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Economics: SL Revision Notes

SL IB Economics

Revision Notes

Home / IB / Economics / SL / Revision Notes / 1. Introduction To Economics / 1.1 What Is Economics? / 1.1.1 Economics as a Social Science


1.1.1 Economics as a Social Science


The Social Nature of Economics

  • Economics is a social science
    • Social sciences study societies and the human interactions within those societies
    • Human interactions are complex and are influenced by many variables
    • Social sciences also include subjects such as Psychology, Politics, Geography and Business Studies

  • Due to the complexities within societies, economists build models so as to better understand certain interactions
    • A model is a simplified version of reality
    • Some models are more complex than others. Examples of models include, the circular flow of income, production possibility curves, demand and supply
    • All models make a range of assumptions. These are often generalizations about behaviour, choices and likely outcomes
    • These assumptions are necessary so as to account for complex human behaviour and constantly changing variables
    • When evaluating different models, the underlying assumptions should always be considered 

  • To think like an economist involves identifying which variables will be studied and which ones will be excluded
    • This way of thinking considers the type of relationship between variables (causal or correlation). E.g. Data shows that when ice cream sales increase, so do car thefts. Correlation, yes. Causation, no
    • Some economists will build an argument to include certain variables in a study and others will argue to exclude them. They will each provide a justification for their decision
    • Two economists analysing the same data may end up with vastly different interpretations. This is often due to the different variables that each economist chooses to focus on
    • This is the complexity found within social sciences

Microeconomics & Macroeconomics

  • Microeconomics is the study of individual markets and sections of the economy, rather than the economy as a whole. Microeconomics examines:
    • The different choices individuals, households and firms make
    • What factors influence their choices
    • How their decisions affect the price, demand and supply of goods/services in a market
    • How Governments influence consumption and production
       
  • Macroeconomics is the study of economic behaviour and decision making in the entire economy, rather than just an individual market. Macroeconomics examines:
    • The role of the government in achieving economic growth and human development through the implementation of specific government policies (fiscal, monetary and supply-side)
    • The role of the government in achieving price stability, low unemployment and a stable Current Account balance on the Balance of Payments account
    • The interaction of the economy with the rest of the world through international trade
       

Some of the Differences Between Micro and Macroeconomics


Microeconomics


Macroeconomics


Single market e.g. milk


Entire economy e.g. Singapore


Price of a good/service


Average price levels in an economy (inflation/deflation)


Individual/market demand


Total demand in an economy


Individual firm/market supply


Total supply in an economy


Government intervention in a market e.g. cigarettes


Government intervention in the economy e.g income tax


Reasons for differences in workers wages


Unemployment and minimum wages

 

The Nine Central Concepts

  • Most student learning focusses on topics and within each topic is the acquisition of facts
  • Each topic is better understood within broader concepts
    • E.g. globalisation as a topic is interesting, but it makes much more sense when studied within the concept of interdependence that exist between nations
  • Understanding the concepts and using them helps to deepen your critical thinking skills
    • E.g. Thinking about how a particular tax policy relates to the concepts of equity, efficiency or government intervention requires critical thinking

HNt5M2X2_1-1-1-the-nine-central-concepts

The nine concepts which all of your learning in economics connects to

  

Explanations of each Concept as Defined by the International Baccalaureate (IBO)

Scarcity

Efficiency

 Intervention

Change

Choices

Sustainability

Equity

Interdependence

Economic well-being

  

  1. Scarcity: since resources are scarce, economics is a study of choices. It is clear that not all needs and wants can be satisfied; this necessitates choice and gives rise to the idea of opportunity cost. Economic decision-makers continually make choices between competing alternatives, and economics studies the consequences of these choices, both present and future
     
  2. Efficiency: is a quantifiable concept, determined by the ratio of useful output to total input. Allocative efficiency refers to making the best possible use of scarce resources to produce the combinations of goods and services that are optimum for society, thus minimising resource waste

  3. Intervention: intervention in economics usually refers to government involvement in the workings of markets. There is often disagreement among economists and policymakers on the need for, and extent of, government intervention. There is a considerable debate about the merits of intervention versus the free market

  4. Change: the economic world is continuously changing and economists must adapt their thinking accordingly. Economics focuses not on the level of the variables it investigates, but on their change from one situation to another. There is continuous and profound change at institutional, structural, technological, economic and social levels

