Rational consumer choice (HL only) — Assumptions—consumer rationality, utility maximization and perfect information

Whether you're a current IB Economics student looking to get a deeper grasp of the syllabus or a prospective IB student weighing your Group 3 options, this post will be your guide. We'll break down the IB Economics syllabus to give you a clear understanding of what to expect in the course.

The IB Economics syllabus is divided into four Units:

In these Units, you will explore the following topics:

Economics

Introduction to economics

Economics as a social science — The social nature of economics

Economics as a social science — The basis of the study of economics: microeconomics and macroeconomics

Economics as a social science — Introduction to the nine central concepts: scarcity, choice, efficiency, equity, economic well-being, sustainability, change, interdependence, intervention

The problem of choice — Factors of production—land, labour, capital and entrepreneurship

The problem of choice — Scarcity — Unlimited human needs and wants to be met by limited resources

The problem of choice — Scarcity — Scarcity and sustainability

The problem of choice — Opportunity cost

The problem of choice — Opportunity cost — The cost of choice

The problem of choice — Opportunity cost — Free goods

The problem of choice — The basic economic questions

The problem of choice — The basic economic questions — What/how much to produce, how to produce and for whom to produce?

The problem of choice — Means of answering the economic questions

The problem of choice — Means of answering the economic questions — Market versus government intervention

The problem of choice — Means of answering the economic questions — Economic systems: free market economy, planned economy and mixed economy

The production possibilities curve model (PPC) — Assumptions of the model

The production possibilities curve model (PPC) — Increasing versus constant opportunity cost

The production possibilities curve model (PPC) — Features of the model: opportunity cost, scarcity, choice, unemployment of resources, efficiency, actual growth and growth in production possibilities

Modelling the economy — The circular flow of income model

Modelling the economy — Interdependence between economic decision-makers interacting and making choices in an economy: households, firms, the government, the banks and financial sector, and the foreign sector (foreign firms and households)

Modelling the economy — Leakages and injections

What is economics?

Economic methodology — The role of positive economics

Economic methodology — The role of positive economics — The use of logic

Economic methodology — The role of positive economics — The use of hypotheses, models, theories

Economic methodology — The role of positive economics — The ceteris paribus assumption

Economic methodology — The role of positive economics — Empirical evidence

Economic methodology — The role of positive economics — Refutation

Economic methodology — The role of normative economics

Economic methodology — The role of normative economics — Value judgments in policy making

Economic methodology — The role of normative economics — The meaning of equity and equality

Economic thought — Origin of economic ideas in a historical context

Economic thought — Origin of economic ideas in a historical context — 18th century: Adam Smith and laissez faire

19th century: classical microeconomics (utility); the concept of the margin; Classical macroeconomics (Say’s law); Marxist critique of classical economic thought

20th century: Keynesian revolution; rise of macroeconomic policy; monetarist/new classical counter revolution

21st century: increasing dialogue with other disciplines such as psychology and the growing role of behavioural economics; increasing awareness of the interdependencies that exist between the economy, society and environment and the need to appreciate the compelling reasons for moving toward a circular economy

How do economists approach the world?

Microeconomics

The law of demand—relationship between price and quantity — Assumptions underlying the law of demand (HL only)

The law of demand—relationship between price and quantity — Assumptions underlying the law of demand (HL only) — The income and substitution effects

The law of demand—relationship between price and quantity — Assumptions underlying the law of demand (HL only) — The law of diminishing marginal utility

Relationship between an individual consumer’s demand and market demand

Non-price determinants of demand — Income

Non-price determinants of demand — Tastes and preferences

Non-price determinants of demand — Future price expectations

Non-price determinants of demand — Price of related goods (in the cases of substitutes and complements)

Non-price determinants of demand — Number of consumers

Movements along the demand curve and shifts of the demand curve

Demand (includes HL only sub-topics)

The law of supply—relationship between price and quantity — Assumptions underlying the law of supply (HL only)

The law of supply—relationship between price and quantity — Assumptions underlying the law of supply (HL only) — The law of diminishing marginal returns

The law of supply—relationship between price and quantity — Assumptions underlying the law of supply (HL only) — Increasing marginal costs

Relationship between an individual producer’s supply and market supply

Non-price determinants of supply — Changes in costs of factors of production (FOPs)

Non-price determinants of supply — Prices of related goods (in the cases of joint and competitive supply)

Non-price determinants of supply — Indirect taxes and subsidies

Non-price determinants of supply — Future price expectations

Non-price determinants of supply — Changes in technology

Non-price determinants of supply — Number of firms

Movements along and shifts of the supply curve

Supply (includes HL only sub-topics)

Demand and supply curves forming a market equilibrium

Shifting the demand and supply curves to produce a new market equilibrium, with reference to excess demand

Functions of the price mechanism — Resource allocation

Functions of the price mechanism — Resource allocation — Signalling

Functions of the price mechanism — Resource allocation — Incentive

Functions of the price mechanism — Rationing

Allocative efficiency at the competitive market equilibrium: — social/community surplus maximized at equilibrium

