# What is economics?

> IB Economics Higher Level · IB Economics HL (2022 syllabus)
> Source: https://www.owlsprep.com/study/ib-economics-hl-u1-what-is-economics/

This sub-topic introduces the fundamental problem of economics: scarcity of resources relative to unlimited human wants. You will learn the core definition of economics and the split between microeconomics and macroeconomics, the foundation of all IB Economics topics.

**Prerequisites:** No prior economics knowledge is required

## Learning objectives

- Define economics and identify its core problem of scarcity
- Distinguish between the two main branches of economics: microeconomics and macroeconomics
- Explain why scarcity is a universal condition for all societies
- Recognize the key elements of the IB definition of economics for exam answers

## The Core Problem: Scarcity and Unlimited Wants

**Scarcity** — The fundamental economic condition that arises when finite resources are insufficient to satisfy all unlimited human wants and needs.

*Example:* A household with $1000 monthly disposable income cannot afford all the goods and services it desires.

Scarcity is a universal condition that affects all societies, regardless of their level of development or income. Even the wealthiest countries have limited factors of production (land, labor, capital, entrepreneurship) to produce goods and services, so all societies must make choices about what to produce.

**Worked example:** A student has 2 hours of free time before their economics exam. They can either study to improve their score or go out with friends. Explain how scarcity applies to this situation.

1. First, identify the limited resource in this scenario: time is fixed at just 2 hours, so it is scarce.
2. Next, identify the two competing wants the student has: a higher exam score from studying, and enjoyment from spending time with friends.
3. The 2 hours cannot be used fully for both activities, so the student cannot satisfy both wants at the same time. This confirms that scarcity applies here.

## The Core Definition of Economics

**Economics** — The social science that studies how individuals, firms, governments and societies allocate scarce resources to satisfy unlimited human wants, and the outcomes of these choices.

*Example:* Economics studies how a consumer chooses what to buy with a limited budget, and how a government chooses how to spend tax revenue.

The entire discipline of economics exists because scarcity forces choice: if resources were unlimited and all wants could be satisfied, there would be no need to study allocation decisions. IB exam mark schemes explicitly require both scarcity and unlimited wants to be included in a full definition of economics.

**Exam command terms**

For definition questions on IB Economics exams, follow this guidance:

- **Define economics** — State the full definition that links scarcity of resources and unlimited wants. *(You will lose marks if you only mention one of these two required elements.)*

**Worked example:** A politician claims: "Once a country achieves high economic growth, it eliminates scarcity, so economics is no longer needed." Evaluate this claim using core economic principles.

1. Recall that scarcity is defined as limited resources relative to unlimited wants. Economic growth increases the amount of goods and services a country can produce, but does not make resources unlimited.
2. As a country's income rises, human wants continue to expand: new products, higher living standards, and new desires emerge, so wants remain unlimited even with higher output.
3. The country still must make choices about how to allocate its larger but still limited resource base, so scarcity remains, and economics is still relevant. The claim is incorrect.

## Microeconomics vs Macroeconomics

IB Economics splits the study of the discipline into two core branches, which are covered separately throughout the course. The key difference between the two is the scope of analysis: individual units vs the entire economy.

**Microeconomics** — The branch of economics that studies the behavior and decision-making of individual economic units: individual consumers, individual firms, and individual single markets.

**Macroeconomics** — The branch of economics that studies the behavior and performance of the entire economy as a whole, focusing on aggregate economy-wide changes.

**Worked example:** Classify each of the following topics as microeconomics or macroeconomics: (1) The impact of a sales tax on the price of coffee, (2) The change in a country's national unemployment rate between 2021 and 2022.

1. The first topic analyzes the impact of a tax on a single individual market (coffee). This is focused on an individual economic unit, so it is classified as microeconomics.
2. The second topic analyzes an aggregate measure (total unemployment) for the entire national economy. This is focused on the whole economy rather than individual units, so it is classified as macroeconomics.

## Common pitfalls

- **Wrong:** Claiming scarcity only affects poor people or poor countries.
  - Why it fails: Scarcity is a universal condition caused by unlimited wants relative to limited resources, not low income.
  - Correct: Recognize that scarcity applies to all individuals and all economies, regardless of their income level.
- **Wrong:** Defining economics without mentioning both scarcity and unlimited wants.
  - Why it fails: IB exam mark schemes require both core elements of the definition to award full marks.
  - Correct: Always include both 'limited scarce resources' and 'unlimited human wants' when defining economics.
- **Wrong:** Automatically classifying any topic involving government as macroeconomics.
  - Why it fails: Government intervention can happen in individual markets, which is still a microeconomic topic.
  - Correct: Classify based on scope: individual market = microeconomics, whole economy = macroeconomics, regardless of government involvement.
- **Wrong:** Thinking economics is only about money, business, and finance.
  - Why it fails: Economics is a social science that studies all choices made under scarcity, including non-market choices.
  - Correct: Recognize economics applies to any situation involving choice from scarce resources, not just commercial business activity.

## Cheatsheet

| Key Term | Core Definition |
| --- | --- |
| Scarcity | Finite resources insufficient for unlimited wants |
| Economics | Study of allocating scarce resources to meet unlimited wants |
| Microeconomics | Study of individual consumers, firms, and single markets |
| Macroeconomics | Study of aggregate performance of the entire economy |

## What's next

Now that you understand the core definition of economics and the fundamental problem of scarcity, the next step is to explore the key implication of scarcity: every choice requires giving up something else of value, captured by the concept of opportunity cost. Opportunity cost is one of the most frequently tested core concepts in IB Economics, and it forms the basis of the production possibilities curve (PPC) model, which you will learn next. Understanding opportunity cost also builds the foundation for analyzing trade-offs made by individuals, firms, and governments, a key skill for all IB Economics exam papers.

- [Scarcity, choice and opportunity cost](https://www.owlsprep.com/study/ib-economics-hl-u1-scarcity-choice-and-opportunity-cost/)
- [Production possibility frontiers](https://www.owlsprep.com/study/ib-economics-hl-u1-production-possibility-frontiers/)
- [Positive vs normative economics](https://www.owlsprep.com/study/ib-economics-hl-u1-positive-vs-normative-economics/)

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