  5. Choice: since resources are scarce, economics is a study of choices. It is clear that not all needs and wants can be satisfied; this necessitates choice and gives rise to the idea of opportunity cost. Economic decision-makers continually make choices between competing alternatives, and economics studies the consequences of these choices, both present and future

  6. Sustainability:  is the ability of the present generation to meet its needs without compromising the ability of future generations to meet their own needs. It refers to limiting the degree to which the current generation’s economic activities create harmful environmental outcomes involving resource depletion that will negatively affect future generations

  7. Equity: in contrast to equality, which describes situations where economic outcomes are similar for different people or different social groups, equity refers to the idea of fairness. Fairness is a normative concept, as it means different things to different people. The degree to which markets versus governments should, or are able to, create greater equity or equality in an economy is an area of much debate

  8. Interdependence: individuals, communities and nations are not self sufficient. Consumers, companies, households, workers, and governments, all economic actors, interact with each other within and, increasingly, across nations in order to achieve economic goals. The greater the level of interaction, the greater will be the degree of interdependence

  9. Economic well-being: is a multidimensional concept relating to the level of prosperity and quality of living standards enjoyed by members of an economy. It includes ♣ present and future financial security ♣ the ability to meet basic needs ♣ the ability to make economic choices permitting achievement of personal satisfaction ♣ the ability to maintain adequate income levels over the long term

NOTE
The definitions for these 9 concepts have been supplied by the International Baccalaureate (IBO). These concepts are widely defined and open to interpretation, hence it is important to use these concepts exactly as the IBO has defined them



