Unit 1

Introduction to
Economics
IBDP Economics Year 1
Fangping Bian, SIPFLS, 2020
CONTENTS
1.1
What is economics?
• Economics as a social science
1.2 How do economists
approach the world?
• The problem of choice • Economic methodology: positive
• The production possibilities curve and normative economics
(PPC) model • Economic thought in the history
• The circular fl ow of income model
 1.
What is
1
economics?
1.1 What is Economics? Economics as a social
science

We are studying economics at a time of enormous

change.
Some of the change is for the better—the AI age
and all the benefits that it brings.
Some of the change is for the worse—terrorism
and recession send shockwaves through our
lives.
Learning economics will help us to understand the
powerful forces that are shaping and changing our
world.
Economics is regarded as a social science because it uses
scientific methods to build theories that can help explain the
behaviour of individuals, businesses, governments, and
societies.
1.1 What is Economics? Economics as a social
science

All economic questions arise because we want more than

we can get.
Our inability to satisfy all our wants is called scarcity.
Because we face scarcity, we must make choices.
The choices we make depend on the incentives we face.
An incentive is a reward that encourages or a penalty that
discourages an action.

Economics is the social science that studies the choices

that individuals, businesses, governments, and societies
make as they cope with scarcity and the incentives that
influence and reconcile those choices.
1.1 What is Economics? Economics as a social
science

Microeconomics Macroeconomics
Study of small economic units such as Study of the large economy as a whole
individuals, firms, and industries. or in its basic subdivisions

• Individual markets • National markets

• the behavior of firms and consumers • Total output and income of nations
• the allocation of resources • Total supply and demand of the nation
• Supply and demand • Taxes and government spending
• The efficiency of markets • Interest rates and central banks
• Product markets • Unemployment and inflation
• Supply and Demand • Income distribution
• Profit maximization • Economics growth and development
• Utility maximization • International trade
• Competition
• Resource markets
• Market failure
1.1 What is Economics? Economics as a social
science

In IBDP Economics course:

1.1 What is Economics? Economics as a social
science
1.1 What is Economics? The problem of choice

Factors of production
All raw materials that are used in the prodcuction of goods and
Land
services, also known as natural capital.

The work done by humans that is used in the production of

Labor
goods and services, also known as human capita.

The factor of production that is made by humans and is used to

Capital
produce goods and services. also known as physical capital.

Entrepreneur- The efforts of entrepreneurs in organizing resources for

ship production, taking risks to create new enterprises, and
innovating to develop new products and production processes.
1.1 What is Economics? The problem of choice

Scarcity
Why is a diamond more expensive than a bottle of water?
• Because they have different levels of scarcity.
• The more scarce an item, the more valueable it is in society!
Wants

What makes something scarce?

• Unlimited human needs and wants to be met by limited
resources.
• Scarcity araises when something is both limited in quantity
yet desired.
Needs
1.1 What is Economics? The problem of choice

Scarcity
Some facts about scarcity ：
• Not all goods are scarce, but most are
• Some goods that humans consume are infinite, such as air
• Organize the following words under the correct category: Scarce or Not Scarce

Scarce (limited and desired) Not Scarce (not limited OR not desired)

factory workers Computers

Teachers Doctors
Apartments in Dirt
Zurich
Oxygen Happiness Creativity
Football players
Nitrogen Love
Murderers Mosquitos
HIV Clouds
British Pounds Air
Forests
1.1 What is Economics? The problem of choice

Opportunity Cost
The central problems of economics are scarcity and choice. This forces societies to face
trade-offs, opportunity costs and the challenge of sustainability.
• You can think about every choice as a trade-off—an exchange—giving up one thing
to get something else.
• Every economic trade-off / choice comes with an opportunity cost.
• An opportunity cost is the value of the second best choice that you must forgone
(give up) when you make a particular choice.
Free good: A good with no scarcity / unlimited supply, thus involve no opportunity cost.
E.g., air and sunshine.
Economic good: A good which is scarce and therefore has an opportunity cost.
E.g., all goods you can buy, public goods (like street light)
1.1 What is Economics? The basic economic
questions
1.1 What is Economics? The basic economic
questions
Three Basic Economic
Questions
The basic economic problem is how to allocate those limited, scarce resources between the
unlimited wants of man.
Every society must answer:
The Three Basic Economic Questions
1. What goods and services should be produced?
2. How should these goods and services be
produced?
3. Who consumes these goods and services?
Means of answering the economic questions:
• Market versus government intervention
• Economic systems: free market economy, planned economy and mixed economy
1.1 What is Economics? Answering the economic
questions
How the free market regulates itself?
Example: the smart phone market
If consumers want smart phones and only one company is making
them…
Other businesses have the INCENTIVE to start making smart phones
to earn PROFIT.
This leads to more COMPETITION….
which means lower prices, better quality, and more product variety.
We produce the goods and services that society wants because
“resources (capitals) follow profits”.

