IB Economics (Grade 11)
Approach to this course
• Carpe Diem – “seize the day” Horace (23 BC)
• Yes we can! Barack Obama (2008)
...
• That you are here—that life exists and identity, That
the powerful play goes on, and you may contribute a
verse. Walt Whitman (1900)
• You (really) don’t know anything until you apply it to
the real life circumstances and challenges
Andreas Schleicher (2003)
What on earth is ECONOMICS???
• Let’s first explore, inquire, derive it ourselves
before we dive into the textbook (relatively
boring : )
• Look at Keynes’
quote on handout
Logistics
• Year 1 of the 2 year IB Economics Program
Optional AP Microeconomics exam in May, 2016
• The 2 year program will culminate with the IB Exam in May, 2017
– Worth doing well, as you can opt out of many first year college
economics classes!
• Assessments and Grading:
– Test per chapter/sections
– Homework and take home assignments (would help you prepare for the tests)
– Final Grade: Semester 1 (35%), Semester 2 (45%) and Final Exam (20%)
• However, for each assessment only one student can receive an A grade and
all other students will get a C grade.
• How should the student who receives the A grade be determined?
• If you need special accommodation doing tests, please let me and Mr.
So know as soon as possible
• Please take notes on a notebook and/or handouts (not on PCs )
• Initially, use textbook to prepare, to review and look up various
economic terms
Key Questions
• Who are the key people, agents,
organizations, institution, etc. making
decisions in this economy/society?
• What are their objectives and goals? (What do
they want and what are they trying to do?)
• How do they interact?
• Where and how do you fit into this picture?
(How does it affect you and why does it matter?)
Who are these people ?
What about these people?
And what about these people and
organizations?
(VI) Positive vs Normative statements
Which statements can be judged as
true/false? Which cannot?
• The administration ought to allow FACEBOOK
to be used in school
• The administration will allow FACEBOOK to be
used in lessons
• The administration does not allow FACEBOOK
to be used in school
Which actions are positive and which
are normative?
• ANALYSIS of economic outcomes
• FORECASTING of economic outcomes
• POLICY SUGGESTIONS for economic outcomes
• DESCRIPTIONS of economic outcomes
Which statements are
positive and which are normative?
• The distribution of income in the USA should be
made more equal
• The taxation system can be used to make the
distribution of income more equal
• The distribution of income in the USA is more
unequal than the distribution of income in Japan
• The distribution of income in the USA has
become more unequal in recent years
The Economic Problem: SCARCITY
Limited (Finite)
Resources
Unlimited
(Infinite)
Human Wants
& Needs
Choices 
Opportunity Cost
Consider calculation of opportunity cost using discussion questions on the H/O
• Wants and needs
– Needs are things we must have to survive such as
food, shelter, clothing
– Wants are things that we would like to have but not
necessary for immediate survival e.g. iphone, tv
• Goods and services “ECONOMIC GOODS &
SERVICES”
• Goods are physical tangible objects e.g. vegetable, meat, cars,
books, etc.
– Services are non-physical, intangibles e.g. catering, repairs,
haircuts, entertainment, education, insurance
• Consider definition of an economic good and of a
FREE good using discussion questions on the H/O
The THREE essential questions of
Resource Allocation
Economic decisions, (choices with opportunity costs) that the economy must
make are as follows:
– What to produce: all economies, societies and countries must
CHOOSE/DECIDE what particular goods/services (G/S) and in what quantities
they wish to produce. e.g. given the scarce resources, how much cars, bikes,
PCs, wheat, corn? Japan – …………., Switzerland – …………….., Saudi – …………
– How to produce: all economies, societies must make CHOICES on how to use
their resources in order to produce goods and services. G/S can be made with
different combination of resources (machines, skills, technology) e.g. shoes be
made by machines or hand? Crops using fertilizers or organically?
– For whom to produce: all economies must make CHOICES how the G/S
produced are distributed among the population. Should everyone get a equal
amount or some more than others? Should some g/s be (re)distributed more
equally(e.g. …………………) ? Should lawyers be paid more than teachers? Prime
minister more than university head?
The economic problem (continued)
• Available resources (e.g. labor, land, machines,
oil, the planet Earth) are limited/finite but our
needs and wants in the form of goods (food,
clothing, cars, etc.) and services (health care,
entertainment, education, etc.) are infinite. There
are not enough resources that human beings
need and want!
