DP1 HL ECONOMICS

SUBJECT INTRODUCTION
&
UNIT 1
Overview of the curriculum model

**
Economics guide
First assessment 2022
Economics and the core
🞂Economics and theory of knowledge

🞂Economics and Extended Essay

🞂Economics and creativity, activity, service

The relationship between inquiries, concepts, content
and contexts in economics
Links to the Middle Years Programme

🞂The concept-based approach to teaching adopted in

the MYP is also relevant to this economics course.

🞂Inquiry-based learning is central to individuals and

societies courses in both the MYP and the DP
providing students with opportunities to
independently and collaboratively investigate and
analyse global issues.
Assessment objectives
🞂 Knowledge and understanding (AO1)
🞂 Demonstrate knowledge and understanding of specified
content
🞂 Demonstrate knowledge and understanding of the common
SL/HL syllabus
🞂 Demonstrate knowledge and understanding of current
economic issues and data
🞂 At HL only: demonstrate knowledge and understanding of the
extension topics
Application and analysis (AO2)
🞂 Apply economic concepts and theories to real-world situations
🞂 Identify and interpret economic data
🞂 Analyse how economic information is used effectively in
particular contexts
🞂 In the internal assessment task: explain the link between key
economic concepts and economic commentaries
🞂At HL only: demonstrate application and analysis of
the extension topics
Synthesis and evaluation (AO3)
🞂Examine economic concepts and theories
🞂Use economic concepts and examples to construct and
present an argument
🞂Discuss and evaluate economic information and
theories
Use and application of appropriate
skills (AO4)
⮚ Produce well-structured written material, using appropriate
economic theory, concepts and
🞂 terminology
🞂 Produce and use diagrams to help explain economic theory,
concepts and real-world issues
🞂 Select, interpret and analyse appropriate extracts from the
news media
🞂 Interpret appropriate data sets
🞂 Use quantitative techniques to identify, explain and analyse
economic relationships
Units of the Economics Syllabus
🞂Unit 1: Introduction to economics

🞂Unit 2: Microeconomics

🞂Unit 3: Macroeconomics

🞂Unit 4: The global economy

Unit 1: Introduction to economics
🞂Conceptual understandings.
🞂Economics is a social science characterized by
interdependence, which focuses on how people
interact with each other to improve their economic
well-being, influenced and enabled by their values and
their natural surroundings.

🞂The economic world is dynamic in nature and

constantly subject to change.
1.1 What is economics?
🞂Economics as a social science
🞂 The social nature of economics
🞂 Any science discipline follows the ff. procedures:
🞂 -Identification of problem
🞂 -Hypothesis
🞂 -Collection of data
🞂 -Organization and processing of data
🞂 -Conclusions leading to theories, laws, etc.
🞂 -Testing conclusions later with a different dataset.
Economics Versus Natural/Physical
Sciences
ECONOMICS
1. Studies human behaviour
2. Works in a uncontrolled
environment
3. Relies on simplified assumptions
NATURAL/PHYSICAL SCIENCES
1. Study things in the natural
environment
2. Works in a controlled environment
3. Relies on facts and predictions
The basis of the study of economics:
🞂Microeconomics:
🞂-is concerned with the behaviour of individuals
🞂-is about profit maximization for individual firms and
🞂-welfare maximization for surplus for consumers
🞂and firms in distinct markets and segments of the
economy
macroeconomics
🞂Examines the operations of the economy as a whole
🞂is about maximizing national income and economic
growth.
🞂It looks at aggregate variables such as national output,
unemployment, inflation, distribution in income.
Introduction to the nine central
concepts (WISE ChoICES)
🞂 scarcity, choice, efficiency, equity, economic well-being,
sustainability, change, interdependence, intervention
WISE ChoICES in Detail
🞂Well-being – economic well-being is about the level of
economic prosperity and quality of life (standards of
living) in the economy.