The End Result:

Most efficient production of the goods that consumers want,
produced at the lowest prices and the highest quality.
1.1 What is Economics? Answering the economic
questions
How a government intervene the market?
Example: the search engine market
If consumers want search engines and one company tends to occupy the whole market…
This company may violate the antitrust law (a law to ensure fair competition) legislated by a
government.
For example, in 2018:

Government intervene the markts because free market may fail to achieve certain societal goals,
such as equity, economic well-being, or sustainability.
1.1 What is Economics? Economic systems

Debate:
Which economic system is better,
free market economy or planned
economy?
1.1 What is Economics? Economic systems

Free Market Economy • Little government involvement

(Laissez Faire = Let it be)
In a free market economy: all decisions
• Individuals OWN resources and answer
are taken by private sector organizations
the three economic questions.
and individuals. (a.k.a., Capitalism)
• The PROFIT gives INCENTIVE to produce
Examples: US, Canada, UK, HK (CN) quality products efficiently.

Advantages: Disadvantages:
1. A wide variety of products 1. Firms will only produce if profitable
2. Firms will respond quickly to changes 2. Firms will only provide products to
in consumer wants & spending patterns consumers who are able
3. The profit encourages firms to develop 3. Harmful goods if profitable
new products / produce more efficiently 4. Some firms may dominate the market
4. No taxes of a particular good or service
1.1 What is Economics? Economic systems

Planned Economy Examples: former Soviet Union, Cuba,

North Korea
In planned or command economy: public
sector organizations (the government) • Lots of organizations owned, controlled
1. own all the resources; and accountable to the government.
2. decide the 3 basic economic questions. • Very few private sector businesses.
(a.k.a., Communism) → Problem: low incentives!!

Advantages: Disadvantages:
1. Low unemployment-everyone has a job 1. No incentive to work harder
2. Great job security-the government 2. No Competition keeps quality of
doesn't go out of business goods poor
3. Equal incomes means no extremely 3. Corrupt leaders
poor people 4. Few individual freedoms
4. Free Health Care
1.1 What is Economics? Economic systems

Mixed Economy
In a mixed economy, the private sector and
public sector own scarce resources and decide
how to use them together
• In reality: NO totally free market or planned
economies
• All economies are mixed to some degree

Examples:
Iceland, Slovakia, Romania — large public sector
controls significant resources
USA, HK (CN), Philippines — large private sector,
https://fortune.com/fortune500/
the role for government is relatively small.
1.1 What is Economics? PPC

Production Possibilities Curve (PPC)

Assumptions: Applications in the IB
• The economy produces only two goods. Economics:
• The resources and state of technology are fixed. Unit 3 Macroeconomics
• All the resources in the economy are fully employed. - economic growth & development
Unit 4 Global Economics
Definition: - international trade
The production possibilities curve (or frontier) represents all combinations of the maximum
amounts of two goods that can be produced by an economy in a given time period, if all the
resources in the economy are being used efficiently and the state of technology is fixed.

Examples: PPC can demonstrate the trade-offs between

• capital goods vs. consumer goods
• military goods vs. civilian goods (e.g., guns vs. butter)
• Agricultural products vs. manufactural goods
1.1 What is Economics? PPC

Production Possibilities Curve (PPC)

The PPC shows the potential output of an economy in a
particular time.

Points on the PPC:

Possible and efficient in production (productively efficient)
• Possible because there are enough resources to produce
these combinations of output.
• Efficient because all available resources are fully used
without wastes.

