchase but some goods and services provided by the government
Consumers and government determine what is produced
Firms decide how to produce
Mixed Economies
Most economies of the world are mixed though they differ in the degree of government involvement.
In a mixed economy the forces of demand and supply and the state determine resource allocation.

25. Transition Economies Command Economy Price Liberalization
Removal of Subsidies
Privatization
Free Trade
Market or Mixed Economy
Transition economies is discussed in the context of development later in the course.

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
Source: Triple A Interactive Textbook

27. Economic Growth and Economic Development
Economic growth entails an increase in a country's total output of goods and services.
Economic development entails a higher standard of living.
Economic Growth is usually measured by changes in real GDP (i.e. the increase in GDP after inflation has been removed)
In April 2010, The Economist conducted a debate on the motion that “This house believes that GDP growth is a poor measure of improving living standards.” The vote was carried by a large majority. (See The
It is important to explore further the relationship between economic growth which is a quantitative measure and economic development with is a qualitative measure. Growth may not entail development but development typically needs some level of economic growth,
The interrelationship between growth and development is a major focus of Section 3.2 and Section 5. At this stage students need to understand that they are separate to some extent but that they do overlap.
Economic Growth and Economic Development

28. Sustainable Development
Image Source: Wikimedia Commons
The environment is preserved for future generations.

29. Production Possibility Frontier (Curve)
Economic model of total obtainable output
Shows how
opportunity costs determine economic choices
economic growth and development can be achieved
This is the first model that students will learn and considerable time should be devoted to it. Students need to develop the work habit of producing clearly labelled diagrams with an accompanying explanation.
The PPC shows the different combinations of goods and services that can be produced with a given amount of resources.
There is no ‘ideal’ point on the curve
Any point inside the curve – suggests resources are not being utilised efficiently
Any point outside the curve – not attainable with the current level of resources
Activities: For some studenits completing actual calculations about opportunity costs is highly effective. The National Council on Economic Education has published two books of student activities. Though they are aimed at the AP Economics Course, many of the worksheets are suitable for IB Economics. For example, Activity 1, Scarcity, Opportunity Cost and Production Possibility Curves from Advanced Placement Economics Macroeconomics: Student Activities (2003) presents activities based upon these important concepts. There is also a Teacher Resource Manual that provides answers.

30. PPC of an economy producing computers and mobile phones
All resources are being used efficiently.
The economy is allocating more resources to computers than mobile phones. A
Show the different combinations of goods and services that can be produced with a given amount of resources
No ‘ideal’ point on the curve.
Students need to know that the curve always touches both axes and does not float. Unless opportunity costs are constant the diagram usually presents a curved PPC.
The axes can be labelled with any two goods. The classic PPC shows guns and butter, while Capital Goods and Consumption goods can show the opportunity cost of investment.

31. PPC of an economy producing computers and mobile phones
Resources are not being used efficiently. B
Any point inside the curve – suggests resources are not being utilised efficiently.
Students could be asked why resources would not be used fully.

32. PPC of an economy producing computers and mobile phones
Actual Economic Growth

33. PPC of an economy producing computers and mobile phones
Not attainable given present Factors of Production C
Any point outside the curve – not attainable with the current level of resources

34. PPC of an economy producing computers and mobile phones
Shift of production from Computers to Mobile Phones E

35. PPC and Economic DevelopmentY
Shift of production to Public and Merit Goods e.g. hospital, school etc X

36. Increasing Opportunity Costs Figure 1B
The question as to why there are increasing opportunity costs when production moves from A to B is a challenging one. The explanation given is that as resources are re-allocated from the production of one product to another, those resources poorly suited to producing A will be reallocated, but as more and more resources have to be reallocated those that were more effective in producing A will have to be sacrificed.

37. Increasing Opportunity Costs Figure 2B C D

38. PPC and Economic Growth and Development
Potential Growth achieved by changes in the quantity and/or quality of Factors of Production
Capital Goods: These are goods that are used in the production of other goods and services i.e. machines, buildings and other plant and equipment.
PPC2
PPC1

39. Resources
Dan Ariely and Behavior Economics

40. Suggested Activities
Keep a journal or maintain your own economics blog and through your writing apply your understanding of economics to the real world.
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.
As Economics can be quite a conceptual and theoretical subject for students and one they have not probably studied before, applying their understanding to the real world is important. This is best achieved by writing on a regular. A blog is an excellent way to achieve this or a simple a journal that contains writing that apples economics to the real world. See
Students can individually or as a class gather a collection of articles on economics. This collection will be valuable when students look forward articles for the IA.

41. 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.

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

43. Typical Questions
Questions that ask you to explain the similarities and differences between various economies.
Explain the differences between free market economy and a planned economy.
Explain the economic consequences of a transition from a planned economy to a market economy.

44. Diagrams
Section 1 does not have a great number of associated diagrams.
However you should know the following:
How the PPC illustrates opportunity costs, actual growth and potential growth in an economy.
PPCs curves that can distinguish between growth and development.