🞂Interdependence – this refers to the growing

interaction and reliance on others in order to achieve
economic goals, because individuals and societies are
not self-sufficient in a rapidly changing world.
WISE ChoICES in Detail
🞂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.

🞂Efficiency – this refers to how well things are done,

determined by the input–output ratio, i.e. the input of
scarce factor resources to generate the output of goods
and services.
WISE ChoICES in Detail
🞂 Choice – Decision of using scarce economic resources to
satisfy some needs and wants and at the expense of other
needs and wants. Choice gives rise to opportunity cost.

🞂 Intervention – this refers to the roles of governments in

monitoring and regulating the behaviour of the workings of
different markets in the private sector. This is to ensure
efficient allocation of scarce resources improve economic
well-being, efficiency, equity and sustainability.
WISE ChoICES in Detail
🞂 Change – Since the economic world is in a continual state
of flux, economists must be aware of this and adapt their
thinking accordingly. Thus, In economic theory, economics
focuses not on the level of the variables it investigates, but
on their change from one situation to another.

🞂 Equity – this concept is about the idea of perceived

fairness. This is subjective, so is an aspect of normative
economics. It is about the challenges faced by individuals
and societies in terms of fair access to the world’s scarce
resources.
WISE ChoICES in Detail
🞂Sustainability – from the perspective of economists, it
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 is about the ways in which economic activity impacts
the natural environment and the world’s scarce
resources. Hence, sustainability is about
intergenerational equity.
ACTIVITY 1.1

🞂Many hotels and restaurants offer all-you-can-eat

buffets.

🞂With a partner, decide on the three most applicable

WISE ChoICES concepts that apply to such economic
activity. Be prepared to share your ideas and discussion
points with the rest of the class.
Factors of production
🞂These are resources used in making goods and services.
🞂They are land, labour, capital and entrepreneurship
Land (Natural resources)
🞂It refers to the resources in their natural or raw form
used in the production process.
🞂Examples include crude oil, coal, water, wood, metal
ores and agricultural products.
🞂 Land can be renewable and non-renewable resources.
🞂Renewable resources are those that can be used and
replaced, e.g. fish stocks, water, forests and plants.
🞂Non-renewable resources are those that cannot be
replaced, e.g. oil supplies, gold reserves, fossil fuels
and metal ores.
🞂The reward for land is rent.
Characteristics of Land
🞂Free gift of nature
🞂Scarce i.e. limited in supply
🞂Geographically immobile
🞂Occupationally mobile
Labour (Human resources or Human
capital)
🞂Labour refers to human effort, physical and mental
exerted in the production of goods and services.
🞂Examples include the services of an accountant,
barrister, chef, doctor or estate agent.
🞂The reward for labour is wage.
Characteristics of Labour
🞂Man made
🞂Scarce
🞂Geographically mobile
🞂Occupationally mobile
Capital (or physical capital)
🞂Refers to non-natural (man-made) products used in the
further production of goods and services.
🞂Examples include machinery, tools, equipment and
vehicles
Characteristics of Capital
🞂Man-made
🞂Scarce
🞂Geographically mobile
🞂Some type of capital are occupationally mobile

🞂The reward for capital is interest.

Enterprise (or entrepreneurship)
🞂Refers to the skills, creativity and risk-taking ability
that a businessperson requires to successfully combine
and manage the other three factors of production.

🞂The reward for entrepreneurship is profit.

ACTIVITY 1.2
🞂Discuss the resources (factors of production) required
to deliver an IB economics lesson.
The basic economic problem
🞂Central to the study of economics is the concept and
problem of scarcity.
🞂This is where our resources, relative to our needs and
wants, are limited in supply.
🞂Economics enables us to solve this problem through
choice.
🞂Decisions are made as to how to best allocate scarce
economic resources in order to satisfy
people’s infinite needs and wants.
🞂Choice results in opportunity cost i.e. the next best
alternative foregone when a choice or decision is made.
It is the real cost or true cost, and not monetary cost,
of a decision.
ACTIVITY 1.3

🞂Make a list of 10 scarce resources in the world.