•  think again why politicians constantly debate,
why you think about what to buy and not, how
business leaders strategize their operations…
As consequence of the Economic Problem…
• We have to make a choice!
• Comes with a cost  called Opportunity Cost
• People cannot have everything that they desire
and so there must be some system for rationing
the scare resources. This is where economics
come in. It is a study of rationing/distribution
(choice making) systems. It is the study of how
scare resources are allocated to fulfill the infinite
wants of consumers.
Consider definition of an economic good and of
a FREE good using discussion questions on the
H/O
Homework
• Homework: 1) M-C questions 1-7 and 11,12
2) Read chapter 1 OMIT pp 6,7 and p12 onwards
3)Think of ONE (big or small) choice you made in your life (or
today) and identify and describe the notion of scarcity,
choice, and opportunity cost by writing a SHORT paragraph.
– e.g. I made a choice to become a teacher. My scarce
resource was time, labor, and human capital (education,
expertise). I chose to use my scarce resources to teach St.
Maur students and by doing so, I also chose not to use my
resources to pursue a job as a writer. That job is my
opportunity cost (the next best alternative
forgone/sacrifice) for becoming a teacher.
Summary of Induction lessons
• Economics arise from the conflict between unlimited wants and needs and
limited (finite,, insufficient, constrained) resources. Since we/all/people
cannot have everything they want, they must make choices. Societies
must choose how much of each good and services they want given their
scarce resources. Resource scarcity forces society to make a choice
between available resources.
• Economics is a study of decision making and choices
• Underlying the choice and decision making thought process surfaces,
introduces a new concept (you have already in fact experienced it , but not
really thought about it consciously)  opportunity cost
• Opportunity cost is the next best alternative forgone when an economic
decision is being made. It is what you give up in order to have what you
choose for. It the price you pay for your decision e.g. IB course selection,
dilemmas in shopping, apple or samsung phone, etc. You have already
confronted many opportunity costs. But some things do not have an OC
to consume e.g. air (or is it)? Salt water. You are not paying or giving up
anything else to get it FREE GOODS
How do they make economic choices?
•
Consumers
– We consumers choose to select the g/s we want by maximizing our utility, psychology,
satisfaction, pleasure given their limited income
– Utility of eating ice cream
– We make an assumption on our utility where the marginal utility gained from extra units
of the g/s falls as consumption increases (Lof DMU)
•
Producers
– producers choose to use select, purchase resources in order to maximize their total
revenue given the cost of production. That is, they make choices to maximize their
profits
– What are these resources?  factors of production or inputs used to produce the g/s
• Land – all natural resources, under and above land, e.g. minerals, oil, water, forests,
lakes. Gifts of nature
• Labor physical and mental effort that people contribute to the production of g/s.
Time, skills, education, etc.
• Capital – physical capital, man-made factors of production e.g. machines, tools,
roads, airports, etc.
• Entrepreneurship – human skill to organize the other three resources to run the
business, risk taking, management, etc.
– g/s are sold at a price, all resources also have a cost/price as they are scarce: rent, wage,
interest, profit and producers need to CHOOSE which product, how much and its costs in
producing in order to make the DECISION
•
Government
– Taxes and subsidies
– Redistribution of income
REFLECTION
Mankind has come so far! Made lots of strides and
innovations. Yet, so many problems and challenges
prevail. What is your voice? Your idea?!
Where we come from, where we at, where can we go?!
What is your and our voice and innovation?!?!
Economics is a social science, great overlap with
History, Psychology, and TOK
The Job of Economists as Social Scientist…
• Social scientific method
– Step 1: make observations of the world around us, and
select an economic question we would like to answer
– Step 2: identify variables we think are important to answer
the question
– Step 3: make a hypothesis/theory/MODEL about how the
variables are related to each other (cause and effect, if
then statement)
– Step 4: make assumptions. Ceteris Paribus “all other things
equal/constant”
– Step 5: collect data and empirically test the hypothesis to
see if it fits with what actually happens in the real world
– Step 6: compare the predictions of the hypothesis with the
data and real world outcomes. Validate or invalidate your
hypothesis and theory
We are complex and dynamic organisms
need MODELS!
