IB DP Economics: Why economics, and how economists think – Revision Notes

These revision notes follow the IB Diploma Programme Economics guide (first assessment 2022, published February 2020), the course examined from the 2022 session onwards. They cover sub-topics 1.1 (What is economics?) and 1.2 (How do economists approach the world?). All of it is SL and HL content, with no HL-only parts. For full explanations read the study guide.

Test yourself with the practice questions, tick off statements on the printable checklist, and find the course on the IB DP Economics hub. The free 10-minute diagnostics show which unit to revise first. All figures are invented.

Key definitions

Term	Definition
Economics	A social science about how people interact to improve economic well-being
Microeconomics / macroeconomics	Individual markets and decision-makers / the economy as a whole
Scarcity	Unlimited needs and wants against limited resources
Opportunity cost	Value of the next best alternative given up
Free good	A good with no opportunity cost, because using it takes nothing from others
Economic good	A good that uses scarce resources, so has an opportunity cost
Factors of production	Land, labour, capital, entrepreneurship
PPC	Maximum combinations of two goods from fully and efficiently used, fixed resources
Leakage	Income withdrawn from the circular flow (S, T, M)
Injection	Spending added to the flow (I, G, X)
Positive statement	Testable against evidence
Normative statement	A value judgment about what ought to be
Ceteris paribus	All other things held equal
Refutation	Rejecting or revising a hypothesis because evidence contradicts it

The nine central concepts

Scarcity, choice, efficiency, equity, economic well-being, sustainability, change, interdependence, intervention. Be ready to link a concept to a context: scarcity and sustainability (non-renewable resources), equity and intervention (redistribution), interdependence (circular flow).

Method box: finding opportunity cost

1. Identify every realistic alternative.
2. Pick the best one that you forgo.
3. State its value (money, goods or time).
4. Do not add the other alternatives.

On a PPC: opportunity cost of one extra unit of good X = (units of Y lost) / (units of X gained).

Reminder. Between two points on a fictional PPC, 30 extra bicycles cost 12 tonnes of grain. Opportunity cost per bicycle = 12 / 30 = 0.4 tonnes.

Basic questions and systems

Three questions: what and how much, how, for whom.

System	Decision-maker	Key feature
Free market	Households and firms	Prices coordinate choices; private ownership
Planned	Government or central planners	Output and distribution set centrally
Mixed	Both	Markets plus government intervention

PPC diagram notes

Axes: one good on each axis, both labelled. A rough sketch of an outward-bowed PPC:

 Good Y
  |*
  |  *
  |    *     x  inside = unemployment
  |       *
  |          *
  |               *
  +-------------------- Good X

Feature	What it shows on the diagram
Scarcity	Points outside the curve are unattainable
Choice	Picking one point on the curve
Opportunity cost	Giving up Y to gain X when moving along the curve
Efficiency	Points on the curve use resources fully and efficiently
Unemployment of resources	A point inside the curve
Actual growth	Moving from inside the curve towards it
Growth in production possibilities	The curve shifts or pivots outwards

Increasing opportunity cost gives a curve bowed outwards: resources are not equally suited to both goods. Constant opportunity cost gives a straight line: resources are equally suited. Causes of an outward shift: more resources, better quality resources, better technology.

Assumptions: two goods; fixed resources; fixed technology; full and efficient use for points on the curve.

Circular flow notes

Households supply factors and receive income; firms supply goods and receive spending. Extended: government, banks and financial sector, foreign sector.

Leakages	Injections
Savings (S)	Investment (I)
Taxation (T)	Government spending (G)
Imports (M)	Exports (X)

Method: add the three leakages, add the three injections, compare. Equal means stable. Injections above leakages means the flow tends to grow; the reverse means it tends to shrink.

Reminder. S = 50, T = 60, M = 40; I = 55, G = 70, X = 25. Leakages = 150, injections = 150, so the flow is stable.

Positive and normative

Positive	Normative
Can be tested with data	Contains “should”, “ought”, “fair”, “better”
“The fictional city of Dunmere has 4% unemployment”	“Dunmere must reduce unemployment first”

A positive statement can still be false. It is positive because it can be checked. Equality is equal shares; equity is fairness, which may mean unequal shares. Which is fairer is normative.

Methodology chain

Logic and assumptions, then hypothesis, then model or theory, then test with empirical evidence, then keep, revise or reject (refutation). Ceteris paribus isolates one variable’s effect. Real-world data rarely holds other factors constant, which limits testing.

