Section 1 : Introduction to Economics Revision
Introduction
The term "economy," from which we get “Economics," comes most directly from
the Old French word "economie," meaning "management of a household."
Definition —Lionel Robbins
‘Economics is a social science, which studies human behaviour as a relationship
between ends and scarce means, which have alternative uses’.
Four basic issues
1 Multiplicity of wants
2 Gradability of wants
3 Scarcity of resources
4 Alternative use of resources
Modern Definition
The scientific study of the choices made by individuals and societies in
regard to the alternative uses of scarce resources which are employed to satisfy
wants.
Meaning
Economics is the study of the way people organize themselves to sustain life and
enhance its quality. Individuals engage in four essential economic activities:
resource maintenance, production of goods and services, distribution of goods
and services, and consumption of goods and services. It is a social science that
studies the allocation of scarce resources used to produce goods and services
that satisfy consumers' unlimited wants and needs.
Social Science
Social Science can be defined as a systematised body of knowledge pertaining
to human relationship and groups living in society .Different aspects of human
behaviour or social life of human beings is dealt with as parts of group or society
and not as independent individuals.
e.g. History, psychology, sociology, economics, political science.
Scientific Methodology
 Organise reality in a rational manner by observation and gathering of data.
 Spotlighting aspects of data to see for emerging patterns.
 Formulate hypothesis.
Reliability and validity of the data must be checked along with the value of
sources.
IB Economics
Introduction to Economics revision notes
Economics as Social Science
Economics is a social science because it is a systematised body of knowledge
regarding economic behaviour of man in society . it seeks to explain how society
deals with the scarcity problem It adapts a scientific framework & it is particularly
concerned with studying human behaviour and about economy as a whole
Steps in scientific method
1
2
3
4
5
Recognising the problem or issue.
Cutting away unnecessary details by making assumption.
Developing a model or story of the problem or issue.
Making predictions.
Testing the model i.e. how well it predicts events.
Scarcity
 The Excess of wants resulting from having limited resources ( land labour
capital and entrepreneurs) in satisfying the endless wants of people
 Economics concerns itself with only those things which are scarce.
 It is a Universal Problem
 If something is scarce , it will have value
Micro Economics
Micro means small
Microeconomics is the branch of economics that studies individual units: e.g.
households, firms and industries. It studies the interrelations between these
units in determining the pattern of production and distribution of goods and
services.
Macro Economics
Macro means large.
Macroeconomics is the branch of economics that studies the entire economy,
aggregate consumption, aggregate production , aggregate investment,
unemployment, inflation, business cycles and so on(grand totals):e.g. the overall
level of prices, output and employment in the economy. It is concerned with the
economy as a whole.
E.g. If we use analogy of a car , the study of engine axle and brakes separately
are micro issues ,how all parts work together is a macro issue.
IB Economics
Introduction to Economics revision notes
Growth
 Growth is the process of increasing the economy's ability to produce goods
 The main sources of growth are increases in the quantity and quality of the
economy's resources (land, labour ,capital and entrepreneurship).
 It is the increase in national output within an economy during a time period
usually 12 months
Economic Growth
 Economic growth is a term usually associated with a region, country or area
 Economic growth means that the actual output of that area increases. that
means, the amount of goods and services produced in that area increased.
 It is measured by measuring total national output in an economy in two
different time periods
Development
Development means goals such as access to basic necessities such as food water
shelter, availability of employment, education & culture , having social choices
and basic freedom such as freedom of speech and democratic elections.
Economic Development
 It is a measure of welfare ,a measure of well being.
 It is measured not just in monetary terms but also in terms of other
indicators such as education indicators health indicators and social indicators.
Sustainable development
Sustainable development is development that meets the needs of the present
without compromising the ability of future generations to meet their own needs
If a country’s capital and land assets remain constant or increase over time
then it is sustainable development ,
It means not using up resources faster than the Earth can replenish them.
Positive statements
 They are objective statements
 Deal with matters of fact, evidence or they question about how things
actually are.
 Involves no value-judgements, opinions, emotions
 Can be proved disproved using a scientific approach
 Can be described as “what is, what was, and what probably will be”
economics
 Unbiased or Detached
 Depends on Logic, reason & Empiricism.
 Explains the way the economy actually operates
E.g.Women are paid less than men.
Inflation rate in 1999 was 2.5 %
IB Economics
Introduction to Economics revision notes
Normative statements
 Subjective Statements
 Value judgments based on opinion only.
 Cannot be proved or disproved as right or wrong.
 Biased and Attached.
 Depends on values ,beliefs, preferences ,self interest.
 Contain words such as: should, ought, or prefer.
 Seeks to recommend the way the economy should operate. It is the policy
side of economics
E.g. Women should be paid the same as men.
Defence spending ought to be cut.
Ceteris Paribus
A very basic (essential) assumption which allows economic models to predict
outcomes and relationships with a degree of certainty and conviction simply by
assuming that variables not addressed in the model are kept constant.
Ceteris paribus is an old Latin phrase that translates as ‘other things being equal’
or ‘other factors remain unchanged .A quick method of showing that we have
made the assumptions is to write ceteris paribus alongside
Example
 What would happen to the quantity demanded of Coca-Cola in Germany if
prices increased by 10%, ceteris paribus
 ‘ An increase in the amount of hours spent studying economics will lead
,ceteris paribus , to an increase in average marks received on economics
test’.
Factors of Production
Anything which contributes to production is called a factor of production.
Land, Labour, capital, and entrepreneurship used by society to produce
consumer satisfying goods and services are termed as factors of production, they
are also known as resources or scarce resources.
 Land
In economics land refers to all kinds of natural resources that are freely
found
in nature ,which are limited in supply ,which can be controlled by man
and
used in the production of goods. Reward for land is rent.

