Economics as a social science and the nine key concepts
Economics studies how households, firms and governments use scarce resources when there are many competing uses for them.
It covers what gets made, who buys and uses it, and who ends up with what.
Money helps people coordinate, but economics is not only about money.
How you spend your time, unpaid work at home and the use of clean water or air are economic questions too.
Why economics is a social science
Economics is a social science because it studies how people behave and how they deal with each other in society.
Like other sciences, it uses careful reasoning, models and evidence.
Unlike a chemist, though, an economist cannot put a whole country in a lab and hold everything else fixed.
People make their choices inside rules and institutions: property rights, contracts, firms and laws.
These rules shape the options people face and the rewards they get.
So the same lake can be shared out in very different ways under different rules.
Take a reservoir used for drinking water, farming and boating.
A physicist can measure how much water it holds.
An economist asks how the competing uses are balanced, whose access is protected and which benefits are given up.
A claim about how people will behave needs a mechanism.
Suppose a firm expects higher sales.
It hires more workers to make more output.
It will do so only if it has room to produce more, can pay the extra wages and believes the extra sales will last.
People differ, but economics is still more than guesswork.
Patterns show up across many decisions.
Differences between people change how strong a pattern is, who it applies to and who gains or loses.
Economics also borrows from other social sciences.
In 2017 Richard Thaler won the Nobel memorial prize in economics.
The Royal Swedish Academy of Sciences said his work built limited rationality, social preferences and self-control into economic analysis.
In other words, economists study how real people decide, not only how a perfectly logical person would.
Evidence, cause and uncertainty
Economists test their explanations against data on prices, output, jobs and spending.
Where they can, they run experiments or compare similar groups.
When two things rise together, that alone cannot prove one caused the other.
Sales and jobs may both rise because firms are expanding.
They may also both rise because of a third cause, such as a general rise in business confidence.
A good explanation sets out a clear chain of decisions and its main assumptions.
A good test then checks whether the evidence fits that chain.
(Hypotheses, theories and models are covered in a later section.)
The numbers themselves can be uncertain.
The UK's Office for National Statistics (ONS) explains that its first GDP estimates are revised as fuller data arrive.
A revision is not proof that the first figure was careless or that the data are useless.
It means you should treat an early estimate as an estimate.
Ask what is measured, over which period, and whether the definitions match before you compare two figures.
Microeconomics: individual decision-makers and markets
Microeconomics studies individual decision-makers, such as consumers, workers and firms, and particular markets.
It asks how consumers spend their income, how firms use their resources and how buyers and sellers interact in one market.
A study of rents near a university is micro: it looks at one housing market.
A study of how one employer recruits is also micro, even if the employer is huge.
Size and geography do not decide the label.
A world market for one commodity, such as coffee, is still a micro topic.
What matters is the level of the question.
A government choice about sharing water between farms and homes is micro too, because it concerns one market, even though a national government makes it.
Macroeconomics: the economy as a whole
Macroeconomics studies the economy as a whole.
Its variables are aggregates, meaning totals or averages across the whole economy: total output (GDP), the general price level, unemployment and economic growth.
A rise in the price of one product is not inflation.
Inflation is a sustained rise in the general price level.
In the same way, one firm growing cannot show that national output has grown.
Macro outcomes come from millions of decisions, but you cannot always scale up one person's experience.
One worker can earn more by working extra hours.
If every worker wants extra hours at once, firms must also want that extra labour, and they may not.
The two levels are linked.
National unemployment affects household incomes and so demand in individual markets.
Changes across many firms add up to national output.
In an answer, first state which level the question is about, then explain the links.
Microeconomics
Macroeconomics
Focus
Individual consumers, workers, firms and markets
The whole economy
Typical variables
Price and quantity of one good, one firm's costs, wages in one job market
GDP, general price level, unemployment rate, growth rate
Example question
Why have rents near the university risen?
Why has national unemployment risen?