Economic thought in one table

Century	Names and ideas
18th	Adam Smith, laissez faire
19th	Utility and the margin; Say’s law (supply creates its own demand); Marxist critique
20th	Keynesian revolution; macroeconomic policy; monetarist and new classical counter-revolution
21st	Behavioural economics and psychology; links between economy, society and environment; circular economy

Worked reminders

Opportunity cost of a choice. Joss, in the fictional country of Orlen, can spend a day repairing bicycles (earning 90 crowns), tutoring (80 crowns) or helping at a market stall (60 crowns). Repairing is chosen. Opportunity cost = the next best, tutoring = 80 crowns. Not 80 + 60 = 140.

Unemployment on a PPC. A fictional economy’s PPC passes through the point 15 tractors and 90 tonnes of cloth, but it is producing 15 tractors and 72 tonnes of cloth. It is inside its PPC. The gap is 90 − 72 = 18 tonnes of cloth that could be produced with no loss of tractors.

Growth. In a second fictional economy, better looms raise the maximum cloth output from 90 to 108 tonnes, while the tractor maximum is unchanged. The curve pivots outwards on the cloth axis. The increase is (108 − 90) / 90 = 20%.

Command terms that matter in this unit

The guide defines the command terms examiners use. Those most likely here:

Command term	What it asks for
Define	The precise meaning of a term
Distinguish	The differences between two concepts
Outline	A brief account
Explain	A detailed account with reasons or causes
Draw / Label	An accurate labelled diagram, or labels added to one
Calculate	A numerical answer with the working shown
Discuss	A balanced review of a range of arguments
Evaluate	A weighing up of strengths and limitations

Pair every diagram with a sentence or two of explanation, and show every stage of a calculation.

Must-know distinctions

• Scarcity (always present) versus shortage (a market imbalance, covered later in the course).
• Movement along a PPC versus shift of a PPC.
• Actual growth versus growth in production possibilities.
• Leakage versus injection.
• Positive versus normative; equality versus equity.
• Hypothesis (a testable claim) versus theory (a tested set of ideas).

Quick self-test

1. Define opportunity cost.
2. Name the four factors of production.
3. A fictional economy has a straight-line PPC: 60 tonnes of maize or 30 tonnes of beans. What is the opportunity cost of one tonne of beans?
4. Using question 3, how much maize remains if 20 tonnes of beans are produced?
5. What does a point inside a PPC mean?
6. Give two causes of growth in production possibilities.
7. In Pellora, S = 50, T = 60, M = 40, I = 55, G = 70, X = 25 (billions). Are leakages equal to injections?
8. Is “the government should tax tobacco more heavily” positive or normative?
9. What does ceteris paribus mean?
10. What did Say’s law claim?
11. Why is sunlight on an open field a free good?
12. Which of the three basic questions is “who gets the output”?

Answers

1. The value of the next best alternative given up.
2. Land, labour, capital, entrepreneurship.
3. 60 / 30 = 2 tonnes of maize.
4. 20 × 2 = 40 tonnes given up, so 60 − 40 = 20 tonnes remain.
5. Resources are unemployed or used inefficiently.
6. For example, more or better resources, or improved technology.
7. Leakages 50 + 60 + 40 = 150; injections 55 + 70 + 25 = 150. Yes, equal.
8. Normative, because it contains a value judgment about what ought to happen.
9. All other relevant factors are held constant while one variable is changed.
10. That supply creates its own demand, so general shortages of demand are unlikely.
11. Using it does not reduce anyone else’s access, so it has no opportunity cost.
12. “For whom to produce”.

Where marks are usually lost

• Defining opportunity cost as “what you give up” without saying it is the next best alternative.
• Adding up all alternatives instead of naming the best one.
• Unlabelled PPC axes or curves, or a curve that touches an axis without explanation.
• Treating a point inside the PPC as a shift, rather than as unemployed resources.
• Drawing growth as a movement along the curve.
• Placing a leakage on the injection side, or vice versa.
• Using a diagram without explaining it in words.
• Calling “should” statements positive, or treating every number in a sentence as proof it is positive.
• Stating ceteris paribus without applying it to the example in the question.
• Listing economists’ names without saying what idea each stands for.

Official syllabus

IB Diploma Programme Economics guide, first assessment 2022, published by the International Baccalaureate Organization (February 2020): Unit 1, sub-topics 1.1 and 1.2.