Few more important classifications and topics
• Micro vs. Macro
– Micro economic examines the behavior of the individual decision
making units in the economy. It opens the black box of demand and
supply. It looks at individual consumers and how they make their
decisions about demand and expenditure; individual firms and how
they make decisions such as what to produce and how much;
government as to how much and who to tax and provide help
(subsidies)
– Macro takes a wider view and examines the economy as a whole to
obtain a broad picture. Study of the aggregates of all consumer and
supplier behaviors, total income, output, employment, price level of
the economy (GDP, UE, inflatioon)
• Economics think about the economic world in two ways, 1)
describes what is actually going on and 2) how things out to work
– Positive economics – are factual statements, statements that are
right or wrong e.g. UE of china this year is 4.2%
– Normative economics – based on norm statements, matter of
opinion, beliefs and cannot be proven right or wrong, subjective, what
ought to be and should be e.g. the UE of china is should be lower or
too high
Two Main Allocation Systems/Methods/Ideologies
• Two overarching philosophies underlying the interaction of the agents
above
• Planned economy:the central or command economy, the what, how and
for whom to produce or the decisions of the consumers, producers are
made primarily by the government. All resources are collectively owned,
government arrange all production (tell who to produce what), set wages
and prices. By 1980s, 1/3 of population lived under this system with USSR
and China. Today, more Easter EU turned into market based, N. Korea,
Cuba stands today
– Free market based economy, aka private enterprise economy or capitalism. All
production is in the private hands and D and S are left free to set wages and
prices. Individuals make indep decisions about what products they would like
at given prices and producers make decisions whether to provide them on the
likelihood of whether they will make profits. If there are changes in the
pattern of D (tastes, trends), then there will be changes in the pattern of
supply in order to meet the demand. E.g. roller skates and skate boards.
Consumers have the power and sovereignty to send signals as to what they
want. It is a self righting system. First suggested by Adam Smith, invisible
hand in the form of competition and pursuit of self interest will lead to
efficient allocation of resources (no wastes, and people happy)  advocates
for no intervention of government (laissez faire)
• Today in real world, most countries at mixed between the above two.
– Formalizing economics
• What is Economics?
– Noun. the science that deals with the production,
distribution, and consumption of goods and services, or
the material welfare of humankind.
– Noun. financial considerations; economically significant
aspects e.g. what are the economics of such a project?
– Greek oikonomikós relating to household management,
equivalent to oikonóm(os) steward (oîko(s) house
+ nómos manager). One who manages and administers all
matters relation to a household (home economics)
– One who is prudent in the use of resources, careful
management of society’s limited resources to avoid waste
– Adj. avoiding waste or extravagance; thrifty; saving;
parsimonious e.g. economical use of resources
– Source: www.dictionary.com
The key agents involved in this
rationing process…
• Consumers (you!) –those who demand, purchase,
and spend the goods/services
– Our consumption is based on our… and constrained
budget
• Producers – suppliers, business, companies,
firms, the private sector
– Costs and profits and prices
• Let’s think about it: how do these two agents
interact?
Market
• What is a market?
– Place for interaction
• Add the circular flow diagram. Two types of
markets
– Goods and services
– Factors of production
– Interrelated, two sides of the same coin
How do the two agents interact??
• Circular flow diagram
– Household represent the groups of individuals in the economy who
perform to be consumers of g/s and owners and provides of labor as
the factor of production/resource
– Firms represent the productive units in the economy that turn the
factors of production into the g/s. aka the private sector
–  they interact, negotiate, debate, to come up with a good price,
contract, terms and regulations to make the best CHOICE (stated
previously) to max happiness and profits, respectively
–  hard to see this in Japan, but CORPORATE lawyers always debate,
my experience in CHINA!! (price NEVER set!! All negotiable)
– Government aka public sector, have a number of roles in the economy
e.g. setting laws, order, regulations, national defense, provide public
goods: water, electricity, public transport, police, education and health
care. AKA social goods. Revenue through tax, and redistribute it
through the public goods. Sanction those who pollute or create health
prob e.g. cigarettes and alcohol
– International trade, how we as citizens of a country and as country as
a whole do business, interact, make economic decisions with other
nations. E.g. why Japan export lots of cars and import lots of natural
resources  idea of comparative and absolute advantage!
Few more important agents we are
missing…
• The government – the public sector
• Internationalization – international trade and
finance