Common trap
Calling a large or international market "macro"
Treating one price rise as inflation
The nine key concepts
The IB course is framed by nine key concepts.
They are tools for analysing an issue.
You do not need to fit all nine into every answer; pick the ones that explain the problem in front of you.
Concept
Meaning
A question to ask
Scarcity
Resources are limited compared with the needs and wants they could meet
Which limit stops every use being met?
Choice
Decision-makers pick among alternatives
Who chooses what, and what do they give up?
Efficiency
Resources are used without waste to give valued outcomes
Could we get more from the same resources, or use them better?
Equity
Fairness in how opportunities, costs and benefits are shared
Which idea of fairness is being used?
Economic well-being
Living standards and wider quality of life
Who gains security, consumption or quality of life?
Sustainability
Meeting present needs without harming future generations' ability to meet theirs
Does use today cut what is possible later?
Change
Economic conditions and behaviour shift over time
What changes, and how do people adjust?
Interdependence
Economic agents depend on and affect each other
Through which link does an effect spread?
Intervention
Deliberate action, often by government, that changes outcomes
What action changes the result, and with what side effects?
Scarcity and choice go together.
A council with a few building sites must choose between housing, schools and parks.
The issue is not just that sites are limited; it is that all the uses cannot be met at once.
Efficiency and equity answer different questions.
A plan can use every resource with no waste and still leave some households with very little.
A plan aimed at fairness can waste resources.
One can exist without the other.
Economic well-being is wider than the amount people buy.
Secure jobs, good health and a clean environment matter too.
More output can raise well-being, but who gets it and what it costs also count.
Sustainability adds time.
Production today may use up a resource that production tomorrow needs.
The comparison is between benefits now and possibilities later.
Change and interdependence explain how effects spread.
If households cut spending, firms sell less.
Firms may then cut jobs or orders, which hits workers and suppliers.
Trace each link; do not just say "everyone is affected".
Intervention needs a concrete action and a mechanism.
A government can set water-use rules, fund pipes or limit pollution.
Whether it works depends on how it is run and how people respond, and that needs evidence.
Writing a concept-based paragraph
A strong paragraph follows the chain: the limit, the decision, how the effect spreads and the result.
Tie each concept to a fact from the context, then name a condition or a missing piece of evidence.
Back to the reservoir.
Scarcity is limited water against many uses.
Choice is giving the next unit of water to farms or to homes.
Interdependence is how farm output affects food suppliers and shoppers.
Sustainability asks whether withdrawals exceed refilling over time.
Equity asks who bears the limits.
A list of these five words, with no links, explains nothing.
How the IB examines this
- Paper 1: the key concepts frame arguments on later topics. Use the one or two that explain the mechanism, not a list in the introduction.
- Paper 2: you may need to say whether a source is about one market or an aggregate. A national setting alone does not make an issue macro.
- Paper 2: you may need to explain which concept a decision in the text shows, and why. Link the concept to the source instead of just defining it.
- Across the course: keep what the evidence shows separate from what you infer from it. You need this skill in every paper.
- Economics: the study of how scarce resources are allocated among competing needs and wants.
- Social science: a subject that studies human behaviour and relationships in society in a systematic way.
- Microeconomics: the study of individual decision-makers and particular markets.
- Macroeconomics: the study of the economy as a whole and its aggregate variables.
- Aggregate: a total or average across the whole economy, such as GDP or the unemployment rate.
- Interdependence: economic agents depend on each other, so one agent's decisions affect others.
- Equity: fairness in how economic opportunities, costs and benefits are shared.
Fictional briefing. Researchers carry out three studies: hiring by a national railway company, the change in the economy's unemployment rate, and world trade in one crop.
Distinguish the level of analysis of each study. [6]
1. Hiring by one firm is micro. Operating nationally cannot turn one firm's choice into an aggregate.
2. The unemployment rate is macro. It combines data across the whole labour force.
3. Trade in one crop is micro. The market is global, but it is still one market.
Answer: The railway and crop studies are micro; the unemployment study is macro.
