1.

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WHAT IS
ECONOMICS?
Syed Radib
Senior Teacher, Economics
IBDP & WACE, AusIS
 The social sciences are academic disciplines that
study human society and social relationships. They
are concerned with discovering general principles
describing how societies function and are
organised. The social sciences include
anthropology, economics, political science,
psychology, sociology and others.

Economics is a social science because it deals with

human society and behaviour, and particularly
THE SOCIAL NATURE those aspects concerned with how people
OF ECONOMICS organise their activities and how they behave to
satisfy their needs and wants. It is a social science
because its approach to studying human society is
based on the social scientific method.
THE BASIS OF THE STUDY OF ECONOMICS

Microeconomics examines the behaviour of individual

decision making units in the economy. The two main groups of
decision-makers we study are consumers (or households) and
firms (or businesses). Microeconomics is concerned with how
these decision-makers behave, how they make choices and
how their interactions in markets determine prices.

Macroeconomics examines the economy as a whole, to

obtain a broad or overall picture, by use of aggregates, which
are wholes or collections of many individual units, such as the
sum of consumer behaviours and the sum of firm behaviours,
and total income and output of the entire economy, as well as
total employment and the general price level.
 Scarcity

Choice

Efficiency

Equity

Economic well-being

Sustainability

Change

Interdependence
I N T RO D U C T I O N TO T H E N I N E
CENTRAL CONCEPTS Intervention
• Scarcity is the situation in which available resources, or
factors of production, are finite, whereas wants are infinite.
There are not enough resources to produce everything that
human beings need and want.
• Economics is the study of choices leading to the best
possible use of scarce resources in order to best satisfy
THE
unlimited human needs and wants. PROBLEM
• The central problems of economics are scarcity and choice. OF
This forces societies to face trade-offs, opportunity costs
and the challenge of sustainability.
CHOICE
FAC TO R S O F
PRODUCTION

• Production of any good or service requires resources. These are divided into four
categories, known as the factors of production:

• Land refers to the natural resources required in the production process (such as
oil, coal, water, wood, metal ores and agricultural products).

• Labour refers to the human resources required in the production process (such
as skilled and unskilled labour).

• Capital refers to the manufactured resources required in the production process

(such as machinery, tools, equipment and vehicles).

• Enterprise refers to the skills a businessperson requires to combine and manage

successfully the other three factors of production and the ability to undertake
risk.

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OPPORTUNITY
COST
• Opportunity cost is the cost measured in terms of the next best
choice given up when making a decision.
• Every choice made has an opportunity cost because in most cases
there is an alternative.
• For examples, the opportunity cost of building an additional
airport terminal is the public housing for low-income families that
the same government funds could have been used for.
• An economic good is one that is limited in supply, such as oil,
wheat, cotton, housing and cars.
• Free goods are unlimited in supply, such as the air, sea, rainwater,
sunlight and public domain web pages.

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THE THREE BASIC ECONOMIC
QUESTIONS

What to produce: determined by what the consumer prefers. Consumers

tell producers what they prefer by demanding goods and using their
‘spending votes’.

How to produce it: producers seek profits and aim to minimize production
costs

For whom to produce it: whoever has the greatest purchasing power in the
economy, and is therefore able to buy the good

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MARKET VS. GOVERNMENT
INTERVENTION

• Countries around the world differ enormously in the ways they make allocation
and distribution decisions.
• There are two main methods that can be used to make these choices: the market
method and the command method.
• In the market method, resources are owned by private individuals or groups of
individuals, and it is mainly consumers and firms (or businesses) who make
economic decisions by responding to prices that are determined in markets.
• In the command method, resources (land and capital in particular) are owned by
the government, which makes economic decisions by commands. In practice,
commands involve legislation and regulations by the government, or in general
any kind of government decision-making that affects the economy.
• Economies that are based strongly on markets but also have some command
methods are called mixed market economies. In mixed market economies, the
command methods of making allocation and distribution decisions are referred
to as government intervention, because the government intervenes (or interferes)
in the workings of markets.

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 The production possibilities curve (or frontier) represents all
combinations of the maximum amounts of two goods that
can be produced by an economy, given its resources and
technology, when there is full employment of resources and
productive efficiency. All points on the curve known as
production possibilities.

