IBDP Economics

Enko Bonanjo
UNIT 1: INTRODUCTION TO ECONOMICS

Summary
 Economics as a social science
 Scarcity
 Choice and opportunity cost
 Central theme.
Economics as a social science
• Why do we describe economics as a social science?

In economics, scientific methods are used to study how human beings allocate
their scarce resources to satisfy their competing wants and needs.

Economists also seek to develop systems that achieve certain objectives

including
 Growth in human standard of living over time
 Sustainable development
 Employment and stability.
 The scientific method has the following steps

Step 1 Step 2 Step 3 Step 4 Step 5

Make observations
Identify Make a
of the world
variables we hypothesis
around us and
think are about how the Make Test the
select an
important to variables are assumptions. hypothesis
economic question
answer the related to each
we want to
question other.
answer.

Example:
1. Observe how bread is demanded in Douala per week. The question will be “why is more of bread bought in
some weeks and fewer in others?”
2. Variables are any measures that can take values. The variables here will be the quantity of bread bought
and the price.
3. A hypothesis is a guess or prediction that indicates a cause effect relationship. It takes the form “if….,
then….” Eg if the price of bread increases, then the quantity of bread bought in Douala will fall.
4. An assumption is a statement we supposed is true for the purpose of building our hypotheses. Eg we
assume that the price of bread is the only variable that influences the quantity of bread bought in Douala
while all other variables that could influence people's buying choice do not play a role.
5. We gather data and use data analysis tools to compare the predictions with the actual information in real
world then conclusions are made.
 Microeconomics vs Macroeconomics

MICROECONOMICS MACROECONOMICS

Studies the behavior of

vs
Macroeconomics studies the
individuals within an
total effect on a nation’s
economy including
people of all the economic
consumers and producers
activities within the nation.
in the market for a
particular good.
Some main concerns are:
 Total output of a nation
 The average price level of a
Example of microeconomic
nation
topics:  The level of employment in
 The allocation of land
a country etc
and labor
 The behavior of firms.
 The demand and supply
of cement in Nigeria.
etc
 THE FUNDAMENTAL CONCEPTS OF ECONOMICS

Economics is about the allocation of scarce resources between society’s

Scarcity various needs and wants.

Resources refer to the factors of production which include land, labor,

Resources capital and entrepreneur.

Individuals and societies as a whole are constantly making choices

Tradeoffs involving tradeoffs between alternatives. There is always a situation
where as on thing increase another one must decrease.

“The opportunity cost is the opportunity lost.” in other words, every

Opportunity cost economic decision involves giving up something .

NB: these concepts are fully used both in microeconomics and

macroeconomics
 Positive and Normative statements

Economists draw conclusions or prescribe policies based on interpretation or even their

own opinions.
 Positive statements deal with facts. It is supported by evidence based on quantifiable
observations. Example: unemployment rose by 3% in 2022 as 250,000 Cameroonians
lost their jobs in both the public and private sector.

 Normative statements are based on observable quantifiable variables, but includes an

element of opinion. Example: unemployment rates are higher amongst less educated
workers, therefore the government should include education and job training
programs.
 SCARCITY
It is the basic problem of economics. It arises when something is both limited in
quantity yet desired.

 Not all goods are scarce both most are.

 Some goods that humans consume are infinite, such as air. Examples

Not scarce
Scarce (limited and desired)
(not limited or desired)

 Diamonds
 Drinking water  Air
 Cars  Sand in the desert
 Doctors  Sea water
 Gold etc  Sunlight etc
They are described as economic goods They are described as free goods

NB: the more scarce an item is the more valuable is the item and the less scarce it is,
the less value it has in a society. This is known as the paradox of value.
 Factors of production
These are the scarce resources that are used in the production of goods that humans desire.
Economists focus on the allocation of these resources between human competing wants.

Factors of production (Resources)

Land Labor Capital entrepreneurship
 it refers to human  Capital is a man
resources that are made resource.  It refers to the
 These refer to all
used in the
natural resources  It includes all the innovation and
production of goods
which are used in creativity applied
and services tools and
the production of in the production
technologies that
goods.  It could be mental of goods and
are used in the
services.
(intellectual) or production
physical efforts process.
 The basic economic questions
o In order to properly allocate the limited and scarce resources between the unlimited
human wants, economies have to answer the basic economic questions.
o They are questions about how to allocate and how to distributed resources. They include:
1. What should be produce?: given the resources that a society is endowed with, what
combination of different goods and services should be produce?
2. How should things be produced?: should production use more of labor or should lots
of capital and technology be used?
3. Who should things be produced for?: how should the output that society produces
be distributed? Should everyone be given equal amount of the output or should it be
everyman for himself?