Labour can be defined as any mental or physical effort (excluding
entrepreneurial organization) which contributes to the production of goods
and services for which it receives income. Reward for labour is wages /
salaries

Capital refers to that part of wealth which is used along with labour for
producing additional wealth .Reward for capital is interest.
IB Economics
Introduction to Economics revision notes

Entrepreneurship is the special sort of human effort that takes on the risk
of bringing labour, capital, and land together to produce goods. or
services in the expectation of a future reward. That reward is called profit
in economics.
Functions of an entrepreneur
 Management and control
 Risk and uncertainty bearing
 Innovation
Factor Income
Rent
It is the factor payments to the owners of land for using the various resources of
land in the production of goods and services
Wages
A factor payment to the owner of labour for using labour services in the
production of goods and services
Interest
It is the payments for the use of borrowed funds or the price paid for the use of
loanable funds’
Profit
Profit refers to a reward enjoyed by an entrepreneur for his entrepreneurship or
for his contribution to the process of production. It is a reward for bearing of
risks and uncertainties and introducing innovations
Utility
Utility is defined as want satisfying power of a commodity so all the
commodities having capacity to satisfy a want possess utility.
Total utility of a commodity refers to the sum total of the utility derived by a
consumer from all the units of that commodity taken together at a point of time
or during a period of time .
Marginal utility refers to an addition made to the total utility by consuming
one more unit of a commodity
Features of utility
It is a subjective term
It cannot be measured objectively
It is a relative term
It has no ethical significance
It is different from pleasure
It depends upon the intensity of the want
Utility of the good can be multipurpose
Utility does not mean satisfaction
IB Economics
Introduction to Economics revision notes
Utility is distinct from usefulness.
Opportunity cost
The cost of any activity measured in terms of the benefit from the best
alternative forgone.
Opportunity cost is the option foregone in making a choice of alternative A over
alternative B . When the best alternative is chosen from a range of alternatives
the second best choice is known as opportunity cost.
Opportunity cost for different people will not be the same.
An opportunity cost can be either explicitt, usually involving a monetary
payment, or implicit, which does not involve a transaction
E.g .The opportunity cost of deciding not to work is the lost wages foregone
The opportunity cost of spending money on a foreign holiday is the lost
opportunity to buy a new dishwasher or the chance to enjoy two short breaks
inside the United Kingdom
Free Goods
 It refer to those goods which are provided freely by nature ,their supply is
abundant that no price is paid for securing them .e.g. air, water, sunlight etc
.All free gifts of nature are free goods
 Does not incur any opportunity costs in its production I.e. resources involved
have no alternative uses.
 No cost so no choice .No market , zero price & no relevance for surplus.
 Production using free goods undertaken with free resources.
 Does not appeal to the economist
Economic Goods
 Economic goods are those goods which have utility and which are relatively
scarce .
 Cost is incurred for producing them and price is paid for purchasing them.
 It uses scarce resources in being provided,
 They have an opportunity cost of the alternative goods foregone and are the
things which economists are interested in.
 Limited availability in relation to desired use.
 Exchanged through markets
Basic Economic Decisions
1. What should be produced in the economy and in what quantities ?
It deals with the allocation of resources to make the goods and services in right
quantities that society wants with society's limited resources
2. How should production be organised?
IB Economics
Introduction to Economics revision notes
It deals with production, methodology, organization and technology for best
outcome.
It determines the way society's limited resources are combined in the production
of goods and services
3. For whom should production take place?
It is the problem of distributing Economic goods and services.
Production possibility frontier
Production possibility frontier shows the boundary of what is possible to produce
and is used as an illustration in economics to show the choices facing all
countries in producing goods which use limited factors of production. Thus it
draws the boundary between what can and cannot be achieved . PPC is also
known as production transformation curve.