PRODUCTION
POSSIBILITIES
CURVES Assumptions of the model:1.All resources must be fully
employed. 2. All resources must be used efficiently.
(PPCS)

PPF curves can show the opportunity cost of using the scarce
resources. For example, if the scare resource is milk, there is a
trade-off between producing more cheese or more yoghurt
from the milk.

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• This PPF shows the opportunity cost of producing
each product. Producing 100 units of cheese means
that only 40 units of yoghurt can be produced
instead of the potential of 90.
• Therefore, the opportunity cost is 90 - 40 = 50 units
of yoghurt.

PRODUCTION POSSIBILITIES
CURVES (PPCS)
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PRODUCTION
POSSIBILITIES
CURVES (PPCS)
• Producing at points A, B, C and D are the most efficient
combinations of output on the PPF. Producing at B
means more oven than computer is produced, incurs
an opportunity cost of producing more computer.
• Producing at F is inefficient, and resources are not used
to their full productive potential. There is the potential
to use these resources more efficiently, which would
shift production closer to the curve. In other words,
there is the unemployment of economic resources.
• Producing at G is not yet attainable with the current
resources.

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PRODUCTION
POSSIBILITIES
CURVES (PPCS)
• Economic growth and decline:

• The PPF can also depict economic growth or decline. Only

production under and on the PPF is attainable. Production
outside of the PPF is not obtainable. However, only production
on the PPF uses resources efficiently (A and B). It is inefficient to
produce below the PPF (point C).

• Economic growth can be shown by an outward shift in the PPF,

from the curve with point A on it, to the curve with point B on it.
A decline in the economy would be depicted by an inward shift.

• The original curve is drawn assuming:

• A fixed amount of resources are used
• There is a constant state of technology

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 An increase in the quantity or quality of resources shifts
Production
u
the PPF curve outwards, so the productive potential of
the economy increases, and there is economic

possibilities growth. This can be achieved with the use of supply

side policies.
Moving along the PPF is different to shifting the PPF.
curves
u
Moving along the PPF uses the same number and state
of resources and shifts production from fewer

(PPCs)
consumer goods to more capital goods, for instance.
This incurs an opportunity cost.
u Shifting the PPF curve outwards, for example, uses
either more resources or resources of a greater quality.
This reduces the opportunity cost of producing either
capital or consumer goods, since more goods can be
produced overall.
The circular flow of
income model
– The circular flow of income model
illustrates several concepts and
relationships that will help us understand
the macroeconomy
– It is assumed that the only decision-
makers are households (or consumers)
and firms (or businesses);
– The model illustrates a closed economy,
meaning it has no links with other
countries (it is ‘closed’ to international
trade), and is also a model of an
economy with no government.
 – In the counterclockwise direction, there is a flow of money used as payment in
sales and purchases.
– When households sell their factors of production to firms, they receive
payments taking the form of rent (for land), wages (for labour), interest (for
capital) and profit (for entrepreneurship).
– These payments are the income of households. The payments that households
make to buy goods and services are household expenditures (or consumer
The circular spending)
– The circular flow of income shows that in any given time period (say a year),
flow of income the value of output produced in an economy is equal to the total income
generated in producing that output, which is equal to the expenditures made
model to purchase that output.
Leakages and
injections
– Figure shows the circular flow
of income model with the four
sectors households, firms, the
foreign sector, and the
government sector taking in to
account the leakages and
injections.
Saving and investment
– Saving is the part of consumer income that is not spent but is saved.
– Investment is spending by firms for the production of capital goods, which is one of the four factors of production

Taxes and government spending

– Taxes and government spending are connected to each other through the government.
– Households pay taxes to the government; this is a leakage because it is income that is not spent to buy goods and
services.
– The government uses the tax funds to finance government expenditures (on education, health, defence, etc.) and this
spending is an injection back into the expenditure flow.

Imports and exports

– Imports are goods and services produced in other countries and purchased by domestic buyers.
– Exports are goods and services produced domestically and purchased by foreigners.
– When an economy has international trade through imports and exports, it is known as an open economy.

Leakages and injections

 – Leakages from the circular flow of income (saving, taxes
and imports) are matched by injections into the circular
The size of flow of income (investment, government spending and
exports), though these need not be equal.
the circular – If injections are smaller than leakages, the income flow
flow becomes smaller;
– If injections are larger than leakages the income flow
becomes larger.
 References
ECONOMICS FOR THE IB IB DIPLOMA PROGRAMME,
DIPLOMA SECOND EDITION ECONOMICS GUIDE
BY ELLIE TRAGAKES