Movements between points along the same PPC (e.g., from A to B) show different choices of
production. The choice is should be made according to the desire of a society.
All the points on a PPC are equally efficient in production. Whereas they may have different
extent of allocative efficiency.
1.1 What is Economics? PPC

Production Possibilities Curve (PPC)

An economy’s actual output, or the quantity of output
actually produced, is always at a point inside the PPC.
• Because in the real world all economies have some
unemployment of resources and some productive
inefficiency. (e.g., natural umemployment of labor)

Points inside the PPC:

Possible but inefficient in production (productively
inefficient)
• Inefficient because all available resources are NOT fully
used without wastes.
Are the points outside
Points outside the PPC: Impossible (unattainable) the PPC always
• Because the resources in this economy is not sufficient to unattainable?
produce these combinations of output in a particular time.
1.1 What is Economics? PPC

Production Possibilities Curve (PPC)

Two factors that can shifts PPC:
1. changes in the amount of resources in the economy
2. changes in state of technology and productivity.

Economic growth: an outward shift of the PPC

Economic recession: an inward shift of the PPC
Economic devolopment: a movement along the PPC

Common Mistake
Unemployment does NOT shift the PPC!
If unemployment exists, then the economy is operating inside
the curve. A decline in unemployment would move the economy
to a point closer to or onto the curve.
1.1 What is Economics? PPC

Production Possibilities Curve (PPC)

Activity 1. Can you draw the PPCs for butter and guns.

Activity 2. Can you calculate the opportunity cost of producing a gun at each
point. What is lost
Per Unit Oppertunity Cost 
What is gained
1.1 What is Economics? PPC

Production Possibilities Curve (PPC)

Shapes of PPC:
• The PPC is straight if the opportunity costs between two
products are a constant.

• The PPC is concave if the opportunity costs between two

products are NOT a constant.

 A concave PPC exists because of the law of increasing

opportunity cost.

The ultimate reason is that some resources are more

productive at the production of one good than another.
1.1 What is Economics? PPC

Production Possibilities Curve (PPC)

Exercise
Paper 1 Question
(a) Explain, using a production possibilities curve (PPC) diagram, an increase in the actual
output of an economy.
1.1 What is Economics? Modelling the economy

Tools of Economic Analysis

Theories are used to explain observed phenomena
in terms of a set of basic rules and assumptions.

Economic models provide simplified

representations of reality such as graphs or
equations.
Also have some simplified assumptions.
• They tell you what will happen if a policy is changed,
but they don’t tell you whether or not that result is
good.
• Two economists can legitimately disagree about which
simplifications are appropriate — and therefore arrive
at different conclusions.
1.1 What is Economics? Modelling the economy

The Circular Flow of

Income
1.1 What is Economics? Modelling the economy

The Circular
Flow of Income
Model
To be specified in Unit 3
 1.
How do economists
approach2
the world?
 Economic
1.2 How do economists approach the world?Methodology

Positive Economics Normative Economics

Positive economics are statements based Normative economics are statements based
on facts or evidence, free from subjectivity. on norms, thus based on subjective
They can be tested scientifically and proved. evaluation.
They cannot be proved or disproved scientifically.

Examples
• If the government increases spending, Examples
unemployment will fall • Extreme poverty should be eradicated
• Brazil's inflation rate in 2016 was 9% • Health care should be provided free for
everyone
 Economic
1.2 How do economists approach the world?Methodology
Positive Economics Normative Economics
• The use of logic • Value judgments in policy making
• The use of hypotheses, models, theories • Concepts: Equity versus equality
• The ceteris paribus (all other things equal)  Equality: equal opportunity and the same levels
assumption of support for all segments of society.
 Equity goes a step further and refers offering
• Empirical evidence
varying levels of support depending upon need
• Refutation
to achieve greater fairness of outcomes.
 Economic
1.2 How do economists approach the world? Thoughts

Presentation - Economic Thoughts in the History

18th century: Adam Smith and laissez faire √
19th century: Classical microeconomics (utility)
The concept of the margin
Classical macroeconomics (Say’s law)
Marxist critique of classical economic thought
20th century: Keynesian revolution
Rise of macroeconomic policy
Monetarist/new classical counter revolution
21st century: Increasing dialogue with other disciplines such as psychology and the growing role of
behavioural economics;
Increasing awareness of the interdependencies that exist between the economy,
society and environment and the need to appreciate the compelling reasons for
moving toward a circular economy.
THANKS