Educerie · IB Diploma · Economics

Unit 1 — Introduction to economics

Unit 1 establishes why economics exists at all, and gives you the two ideas — scarcity and opportunity cost — that every later unit is an application of.

Scarcity, choice and opportunity cost

Scarcity is the central economic problem: resources are finite, but human wants are unlimited. Everything else follows from that single mismatch.

Because resources are scarce, every society must answer three questions:

1. What to produce?
2. How to produce it?
3. For whom to produce it?

Because we cannot have everything, we must choose — and every choice has a cost. Opportunity cost is the value of the next best alternative forgone.

That phrasing is exact and examinable. It is not "everything you gave up" and it is not "the money you spent". If you have €50 and could buy a textbook, a concert ticket or shoes, and you rank them in that order, then buying the textbook costs you the concert ticket — the single next best option, not the ticket plus the shoes.

Opportunity cost also applies where no money changes hands: an hour spent revising economics costs you the hour of sleep or the shift at work you would otherwise have taken.

Factors of production

Resources are grouped into four factors, each with its own return:

Note that capital in economics means machinery, tools and factories — physical goods used to make other goods. It does not mean money. Money is a means of acquiring capital, not capital itself. Writing "capital is money" in an exam is a definitional error that examiners notice.

The production possibilities curve

The PPC shows the maximum combinations of two goods an economy can produce when all resources are fully and efficiently employed.

Reading it is a reliable source of marks:

• On the curve — efficient. All resources are employed; more of one good requires less of the other.
• Inside the curve — inefficient. Resources are unemployed or underemployed, as in a recession.
• Outside the curve — currently unattainable.

The curve is normally drawn concave to the origin (bowed outward), because of increasing opportunity cost: resources are not equally suited to both uses, so as you shift production toward one good you must transfer progressively less suitable resources, and each additional unit costs more of the other good. A straight-line PPC would mean constant opportunity cost, which implies resources are perfectly substitutable between uses.

Two distinct movements, often confused:

• A movement along the curve is a reallocation between the two goods. Total capacity is unchanged.
• A shift outward of the whole curve is economic growth — an increase in the quantity or quality of factors of production, through investment, technology, education or discovery of resources. A shift inward follows a war or a natural disaster destroying capacity.

Choosing between more capital goods and more consumer goods today is itself a PPC decision with a long-run consequence: capital goods shift the curve outward later, which is the trade-off between present consumption and future growth.

Economic systems

• Free-market economy — resources allocated by the price mechanism through the interaction of demand and supply. Incentivises efficiency and innovation, but tends to produce inequality and under-provides public goods.
• Planned economy — resources allocated by government direction. Can pursue equity and guarantee provision, but lacks price signals and so tends toward inefficiency and shortages.
• Mixed economy — both, in some proportion. Every real economy is mixed; the pure forms are theoretical benchmarks. Say this explicitly when a question asks you to compare them.

The nine key concepts

Scarcity — resources are finite, wants unlimited. Choice — scarcity forces decisions between alternatives. Efficiency — resources used to produce maximum output with minimum waste. Equity — fairness in the distribution of resources. Distinguish it sharply from equality: equity is about fairness, which may or may not mean equal shares. Economic well-being — the material and non-material welfare of individuals and society. Sustainability — meeting present needs without compromising future generations' ability to meet theirs. Change — economies are dynamic; nothing analysed is static. Interdependence — economic agents and economies rely on one another; a shock in one transmits to others. Intervention — government action to correct market outcomes.

The concepts most often set against each other are efficiency versus equity. A policy that raises efficiency frequently worsens the distribution, and vice versa — and identifying that trade-off explicitly is often what turns a good evaluation into a top-band one.

Positive and normative

• A positive statement is factual and can be tested against evidence, whether or not it turns out to be true. "Raising the minimum wage increased unemployment in this region by 2 %."
• A normative statement is a value judgement containing an opinion about what ought to happen. "The minimum wage should be raised."

Look for should, ought, fair, too much, better. Normative statements cannot be proved or disproved by data, which is why economists agreeing entirely on the evidence can still disagree entirely on the policy.

What actually loses marks in this unit

1. Defining opportunity cost as everything given up, rather than the next best alternative.
2. Writing that capital means money.
3. Drawing a PPC without labelling both axes, including units.
4. Confusing a movement along the PPC with a shift of it.
5. Not explaining why the PPC is concave — increasing opportunity cost.
6. Treating equity and equality as the same thing.
7. Describing an economy as purely free-market or purely planned.
8. Using generic examples where a named country and year were available.

Educerie · written from the published IB syllabus structure for Economics Unit 1, first assessment 2022. Original text. Last reviewed 5 September 2026.