  • 1. Introduction To Economics
    • 1.1 What Is Economics?
      • 1.1.1 Economics as a Social Science
        • 1.1.2 The Problem of Choice
          • 1.1.3 The Production Possibilities Curve Model (PPC)
            • 1.1.4 Modelling the Economy
            • 1.2 How Do Economists Approach The World?
              • 1.2.1 Economic Methodology
                • 1.2.2 Economic Thought
              • 2. Microeconomics
                • 2.1 Demand
                  • 2.1.1 Demand, Price & Quantity
                    • 2.1.2 Non-Price Determinants of Demand
                    • 2.2 Supply
                      • 2.2.1 Supply, Price & Quantity
                        • 2.2.2 Non-Price Determinants of Supply
                        • 2.3 Competitive Market Equilibrium
                          • 2.3.1 Market Equilibrium & Disequilibrium
                            • 2.3.2 Functions of the Price Mechanism
                              • 2.3.3 Consumer & Producer Surplus
                              • 2.4 Price Elasticity of Demand (PED)
                                • 2.4.1 Definition, Calculation & Determinants of PED
                                  • 2.4.2 The Significance of PED
                                  • 2.5 Income Elasticity of Demand (YED)
                                    • 2.5.1 Definition, Calculation & Illustration of YED
                                    • 2.6 Price Elasticity of Supply (PES)
                                      • 2.6.1 Definition, Calculation & Determinants of PES
                                      • 2.7 Role of Government In Microeconomics
                                        • 2.7.1 Reasons For Government Intervention In Markets
                                          • 2.7.2 Government Intervention: Indirect Taxes & Subsidies
                                            • 2.7.3 Government Intervention: Price Controls, Direct Provision & Regulation
                                            • 2.8 Market Failure: Externalities & Common Pool (Access) Resources
                                              • 2.8.1 Market Failure
                                                • 2.8.2 Negative Externalities
                                                  • 2.8.3 Positive Externalities
                                                    • 2.8.4 Common Pool (Access) Resources
                                                      • 2.8.5 Government Intervention to Address the Market Failure
                                                        • 2.8.6 Other Interventions to Address the Market Failure
                                                        • 2.9 Market Failure: Public Goods
                                                          • 2.9.1 Public Goods
                                                        • 3. Macroeconomics
                                                          • 3.1 Measuring Economic Activity
                                                            • 3.1.1 National Income & The Circular Flow of Income
                                                              • 3.1.2 National Income Terminology & Calculations
                                                                • 3.1.3 The Business Cycle
                                                                  • 3.1.4 Appropriateness of Using GDP/GNI to Measure Well-being
                                                                    • 3.1.5 Alternative Measures of Well-Being
                                                                    • 3.2 Variations in Economic Activity (AD & AS)
                                                                      • 3.2.1 Aggregate Demand (AD)
                                                                        • 3.2.2 Short-Run Aggregate Supply (SRAS)
                                                                          • 3.2.3 Alternative Views of Aggregate Supply (AS)
                                                                            • 3.2.4 Shifts of the Long-Run Aggregate Supply (LRAS)
                                                                              • 3.2.5 Macroeconomic Equilibrium
                                                                              • 3.3 Macroeconomic Objectives
                                                                                • 3.3.1 An Introduction to Macroeconomic Objectives
                                                                                  • 3.3.2 Economic Growth
                                                                                    • 3.3.3 Low Unemployment
                                                                                      • 3.3.4 Low & Stable Rate of Inflation
                                                                                        • 3.3.5 Potential Conflicts Between Macroeconomic Objectives
                                                                                        • 3.4 Inequality & Poverty
                                                                                          • 3.4.1 Measuring Inequality & Poverty
                                                                                            • 3.4.2 Causes of Inequality & Poverty
                                                                                              • 3.4.3 Using Taxation to Reduce Inequality & Poverty
                                                                                                • 3.4.4 Other Policies to Reduce Inequality & Poverty
                                                                                                • 3.5 Demand Management: Monetary Policy
                                                                                                  • 3.5.1 An Overview of Monetary Policy
                                                                                                  • 3.6 Demand Management: Fiscal Policy
                                                                                                    • 3.6.1 An Overview of Fiscal Policy
                                                                                                    • 3.7 Supply-Side Policies
                                                                                                      • 3.7.1 An Overview of Supply-Side Policies
                                                                                                        • 3.7.2 The Effectiveness of Supply-Side Policies
                                                                                                      • 4. The Global Economy
                                                                                                        • 4.1 Benefits of International Trade
                                                                                                          • 4.1.1 The Advantages of Free Trade
                                                                                                          • 4.2 Types of Trade Protection
                                                                                                            • 4.2.1 Tariffs
                                                                                                              • 4.2.2 Quotas
                                                                                                                • 4.2.3 Export Subsidies
                                                                                                                  • 4.2.4 Administrative Barriers
                                                                                                                  • 4.3 Arguments For & Against Trade Protection
                                                                                                                    • 4.3.1 Arguments For & Against Trade Protection
                                                                                                                    • 4.4 Economic Integration
                                                                                                                      • 4.4.1 Understanding Economic Integration
                                                                                                                        • 4.4.2 Types of Trading Blocs
                                                                                                                          • 4.4.3 The World Trade Organisation (WTO)
                                                                                                                          • 4.5 Exchange Rates
                                                                                                                            • 4.5.1 Types of Exchange Rate Systems
                                                                                                                              • 4.5.2 Causes & Consequences of Exchange Rate Fluctuations
                                                                                                                              • 4.6 Balance of Payments
                                                                                                                                • 4.6.1 Components of the Balance of Payments
                                                                                                                                • 4.7 Sustainable Development
                                                                                                                                  • 4.7.1 The Sustainable Development Goals
                                                                                                                                  • 4.8 Measuring Economic Development
                                                                                                                                    • 4.8.1 Single Indicators of Development
                                                                                                                                      • 4.8.2 Composite Indicators of Development
                                                                                                                                        • 4.8.3 Evaluating the Different Approaches
                                                                                                                                        • 4.9 Barriers to Economic Growth & Development
                                                                                                                                          • 4.9.1 Poverty Traps
                                                                                                                                            • 4.9.2 Economic, Political & Social Barriers
                                                                                                                                            • 4.10 Economic Growth & Development Strategies
                                                                                                                                              • 4.10.1 Trade Strategies, Diversification & Social Enterprise
                                                                                                                                                • 4.10.2 Market-Based & Interventionist Policies
                                                                                                                                                  • 4.10.3 Merit Goods & Inward Foreign Direct Investment
                                                                                                                                                    • 4.10.4 Foreign Aid & Development Assistance
                                                                                                                                                      • 4.10.5 Institutional Change
                                                                                                                                                        • 4.10.6 Evaluating Market Orientated Approaches Versus Government Intervention
                                                                                                                                                          • 4.10.7 Progress Towards Sustainable Development Goals

                                                                                                                                                        Author: Steve



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