Compare your list with that of a partner to see how
many similarities and differences you have.
Needs versus wants
🞂They are goods and services that are essential for
survival; for example, nutritional food, clean water,
shelter (housing), protection (safety),clothing, and
access to healthcare and education
🞂Wants are goods and services that are not deemed to
be necessary for survival but are human desires, that is,
things we would like to have.
🞂Examples of wants are …………………………
ACTIVITY 1.4
🞂1 Make a list of your top 10 wants and needs.
🞂2 Are there any ‘needs’ that you could actually survive
without?
🞂3 Are there any wants that might be considered as
needs?
🞂4 Identify a shortage of any good or service in your
economy. Explain why the shortage has occurred.
Free goods versus economic goods
🞂Free goods are products that are unlimited in supply
and do not require any deliberate effort to obtain them.
Unlike economic goods, there is zero (no) opportunity
cost of free goods in terms of their output.
🞂Examples include air, desert sand, seawater, airwaves,
rainwater, sunlight.

🞂Question: Under what circumstances is air not a free

good?
Economic goods
🞂These are goods that are limited in supply (scarce) and
can only be obtained at a cost. The decision to obtain
economic goods gives rise to opportunity cost.

🞂Give examples of economic goods.

Opportunity cost
🞂It refers to costs of an economic decision measured in
terms of the next best alternative choice foregone, that
is, it is the economic cost of choice.
🞂It is also known as true cost or real cost, and not
monetary cost, of a decision or choice.
Examples of opportunity cost
🞂The OC of choosing to study IB economics is another
Group 3 subject you could be studying instead.
🞂The OC of spending more money on national defence
is using the same funds for other government priorities
such as public housing for low-income families.
🞂The OC of going to university to earn a degree is the
loss of income during that time if the student chose to
work instead.
🞂OC affects individuals, firms and governments.
🞂One must always make the choice that gives the least
opportunity cost.
Illustration on opportunity cost
🞂Suppose you have $10 to spend on an endless list of
items. Your scale of preference for the first 6 items is
given below:
🞂A pair of shoes @ $10
🞂Wrist watch @ $5
🞂2 shirts @ $3
🞂2 trousers @ $4
🞂10 sessions of horse riding @$5
🞂7 days of piano lessons @$5

Question: What is the opportunity cost of choosing to

buy the pair of shoes?
Answer: The OC of shoes is wrist watch, 2 shirts and a
pair of trousers.
ACTIVITY 1.5
🞂 Make a list of the goods and services provided by the public
sector in your economy or a country of your choice.
🞂 2 Identify the goods and services that are free to individuals
and those for which you have to pay.
🞂 3 List which products could be provided by a private sector
firm as well as by the public (government) sector.
🞂 4 Compare and contrast the aims and objectives of a
government-funded swimming pool and a private health and
leisure club.
WORKED EXAMPLE
🞂Suppose a firm can produce either 5,000 units of X
plus 4,000 units of Y or 6,000 units of X plus 3,000
units of Y. Explain the opportunity cost of producing
the extra 1,000 units of X. [2 marks]

🞂Solution
🞂The firm gains 1,000 units of X (from 5,000 to 6,000)
at the opportunity cost of 1,000 units of Y (from 4,000
to 3,000).
EXAM PRACTICE QUESTION
1.1
🞂Consider the table below, which shows the maximum
combination of consumer and producer goods in an
economy:
🞂Consumer goods Producer goods
100 units & 50 units
80 units & 60 units

🞂Calculate the opportunity cost of one unit of producer

goods in terms of units of consumer goods.
[2 marks]
EXAM PRACTICE QUESTION
1.2
🞂A farmer has land on which carrots and corn are grown.
The production possibilities are shown in the table
below:
🞂Calculate the farmer’s opportunity cost of producing 1
kilogram of carrots in terms of kilograms of corn.
[2 marks]
Carrots (’000 kg) Corn (’000 kg)
2 4
6 10