Allocative efficiency at the competitive market equilibrium: — marginal benefit (MB) equals marginal cost (MC)

Competitive market equilibrium

Rational consumer choice (HL only) — Behavioural economics—limitations of the assumptions of rational consumer choice

Rational consumer choice (HL only) — Behavioural economics—limitations of the assumptions of rational consumer choice — Biases—rule of thumb, anchoring and framing, availability

Rational consumer choice (HL only) — Behavioural economics—limitations of the assumptions of rational consumer choice — Bounded rationality

Rational consumer choice (HL only) — Behavioural economics—limitations of the assumptions of rational consumer choice — Bounded self-control

Rational consumer choice (HL only) — Behavioural economics—limitations of the assumptions of rational consumer choice — Bounded selfishness

Rational consumer choice (HL only) — Behavioural economics—limitations of the assumptions of rational consumer choice — Imperfect information

Behavioural economics in action (HL only) — Choice architecture—default, restricted, and mandated choices

Behavioural economics in action (HL only) — Nudge theory

Business objectives (HL only) — Profit maximization

Business objectives (HL only) — Alternative business objectives

Business objectives (HL only) — Alternative business objectives — Corporate social responsibility

Business objectives (HL only) — Alternative business objectives — Market share

Business objectives (HL only) — Alternative business objectives — Satisficing

Business objectives (HL only) — Alternative business objectives — Growth

Critique of the maximizing behaviour of consumers and producers

Price elasticity of demand (PED) — percentage change in quantity demanded

PED = percentage change in price — Degrees of PED—theoretical range of values for PED

PED = percentage change in price — Changing PED along a straight line downward sloping demand curve (HL only)

Unit 2: Microeconomics — Determinants of PED—number and closeness of substitutes, degree of necessity, proportion of income spent on the good, time

Unit 2: Microeconomics — Relationship between PED and total revenue

Unit 2: Microeconomics — Importance of PED for firms and government decision- making

Unit 2: Microeconomics — Reasons why the PED for primary commodities is generally lower than the PED for manufactured products (HL only)

Income elasticity of demand (YED) — percentage change in quantity demanded

YED = percentage change in income — Income elastic demand (services and luxury goods) and income inelastic demand (necessities)

YED = percentage change in income — Significance of sign

YED = percentage change in income — Significance of sign — Positive YED (normal goods) and negative YED (inferior goods)

YED = percentage change in income — Significance of sign — Less than one (necessities) and greater than one (services and luxury goods)

YED = percentage change in income — Importance of YED (HL only):

YED = percentage change in income — Importance of YED (HL only): — for firms

YED = percentage change in income — Importance of YED (HL only): — in explaining changes in the sectoral structure of the economy.

Elasticity of demand (includes HL only sub-topics)

Price elasticity of supply (PES) — percentage change in quantity supplied

PES = percentage change in price — Degrees of PES—theoretical range of values for PES

PES = percentage change in price — Determinants of PES—time, mobility of factors of production, unused capacity, ability to store, rate at which costs increase

PES = percentage change in price — Reasons why the PES for primary commodities is generally lower than the PES for manufactured products (HL only)

Inquiry—possible areas to explore (not an exhaustive list) — An investigation into the problems associated with volatile pric

Inquiry—possible areas to explore (not an exhaustive list) — An investigation into how choice architecture influences decisio example, its role in a supermarket, or how it may influence the countries).

Inquiry—possible areas to explore (not an exhaustive list) — A critical investigation into the CSR practices of different com

Inquiry—possible areas to explore (not an exhaustive list) — An investigation into the extent to which firms actually use kno decisions.

Elasticity of supply (includes HL only sub-topics)

Reasons for government intervention in markets — Influencing market outcomes in order to:

Reasons for government intervention in markets — Influencing market outcomes in order to: — earn government revenue

Reasons for government intervention in markets — Influencing market outcomes in order to: — support firms

Reasons for government intervention in markets — Influencing market outcomes in order to: — support households on low incomes

Reasons for government intervention in markets — Influencing market outcomes in order to: — influence level of production

Reasons for government intervention in markets — Influencing market outcomes in order to: — influence the level of consumption

Reasons for government intervention in markets — Influencing market outcomes in order to: — correct market failure

Reasons for government intervention in markets — Influencing market outcomes in order to: — promote equity.

Main forms of government intervention in markets — Price controls: price ceilings (maximum prices) and price floors (minimum prices)

Unit 2: Microeconomics — Indirect taxes and subsidies

Unit 2: Microeconomics — Direct provision of services

Unit 2: Microeconomics — Command and control regulation and legislation

Unit 2: Microeconomics — Consumer nudges (HL only)

Government intervention in markets—consequences for markets and stakeholders

Role of government in microeconomics (includes HL only calculation)

Socially optimum output: marginal social benefit (MSB) equals marginal social cost (MSC).

