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IB DP Economics — Unit 1: Introduction to Economics | SL | 1.1 What is Economics?
📋 What You Will Learn
- Identify the central economic problem of scarcity and explain how it gives rise to the need for choice
- Explain the distinction between positive and normative economics and identify examples of each
- Analyse the role of economic models and assumptions in economic reasoning
- Explain the difference between microeconomics and macroeconomics
- Describe the historical development of economic thought from classical to contemporary schools
- Evaluate the strengths and limitations of economic methodology as a social science
🔍 Guiding Question Can economics ever be a truly objective science, or are economic theories always shaped by the values and assumptions of the economists who build them?
🌍 Why This Matters In 2023, the IMF and the UK Treasury disagreed sharply over whether austerity or stimulus would better serve the British economy. Both institutions used economic models — yet reached opposite conclusions. This is not unusual: economics is a discipline where rigorous methodology and deeply held values collide, and understanding why requires knowing how economists think, what assumptions they make, and where those ideas came from.
The Central Economic Problem: Scarcity and Choice
Every economic question — from household budgeting to government policy — begins with a single inescapable fact: resources are limited, but human wants are not. This is the foundation of economics as a discipline.
📖 Definition — Scarcity Scarcity is the fundamental economic problem that arises because resources (land, labour, capital, and entrepreneurship) are finite while human wants are unlimited. Scarcity forces individuals, firms, and governments to make choices.
- Scarcity is universal: it applies to all economies — rich or poor, capitalist or socialist — because wants always exceed available resources
- Scarcity is not the same as shortage: a shortage is a temporary market condition (demand exceeds supply at a given price); scarcity is a permanent condition of the human situation
- Scarcity forces three fundamental questions: What to produce? How to produce it? For whom to produce it?
- Choice and opportunity cost: every choice involves giving up the next-best alternative — this foregone alternative is the opportunity cost
📖 Definition — Opportunity Cost Opportunity cost is the value of the next-best alternative foregone as a result of making a choice. It is the true cost of any decision in economics.
🔗 Analogy — The Student's Dilemma A student has three hours before an exam. She can study economics, sleep, or watch television. If she chooses to study, the opportunity cost is the sleep she gave up (assuming that was her next-best option). The opportunity cost is not the television — it is only the single best alternative foregone. This logic applies to every economic decision, from a firm choosing between two investment projects to a government allocating a fixed budget.
📖 Definition — Economics Economics is the social science that studies how individuals, firms, and governments allocate scarce resources among competing uses to satisfy unlimited wants.
Factors of Production
Resources used in production are categorised into four factors of production. Understanding these is essential because scarcity applies to all of them.
- Land: all natural resources — not just land itself but oil, water, minerals, forests; reward is rent
- Labour: the human effort (physical and mental) used in production; reward is wages
- Capital: man-made resources used to produce other goods — machinery, tools, infrastructure (NOT money); reward is interest
- Entrepreneurship: the ability to combine the other factors of production and bear risk; reward is profit
💡 Note — Capital vs Financial Capital In economics, "capital" means physical capital — machines, buildings, tools. It does NOT mean money. Money is a medium of exchange, not a factor of production. This distinction is frequently tested in Paper 1 definitions.
Microeconomics and Macroeconomics
Economics is divided into two broad branches. Knowing which branch a question belongs to helps students structure their answers correctly.
📖 Definition — Microeconomics Microeconomics is the branch of economics that studies the behaviour of individual economic agents — consumers, firms, and industries — and how they make decisions