10 16
14 20
The basic economic questions
🞂What ( and how much) to produce? i.e. which type of
goods and what quantities should society produce at a
give time?
🞂How to produce? i.e. which method and process of
production should be used: capital-intensive or labour-
intensive
🞂For whom to produce? This question is about which
economic agents are to use the goods and services.
ACTIVITY 1.6
🞂Discuss how a private firm that produces running shoes
(sneakers) would answer the three basic economic
questions: What to produce? How to produce? For
whom to produce?
Means of answering the economic
questions
🞂 Market versus government intervention

🞂 Market
🞂 Free market economy: Decision regarding the economic
questions is taken by the private sector. i.e. the forces of
demand and supply (individuals and firms), allocates
resources.

🞂 Government intervention
🞂 Planned economy: Decision regarding the economic
questions is taken by the government. i.e. government
allocates scarce resources, e.g. North Korea, Venezuela,
Cuba.`
Mixed economy
🞂It is a combination of the planned and market economic
system, with some resources being owned and
controlled by private individuals and firms while others
are owned and controlled by the government in the
public sector.
🞂e.g. Belgium, France, Italy, Spain, Mexico, Ghana,
Nigeria, etc.
Table 1.1 The world’s ‘freest’ economies,
2019
🞂 Ranking Economy
🞂1 Hong Kong, SAR
🞂2 Singapore
🞂3 New Zealand
🞂4 Switzerland
🞂5 Australia
🞂6 Ireland
🞂7 United Kingdom
🞂8 Canada
🞂9 United Arab Emirates
🞂 10 Taiwan

🞂 Source: The Heritage Foundation,

https://www.heritage.org/index/ranking
The production possibilities curve model
(PPC)
🞂It is a diagrammatic representation of the maximum
combination of two products (goods and services) that
an economy can produce, when all its resources are
used efficiently, per time period.
🞂Assumptions of the model
🞂- Two goods or services are produced
🞂- Full employment of factors of production
🞂-Efficiency
🞂-Technology is constant
🞂-Production occurs in a given time period.
The production possibilities curve model
(PPC)
Increasing versus constant opportunity
cost
🞂Increasing opportunity cost: The PPC curve is concave
(i.e. bows away from the origin). This is due to
imperfect factor substitution of factors of production.

🞂Constant opportunity cost: The PPC curve is linear (i.e.

a straight line). This is perfect substitution of factors of
production.
Features of the model
🞂 Opportunity cost
🞂 Scarcity
🞂 Choice
🞂 Unemployment of resources,
🞂 Efficiency
🞂 Actual growth
🞂 Potential growth (i.e. growth in production possibilities)

🞂 NB: Use a PPC diagram to illustrate this concepts.

Shifts of the PPC on both axes
🞂Outward Shift of PPC: Causes
🞂Increase in the quantity and/or quality of factors of
production such as:
🞂Technological improvement
🞂Discovery of natural resources
🞂Increase in population leading to increase in labour
force.
🞂 Improvement in quality of education leading to more
skilled labour.
🞂Increase in savings leading to increased capital and
investment.
Inward Shift of PPC: Causes
🞂Decrease in the quantity and/or quality of factors of
production such as:
🞂Decline in technological efficiency
🞂Depletion of natural resources
🞂Decrease in population leading to decrease in labour
force, due to natural disasters, wars.
🞂 Decline in quality of education leading to less skilled
labour.
🞂Declining savings leading to less capital and
investment.
EXAM PRACTICE QUESTION
1.3
🞂 Low-lying areas of Bangladesh are prone to flooding each year.
Crops are lost and thousands of people lose their homes. During
times of severe flooding, roads and railways are damaged and
farmers find it impossible to transport their dwindled crops to
market.

🞂 a Draw a relevant PPC diagram and explain the impact of

flooding on the productive capacity of Bangladesh.
[4 marks]
🞂 b On the diagram, draw and label a point where some of the
factors of production will be idle. [1 mark]
🞂 c On the diagram, draw and label a point that is unattainable.
] [1 mark]
Modelling the economy
🞂A model is a simplified representation of a real world
situation.

