IB Economics SL & HL Complete Notes

1.0 Introduction to Economics

Core Concepts

  • Definition: Economics is a social science studying human interactions in the commercial realm.

  • Focus: Allocation of scarce resources to meet needs and wants.

  • Goals:

    • Improving living standards.

    • Achieving sustainable development.

    • Ensuring employment and stability.

Branches of Economics

  1. Microeconomics:

    • Focuses on individual behaviors (consumers, producers, markets).

    • Examples: Markets for automobiles, movie tickets, etc.

  2. Macroeconomics:

    • Studies total effects on a nation (national output, price level, employment, income distribution).

    • Examples: Unemployment, inflation, economic growth, income inequality.

Fundamental Key Concepts

  • Scarcity: Allocation of limited resources.

  • Resources: Allocation among needs and wants.

  • Tradeoffs: Choices between alternatives.

  • Opportunity Cost: The opportunity lost with each economic decision.

  • Model Building:

    • Economists use models to represent real-world phenomena.

    • Ceteris Paribus: Assumption to hold all else equal.

  • Positive Economics:

    • Deals with facts and data, supported by quantifiable observations.

    • Examples: Unemployment rates, pork prices.

  • Normative Economics:

    • Incorporates opinions; examples include policy recommendations.

2.0 Scarcity

Basic Principles

  • Scarcity Defined: Factors of production are finite, wants are infinite.

  • Economics Focus: Resource allocation to meet needs and wants.

Three Basic Economic Questions

  • What to produce?

  • How to produce?

  • For whom to produce?

Factors of Production

  • Land: Includes soil, wood, minerals.

  • Labor: Human resources, physical and intellectual work.

  • Capital: Tools and technologies used in production.

  • Entrepreneurship: Innovation and creativity.

Economic Systems

  • Free Market System: No government control, determined by voluntary trade.

  • Command System: Central planning authority controls production factors.

  • Mixed Economic System: Combines market and command systems.

3.0 Choice and Opportunity Cost

Core Concepts

  • Choices & Tradeoffs: Resources are scarce, choices must be made.

  • Opportunity Cost: Value of the next best alternative foregone.

  • Production Possibilities Curve (PPC):

    • Models scarcity, choice, opportunity cost, unemployed resources, and inefficiency.

  • Examples:

    • Watching TV: Giving up study time.

    • College: Foregoing income from a job.

4.0 Central Themes

Major Themes

  • Government intervention in resource allocation.

  • Threats to sustainability from current resource use.

  • Conflicts between economic efficiency and equity.

  • Economic growth vs. economic development.

    • Economic Growth: Increase in total output.

    • Economic Development: Improvement in living standards.

5.0 Competitive Markets, Demand and Supply

Market Types

  • Resource Market:

    • What: Land, Labor, Capital, Entrepreneurship.

    • Demanders: Business firms.

    • Suppliers: Households.

  • Product Market:

    • What: Goods and services.

    • Demanders: Households.

    • Suppliers: Firms supply products.

Demand

  • Law of Demand: Negative causal relationship between price and quantity demanded.

  • Demand Definition: Quantity consumers are willing and able to buy at a range of prices.

  • Law of Demand Factors:

    • The income effect.

    • The substitution effect.

    • The law of diminishing marginal utility.

Non-Price Determinants of Demand

  • Tastes and preferences of consumers

  • Other related goods’ prices

  • Expectations of future prices

  • Incomes

  • Size of the market

  • Special circumstances

Supply

  • Supply and demand determines market equilibrium

  • Non-Price Determinants of Supply (Supply shifters):

    • Subsidies - Subsidies cause supply to increase.

    • Taxes - Taxes cause supply to decrease.

    • Technology - Technology increases supply.

Market Equilibrium

  • Meaning of market equilibrium diagrams

  • Changes in determinants of demand and/or supply

  • Market Equilibrium, Surplus vs Shortage

  • Calcula ng and illustra ng equilibrium using linear equa ons (HL only)

    • Calculate the equilibrium price and quantity from linear demand and supply functions.

Surplus

  • Consumer Surplus: Benefit enjoyed by buyers who paid less than they were willing to pay.

  • Producer Surplus: Benefit enjoyed by producers who sell higher than they were willing to sell.

Allocative Efficiency

  • Best allocation of resources at competitive market equilibrium.

  • Social (community) surplus maximized (Marginal benefit = marginal cost).

6.0 Elasticities

Price Elasticity of Demand (PED)

  • Concept: Responsiveness of quantity demanded to a change in price.

  • Calculation: Using the PED equation.

  • Types:

    • Price elastic demand

    • Price inelastic demand

    • Unit elastic demand

    • Perfectly elastic demand

    • Perfectly inelastic demand

  • Determinants:

    • Number and closeness of substitutes

    • Degree of necessity

    • Time

    • Proportion of income spent on the good

Cross Price Elasticity of Demand (XED)

  • Concept: Responsiveness of demand for one good to a change in the price of another good.

  • Calculation: Using the XED equation.

  • Types:

    • Substitute goods (positive XED)

    • Complementary goods (negative XED)

Income Elasticity of Demand (YED)

  • Concept: Responsiveness of demand to a change in income.

  • Calculation: Using the YED equation.

  • Types:

    • Normal goods (positive YED)

    • Inferior goods (negative YED)

    • Necessity goods (income inelastic)

    • Luxury goods (income elastic)

Price Elasticity of Supply (PES)

  • Concept: Responsiveness of quantity supplied to a change in price.

  • Calculation: Using the PES equation.

  • Types:

    • Elastic supply

    • Inelastic supply

    • Unit elastic supply

    • Perfectly elastic supply

    • Perfectly inelastic supply

  • Determinants:

    • Time

    • Mobility of factors of production

    • Unused capacity

    • Ability to store stocks

7.0 Government Intervention in Markets

Taxes

  • Types: Specific and ad valorem taxes

  • Tax Incidence: How the burden of tax is divided between consumers and firms.

Subsidies

  • Why governments provide subsidies

  • Consequences for stakeholders

Price Controls

  • Price Ceilings

  • Price Floors

8.0 Market Failure

Core Concepts

  • MPB: Marginal Private Benefits

  • MSB: Marginal Social Benefits

  • MPC: Marginal Private Costs

  • MSC: Marginal Social Costs

  • Externalities: Failure of the market to achieve social optimum where MSB=MSCMSB = MSC.

Negative Externalities

  • Negative externalities of production and consumption:

    • Welfare loss associated with the production or consumption.

    • Demerit goods create external costs.

  • Policy Responses:

    • Market-based policies (taxation and tradable permits)

    • Government regulations

Positive Externalities

  • Positive externalities of production and consumption:

    • Welfare loss associated with the production or consumption.

    • Merit goods create external benefits.

  • Government Responses:

    • Subsidies

    • Legislation

    • Advertising to influence behavior

    • Direct provision of goods and services

Lack of Public Goods

  • Public vs. Private Goods:

    • Public goods (non-rivalrous and non-excludable)

    • Private goods (rivalrous and excludable)

  • Free Rider Problem: How the lack of public goods indicates market failure.

  • Government Provision: Implications of direct provision of public goods.

Common Access Resources

  • Consequences of lacking a pricing mechanism leading to overuse.

  • Threat to sustainability from using fossil fuels.

  • Asymmetric Information (HL only)

    • Market failure when one party has more information than the other.

    • Government responses: legislation, regulation, information provision.

  • **Abuse of