(MSB = MSC): allocative efficiency; social/community surplus — Positive externalities of production and consumption and welfare loss

(MSB = MSC): allocative efficiency; social/community surplus — Merit goods

(MSB = MSC): allocative efficiency; social/community surplus — Negative externalities of production and consumption and welfare loss

(MSB = MSC): allocative efficiency; social/community surplus — Demerit goods

(MSB = MSC): allocative efficiency; social/community surplus — Common pool resources

(MSB = MSC): allocative efficiency; social/community surplus — Common pool resources — Characteristics: Tragedy of commons, rivalrous but non-excludable

(MSB = MSC): allocative efficiency; social/community surplus — Common pool resources — Unsustainable production creating negative externalities

Government intervention in response to externalities and — Indirect (Pigouvian) taxes

Government intervention in response to externalities and — Carbon taxes

Government intervention in response to externalities and — Legislation and regulation

Government intervention in response to externalities and — Education—awareness creation

Government intervention in response to externalities and — Tradable permits

Government intervention in response to externalities and — International agreements

Government intervention in response to externalities and — Collective self-governance

Government intervention in response to externalities and — Subsidies

Government intervention in response to externalities and — Government provision

Strengths and limitations of government policies to correct — challenges involved in measurement of externalities

Strengths and limitations of government policies to correct — degree of effectiveness

Strengths and limitations of government policies to correct — consequences for stakeholders

Importance of international cooperation — Global nature of sustainability issues

Importance of international cooperation — Challenges faced in international cooperation

Importance of international cooperation — Monitoring, enforcement

Market failure—externalities and common pool or common access resources (includes HL only calculation)

Public goods — Non-rivalrous, non-excludable

Government intervention in response to public — Direct provision

Government intervention in response to public — Contracting out to the private sector

Market failure—public goods

Asymmetric information — Adverse selection

Responses to asymmetric information — Government responses: legislation and regulation, provision of information

Responses to asymmetric information — Private responses: signalling and screening

Market failure—asymmetric information (HL only)

Perfect competition–many firms, free entry, homogeneous products

Monopoly—single or dominant firm, high barriers to entry, no close substitutes

Imperfect competition — Oligopoly—few large firms, high barriers to entry, interdependence

Imperfect competition — Monopolistic competition—many firms, free entry, product differentiation

Rational producer behaviour—profit — Total revenue - Total costs (TR -TC)

Rational producer behaviour—profit — Marginal cost = Marginal revenue (MC=MR)

Rational producer behaviour—profit — Abnormal profit (AR > AC)*

Rational producer behaviour—profit — Normal profit (AR = AC)*

Rational producer behaviour—profit — Losses (AR < AC)*

Degrees of market power — Meaning of market power

Degrees of market power — Perfect competition—no market power —firm as price taker

Degrees of market power — Perfect competition—no market power —firm as price taker — profit maximization:

Degrees of market power — Perfect competition—no market power —firm as price taker — in the short run

Degrees of market power — Perfect competition—no market power —firm as price taker — in the long run

Degrees of market power — Perfect competition—no market power —firm as price taker — Meaning of allocative efficiency, necessary conditions

Degrees of market power — Perfect competition—no market power —firm as price taker — Imperfect competition—varying degrees of market power—firm as price maker

Monopoly — Allocative inefficiency (market failure)

Monopoly — Welfare loss in a monopoly in comparison with perfect competition due to restricted output and higher price

Oligopoly — Collusive versus non-collusive

Oligopoly — Interdependence, risk of price war, incentive to collude, incentive to cheat

Oligopoly — Allocative inefficiency (market failure) simple game theory payoff matrix

Oligopoly — Price and non-price competition

Oligopoly — Measurement of market concentration – concentration ratios Monopolistic competition

Oligopoly — Profit maximization: — in the short run

Oligopoly — Profit maximization: — in the long run

Oligopoly — Less market power due to many substitutes—more elastic demand curve compared with monopoly

Oligopoly — Allocative inefficiency (market failure)

Oligopoly — Less inefficiency, more product variety

Advantages of large firms having significant — Economies of scale including natural monopolies

Advantages of large firms having significant — Abnormal profits may finance investments in research and development (R&D), hence innovation

Risks in markets dominated by one or a few — Risks in terms of output, price, consumer choice

Government intervention in response to — Legislation and regulation

Government intervention in response to — Government ownership

Government intervention in response to — Fines

Market failure—market power (HL only)

Workings of free market economy may result in an unequal distribution of income and wealth

Inquiry—possible areas to explore (not an exhaustive — The impact of a price floor or price ceiling in a

Inquiry—possible areas to explore (not an exhaustive — The impact of a government policy to correct mark

Inquiry—possible areas to explore (not an exhaustive — How different communities approach the managing o

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Critique of the maximizing behaviour of consumers and producers

Syllabus concepts to know

Rational consumer choice (HL only)

Behavioural economics in action (HL only)

Business objectives (HL only)

Study & practice 2.4 Critique of the maximizing behaviour of consumers and producers

Practice 2.4 in Question Bank

Read Notes for 2.4

Review 2.4 Flashcards