🞂The circular flow of income model

🞂It is a model of the economy which shows the flows of
goods, services and factors and their payments around
the economy.
Two-sector circular flow of income
model (closed economy without
Government)
The open economy (four-sector) model
🞂The model shows the interdependence between
economic decision-makers interacting and making
choices in an economy: households, firms, the
government, the banks and financial sector, and the
foreign sector (foreign firms and households)

🞂The model shows the Leakages and injections in the

open economy.
🞂Injections (J) are: I, G, X
🞂Leakages/withdrawals (W) are: S, T, M
The open economy (four-sector) model
The open economy (four-sector) model
1.2 How do economists approach the
world?
🞂Economic methodology
🞂It refers to the study of the processes, practices and
principles in relation to the discipline of economics as a
social science.
🞂It includes the models, theories and assumptions
underlying economic reasoning. It deals with what is
and what is not economics.
Economic methodology

🞂Economic methodology is concerned with three key

aspects:
🞂how economics functions
🞂how it could function, and
🞂how it should function.

🞂This section of the syllabus considers two main

dimensions of how economists approach the world:
Economic methodology in terms of:
🞂The role of positive (objective) economics, and

🞂The role of normative (subjective) economics.

The role of positive economics
🞂It is the study of economics that is provable, that is,
factual statements about the economy or statements of
‘what is’ rather than ‘what ought to be’.
🞂Examples of positive economic statements:
🞂Scarcity is the foundation of the basic economic
problem.
🞂Customers will buy more of a product if the price is
reduced.
🞂Globalization creates more winners than losers.
Positive economics uses:
🞂Logic
🞂Hypotheses, models, theories
🞂The ceteris paribus assumption
🞂Empirical evidence
🞂Refutation

🞂These shall be looked at in detail.

The use of logic
🞂Logic refers to rationality and reasoning, rather than
emotions or beliefs, in explaining economic
phenomena and policymaking.
🞂Logic involves presenting and analyzing facts and data
as they are, in an objective, and often measurable, way.
🞂e.g. the following logical sequence of events is likely to
take place:
🞂Bad weather higher cost of tomatoes
less supply of ketchup higher price of
ketchup less quantity of ketchup demanded
The use of hypotheses, models and
theories
🞂A hypothesis is an assumption, notion or educated
guess made before research has been conducted.
🞂Two examples of hypotheses are:
🞂‘The introduction of a national minimum wage will
improve the economy’ OR as a question
…………………………?
🞂‘Men, on average, are paid more than women’ OR as a
question ………………………..?
Model & Theory
🞂A model is a hypothesis that has been repeatedly tested
and proven or rejected and can be used to explain the
real world.