The way an economy answers these questions determines the type of economic system
used by that economy.
 ECONOMIC STSTEMS

 These are the set of rules and regulations governing the production, exchange,
distribution and consumption of goods and services in an economy.
 They are the systems that societies adopt in allocating and distributing resources and
the include: The Free Market System, Command Economic System and Planned
Economic System.
 THE COMMAND MIXED
THE FREE ECONOMIC ECONOMIC
MARKET SYSTEM SYSTEM SYSTEM

 These are economies in  It is an economy in  This is an economic

which the government has which the government system in which
no control over the owns and controls the resources are owned
ownership or allocation of allocation of resources. and controlled by both
resources. the government and
 What gets produced, private individuals.
 The basic economic how it is produced and  Public goods like roads,
questions are determined who gets it is national defense, law
by the interaction of determined by the and order are provided
private individuals who government. by the government
engage voluntarily in  The main aim of such while most of the
trade in the market for economy is to eliminate things we buy like cars,
goods, services and class differences and bags , shoes etc are
factors of production. promote equity. provided by the
 They are also known as market.
 It is also known as the socialist or communists  It is a system practice
capitalist economy or economies. by nearly every
laissez faire economy. country.
 PRODUCTION POSSIBILITIES CURVE (PPC)

 Due to the scarcity of resources, societies face tradeoffs in how to allocate them between
different uses. Every choice about the use of a resource comes with an opportunity cost.

 This can be illustrated using a PPC.

 The PPC is a graph that shows various combinations of two goods that can be produced by a
country, using all its available resources and its given level of technology.

 NB: opportunity cost refer to the next best forgone alternative. It is not necessarily measured
in monetary terms as it is also measured in real terms.
 Tradeoff refer to a situation whereby one thing increases and another must decrease.
Example: let’s assume a hypothetical economy producing only 2 goods; microwave ovens and
computers as shown on the table below.

 Plotting the various combinations will generate the PPC of this nation as shown below
Figure 1.1: production possibilities curve
 The line joining point A to point E is known as the PPC. For the economy to produce the
greatest possible output, ie for the economy to produce any combination on the PPC, two
conditions must be met.

1. All resources are fully employed, meaning no resource is left idle.

2. All resources must be used efficiently in order to avoid waste.

If these two conditions are not met, the economy will not produce at a point on the PPC. Rather
it will produce somewhere in the PPC such as point F. At this point, there is either
unemployment of resources or inefficient use of resources or both.
 Key concepts shown by the PPC

In addition to opportunity cost and tradeoffs, the PPC can be used to illustrate several other key
economic terms including:
 Scarcity: due to scarcity, the economy can not produce an output above its PPC such as G

 Actual output: it is shown by where it is currently producing. In real world, the actual output is
always at a point inside the PPC,

 Potential output: any point on the PPC represents its potential output. It represents what the
economy can produce using all its resources efficiently with no idle resources.

 Economic growth: an increase in the quantity and quality of a country’s resources will
shift the PPC outward indicating economic growth.

 Economic development: it refers to an improvement in people's standard of living over time.

Reallocation resources in favor of the production of more essential goods leads to economic
development.
 The diagrams below illustrate the difference between economic growth and economic
development.

Economic development is measured by

A shift of the entire PPC to the right indicates
improvement in health, education, equality
economic growth.
etc.
It measures an increase in the country’s
Its shown on the PPC by a movement
productive potential through an improvement in
towards the production of goods that
the quality and quantity of its resources.
improve people’s life
Types of PPC’s
 Model building in economics
A model is a graphical representation of a real world situation.

 To explain real world situations, economists use models.

 In economics, models are illustrated with the use of diagrams and mathematical
equations which show the relationship between variables.

 Models are usually build on well established theories or laws. Such models represent the
relationship between variables. Example: the law of demand and supply.

 Some models are descriptive as they are not based on any theory or law. Example the
production possibilities model.

To develop economic models, economists must use the assumption “ceteris paribus.”
which means everything being equal.
 Central themes

We come across these themes through out our IB Economics study. Different economists have
different views to the various themes. These themes include:

 The distinction between economic growth and economic development.

 Current pattern of resource allocation as a threat to sustainability.

 The extent to which governments should intervene in the allocation of resources.

 The extent to which the goal of economic efficiency and equity might conflict

Question: why do economists disagree?

 Economic growth and economic Current patterns of resource allocation as a
development. threat to sustainability
 Should economies focus more on  Sustainability refers to when resources are
economic growth, knowing that used in such a way that their quantity and
development will follow automatically if quality are not reduce over time.
growth occurs?
 Should development objectives be the  The threat to sustainability is “what and how
priority instead? goods are produced.”
 Economist agree on the importance of
 What are the best policies to be adopted sustainability, how ever they disagree on the
to achieve both growth and development? meaning from a practical point of view and
how it can be achieved.
The extent to which the government
The extent to which the goal of economic
should intervene in the allocation of
efficiency and equity might conflict
resources

 Two schools of thoughts argue over this.  What will happen if the government intervenes
 Should the government decide on what to to redistribute income and wealth (achieving
produce, how to produce and for whom to equity)?
produce?
 Or should the market be allowed to  Is it going to discourage hard work (efficiency)?
function on its own without any
 Is going to encourage those who were poor
government intervention to provide the
answers to these questions? and have benefited in the redistribution?
THANKS