One mark for each correct label [3] and one for each reason [3].
Fictional district. In Bellmere, one reservoir serves farms and homes.
The council reserves water for essential household use, limits farm withdrawals in dry months and pays to repair leaking pipes.
Explain how scarcity, equity and efficiency apply. [6]
1. Scarcity: the water cannot meet every use. The farm limit responds to scarcity; it is not scarcity itself.
2. Equity: protecting household access applies a fairness rule based on need, though farmers bear a real cost.
3. Efficiency: fixing leaks cuts waste, so the same stock of water supports more use.
Answer: For each concept, one mark for naming it accurately and one for linking it to the council's action [6].
Nothing in the case shows that every household gets the same amount.
In 1992 New Jersey in the United States raised its minimum wage.
David Card and Alan Krueger, in a 1994 study, compared fast-food jobs in New Jersey with those in nearby eastern Pennsylvania, where the minimum wage stayed the same.
They reported no sign that jobs fell in that setting.
Explain why they compared the two areas, and one limit of the finding. [4]
1. Many things affect fast-food jobs at once, such as local demand and the season.
2. Nearby Pennsylvania faced many of the same influences but not the wage rise, so it acts as a comparison group.
3. A gap in job changes between the two areas is then more likely to reflect the wage rise.
4. The study covers one industry, one region and one period, so it cannot show what any minimum wage does in every labour market.
Answer: No lab can hold other influences fixed [1], so a similar area without the policy shows what might have happened without it [1].
The difference can then be linked more plausibly to the policy [1].
Limit: one industry, place and time, so the result may not apply elsewhere [1].
Fictional claim. An analyst writes: "National output increased, so every household is better off."
Explain two reasons why the conclusion is not supported. [4]
1. Output is an aggregate. A rise tells you nothing about how the extra income was shared.
2. Well-being includes wider conditions. More output could come with worse pollution or less secure jobs for some groups.
Answer: The spread of the gain is unknown [1], so you cannot say every household gained [1].
Well-being includes wider conditions [1], and a fall in those could outweigh the material gain [1].
When you apply a concept, write three things: the concept, the economic link it explains, and the evidence from the context.
A concept label with no link does not answer an Explain question.
- Defining economics as the study of money. Money is one way to coordinate; time and natural resources are economic choices too.
- Calling every national issue macro. The question must be about an aggregate or the whole economy.
- Calling a price rise for one product inflation. Inflation is about the general price level.
- Treating efficiency and equity as the same. Using resources without waste says nothing about fair shares.
- Thinking uncertain data are useless. Uncertain data call for careful, qualified conclusions.
Check your understanding
1. State whether a study of rents near one university is microeconomic or macroeconomic. [1]
2. Identify the key concept that deals with fairness in how costs and benefits are shared. [1]
3. State one aggregate variable studied in macroeconomics. [1]
4. Define microeconomics. [2]
5. Define macroeconomics. [2]
6. Outline why economics is a social science. [2]
7. Distinguish between efficiency and equity. [4]
8. Fictional report. One firm's employment rose last year while national employment fell. Suggest why these two facts do not contradict each other. [3]
9. Fictional extract. "A town must use a limited waterfront either for a freight terminal or for a public park. The terminal would raise firms' sales, but nearby residents worry about noise." Explain how choice and interdependence apply. [4]
10. Using the extract in question 9, outline why data on firms' extra sales alone cannot show the effect on economic well-being. [3]
11. Fictional proposal. "A council will limit water withdrawals this year to protect the reservoir's future capacity. Some firms will have to produce less now." Describe the link between sustainability and current choices in this proposal. [4]
12. Fictional claim. "Because a public authority stepped in, the outcome must be both efficient and fair." Explain why this does not follow, referring to both concepts. [4]
13. Using real-world examples, explain the difference between microeconomics and macroeconomics. [10]