🞂A theory is a broad generalization used to explain

situations or scenarios already supported by economic
evidence and data from economic models.
The ceteris paribus assumption
🞂Ceteris paribus is a Latin phrase meaning ‘all other
factors remaining constant’ or ‘all else unchanged’.
🞂It is used by economists to explain cause and effects of
economic variables.
🞂For example, ceteris paribus, firms will increase the
supply of flowers if the price of flowers rises.
Empirical evidence
🞂Empirical evidence refers to first-hand data and
information acquired by observation or
experimentation of certain behaviours and patterns.
🞂A positive economic statement (such as ‘an increase in
the price of a product causes an increase in the quantity
demanded’) can be accepted or rejected based on
empirical evidence.
Refutation
🞂 Refutation is the act of a statement or theory being proved
to be wrong or false by the empirical evidence.
🞂 An economic statement is considered to be false if it is
refuted (rejected) by the empirical evidence.
🞂 For example, economic theory suggests that more people
will reduce savings and increase consumption if interest
rates fall, however Japan used a zero interest rate policy
(ZIRP) for more than 20 years, had a minimal impact on the
economy.
The role of normative economics
🞂Normative economics considers people’s varying
opinions and beliefs about what should be (or what
ought to be). Such claims are subjective and expressed
as value judgements.
🞂Normative economic statements cannot be verified or
refuted by referring to facts, evidence or further
investigation.
🞂Examples of normative statements include:
🞂The government should impose higher income taxes on
wealthier people.
🞂Society ought to ensure housing is provided for
everyone.
Value judgements in policymaking
🞂Value judgements are the beliefs of individuals and
societies about what is right or wrong, or good or bad.
🞂These judgements are often influenced by morals,
ethics, and cultural values and beliefs.
🞂For example:
🞂On average, men should be paid more than women.
🞂It is wrong to have any form of discrimination when
hiring and promoting people in the workplace.
The meaning of equity and equality
🞂Equity is the concept concerned with economic
fairness in the distribution of resources.
🞂Equity, although subjective to some extent justifies the
use of the price mechanism to rationalize the allocation
of scarce resources.
🞂For example, doctors are paid more than junior nurses
owing to the relatively higher demand and lower
supply of doctors.
🞂Equality is the concept concerned with everyone being
equal and should have equal recognition. It is about
social fairness and collectivism.
Economic thought
🞂Economic thought refers to a historical account of the
different economic ideas, beliefs and principles.

🞂Origin of economic ideas in a historical context

Eighteenth century

🞂Adam Smith (1723–90) was widely credited as the

Father of Economics.
🞂In The Wealth of Nations, Smith laid the foundations of
free market (or laissez-faire) economics.
🞂He believed in a laissez faire approach to economics,
which refers to the policy of leaving things to their own
devices, without government interference.
🞂His metaphor of “invisible hand” describes how the
forces of demand and supply (price mechanism)
determine the prices of goods and services.
Nineteenth century
🞂 Classical microeconomics:
🞂 Classical economic theory focused on the self-regulation of
market forces to allocate resources in an efficient way.
🞂 Example of Classical microeconomics is the utility theory
developed by Alfred Marshall (1842–1924).
🞂 Utility refers to the level of consumer satisfaction from the
consumption or use of a product.
🞂 A product has utility if it provides the consumer with
satisfying use and/or enjoyment (happiness or usefulness).
🞂 Utility maximization is the most important factor in
determining the demand for a good or service.
Classical macroeconomics (Say’s Law)
🞂Jean-Baptiste Say (1767–1832) was a French classical
economist
🞂Say’s law states that the ability to purchase a product
depends on the ability to produce or supply, thereby
generating income.

🞂Essentially, this means that supply can create its own

demand.
Twentieth century
Keynesian revolution
🞂Following the Great Depression of 1929–39, the worst
economic downturn in history British economist John
Maynard Keynes (1883–1946):
🞂 Advocated the use of interventionist macroeconomic
policies to pull the world’s economies out of a global
depression.
🞂This would be achieved by a combination of increasing
government expenditure and lowering taxes in order to
stimulate aggregate demand in the economy
Monetarists & new classical counter
revolution
🞂Monetarists, led by Milton Friedman (1912–2006),
believe that monetary policy is a the most powerful and
effective macroeconomic stabilization policy to
influence the overall level of economic activity.
🞂The new classical counter revolution (NCCR)
favoured supply-side macroeconomic policies over
interventionist arguments, such as privatization of
state-owned enterprises and deregulation of markets.
🞂Their argument is based on the example of the Asian
Tigers’ (Singapore, Hong Kong, South Korea and
Taiwan) export-led growth.
Twenty-first century
🞂 Increasing dialogue with other disciplines such as
psychology , marketing and the growing role of
behavioural economics.
🞂 Richard Thaler, a pioneer of behavioural economics, called
this ‘economics done with strong injections of good
psychology’.
🞂 Increasing awareness of interdependencies existing between
the economy, society and environment and the need to
appreciate the compelling reasons for moving toward a
circular economy where raw materials, components
🞂 and other resources are used sustainably to generate output.