Show the different combinations of goods and services that can be
produced with a given amount of resources
There is no ‘ideal’ point on the curve
Any point inside the curve – suggests resources are not being utilised
efficiently
Any point outside the curve – not attainable with the current level of
resources
Useful to demonstrate economic growth and opportunity cost
When the PPF shifts outwards, there is growth in an economy
If Economic growth leads to higher level of consumption ,increase in goods and
services reduces poverty, leads to an improvement in nutrition, health care and
literacy then development has taken place along with economic growth.
Growth and development are not the same.
The Market Economy
A free market economy is one where economic decisions are made through the
free market mechanism. The forces of market demand and supply, without any
government intervention, determine how resources are allocated.
Features of market mechanism




Consumer sovereignty (freedom of consumption)
Freedom of enterprise, occupation, savings and investment.
Profit oriented production
Free price mechanism (prices of products & factor units are determined by
the forces of demand and supply)
 Price acts as a signal & an incentive for producers
 Firms consumers and owners of factors of production act in their own self
interest, firms will maximise profits, consumers their utility and factor owners
their return.
IB Economics
Introduction to Economics revision notes
 Free market produces the best possible outcome in terms of resource
allocation.
 Factors of production are privately owned.
 Motive of profit maximisation
 Circular flow of money and goods.
 Minimum role of the government.
 Economic activities are guided by the market forces.
 Existence of free competition
Command Economy
A command economy is an economy, or economic system, that relies heavily on
central planning by government to allocate resources and answer the three basic
questions of allocation. It is an economy where all key economic decisions are
made by the government (or state).
Features of command Economy
 All economic decisions are taken by central planning authority according to
the plan that contains details about production, consumption, distribution,
savings, investment etc.
 All means of production are owned and controlled by the state so no private
ownership.
 Prices of most of the goods are fixed by the state and these prices are used
by the state as tools of planning.
 All investments are made by the state ,individuals cannot establish private
business to earn profit.
 Money credits and profits are used for controlling the enterprises and they
are not the basis of transactions
 Central planning authority lays down the objectives of planning such as rapid
increase in national income, achievement of self-sufficiency, removal of
poverty and unemployment & attempts to achieve them in a specific period.
 There is comprehensive planning as the plans for all interdependent sectors
are minutely detailed in physical terms and implemented.
 CPA has to make efforts to mobilise human and material resources and
allocate it between various sectors to produce goods and services as per the
sectoral target.
 Consumers, workers and the government are all assumed to be working for
the ‘common good’
 Decisions about the productions are taken first and then prices are set and
necessary demand created for the same. Workers are paid & they are required
to spend money on the available goods & at prices set by govt.
 There is no freedom of occupation as the CPA decides about the allocation of
labour to different lines of production and occupation so workers are forced to
work in different sectors. Wages set centrally.
IB Economics
Introduction to Economics revision notes
 There is no freedom of consumption, as people have to consume goods
allotted to them through rationing & control at the prices fixed by the CPA so
consumption is need based.
 The distribution policy is adapted to bring about an equality between income
and wealth.
 Provision of health care, education and housing freely to all.
 No competition and no price mechanism.
Mixed economy
A mixed economy is an economy that has a mix of economic systems. It is
usually defined as an economy that contains both private-owned and stateowned enterprises or that combines elements of capitalism based upon price
mechanism and socialism based upon central direction, or a mixture of a pure
free-enterprise market economy and a command economy. It is an economy, or
economic system, that relies on both markets and governments to allocate
resources
Features
 The government owns some of the country's factors of production publicly
and some are owned privately
 Private sector business activity is encouraged.
 State controls resources in supply of certain goods and services.
 Co-existence of the motives of social gain and private profit.
 Key role to the government
 Democratic planning where targets fixed for the private sector
 Optimim allocation of resources and maximisation of social welfare.
 Division of enterprises
 Most essential services ( public goods) are only provided by the state.
 Merit goods like education health services are provided by both state and the
private sector .
 In order to finance state operated services the population pays taxes to the
government.
 Government places limits on the nature of the business activity eg restricting
monopoly power or taking measures to control pollution.
.
The public sector is the part of the economy where goods and services are
provided by the government or local authorities. These goods and services are
sometimes provided free and in other cases consumers have to pay a price. The
aim of public sector activity is to provide services that benefit the public as a
whole. This is because it would be difficult to charge people for the goods and
services concerned or people may not be able to afford to pay for them. The
government provide these goods and services at a cheaper price than if they
were provided by a profit making company..
IB Economics
Introduction to Economics revision notes
The private sector consists of business activity that is owned, financed and run
by private individuals. These businesses can be small firms owned by just one
person, or large multi-national businesses that operate around the world In the
case of large businesses, there might be many thousands of owners involved.
The goal of businesses in the private sector is to make a profit
It is termed the private sector to indicate that decisions are made by private
individuals (either consumers or producers) in pursuit of their personal selfinterests
The private sector is comprised of the household sector and the business sector
but excludes the government sector.
Transition Economy [comm.
mixed ]
and
market
Problems
 Falling growth
 Lack of legal institutions
 Lack of financial
 High unequal distribution.
 Corruption at highest level
 High inflation rates and falling exchange
 Development of Barter economies.
 Black markets and organised crimes
 Increased unemployment and falling demand for domestic goods.
 Lack of necessary funds
IB Economics
Introduction to Economics revision notes