# What is economics

> IB Economics SL · IB Economics SL
> Source: https://www.owlsprep.com/study/ib-economics-sl-u1-what-is-economics/

This sub-topic introduces the foundational concepts that underpin all of IB Economics. We cover the core economic problem of scarcity, the link between scarcity and choice, opportunity cost, and the split between microeconomics and macroeconomics.

**Prerequisites:** No formal prerequisites, this is the opening topic of the course

## Learning objectives

- Define the core economic problem of scarcity
- Explain why scarcity forces all economic agents to make choices
- Define opportunity cost and identify it in real-world scenarios
- Distinguish between the core branches of microeconomics and macroeconomics

## The Core Economic Problem: Scarcity

**Scarcity** — The universal, permanent condition where society has unlimited wants, but only a limited amount of resources (factors of production) to satisfy those wants.

*Example:* A city has 100 hectares of empty land; it can build a new public park or a new housing development, but cannot do both at full capacity because land is a scarce resource.

Scarcity applies to all economic agents: individual consumers, firms, and governments. Even the wealthiest person on Earth has limited time and unlimited wants, so they still face scarcity and must make choices.

> **tip**
>
> Scarcity is not the same as a temporary shortage. A shortage occurs when quantity demanded exceeds quantity supplied at a given price; scarcity is a permanent condition that applies to all resources.

**Worked example:** A student has 2 hours of free time on a Friday evening. They can either go to the movies with friends or study for a Monday math test. Explain why scarcity applies to this scenario.

1. 1. Identify the limited resource: the student only has 2 hours of free time available, which is finite.
2. 2. Identify the unlimited wants: the student wants both to socialize at the movies and to get a good grade by studying.
3. 3. Because the limited resource of time cannot satisfy both wants fully, the condition of scarcity holds.

## Scarcity, Choice and Opportunity Cost

Because scarcity means we cannot have everything we want, we must make choices between competing alternatives. Every choice means giving up something else, and the value of the next best alternative we give up is called opportunity cost.

**Opportunity Cost** — The value of the next highest-valued alternative that is foregone when a choice is made. Only the next best alternative counts, not all possible alternatives.

*Notation:* OC

*Example:* If you rank your options for a Saturday as: 1) work for \textbackslash\backslash$100, 2) go to a concert, 3) stay home, the opportunity cost of working is the value of going to the concert.

**Worked example:** A local government has a \textbackslash\backslash$5 million grant that can only fund one infrastructure project. The top two options are: a new bike lane network (valued at \textbackslash\backslash$5 million benefit) or a new sewage treatment plant (valued at \textbackslash\backslash$4 million benefit). What is the opportunity cost of building the bike lanes?

1. 1. Identify the choice made: the government uses all \textbackslash\backslash$5 million to build the bike lane network.
2. 2. Identify the next best alternative: the sewage treatment plant, which provides \textbackslash\backslash$4 million of benefit to the community.
3. 3. Opportunity cost is the value of the next best alternative foregone, so the opportunity cost is the sewage treatment plant and its \textbackslash\backslash$4 million of benefit.

**Check your understanding**

Test your understanding:

1. What is the opportunity cost of attending university full-time?

   - A. Only the tuition fees you pay to attend
   - B. The full-time job you would have taken if you did not attend
   - C. There is no opportunity cost if your parents pay your tuition
   - D. Only the cost of textbooks and accommodation

   *Why:* Opportunity cost counts the next best alternative, not just monetary costs. The highest-valued alternative to full-time university is almost always a full-time job, whose wages and experience are the opportunity cost of your choice.

## Core Branches: Microeconomics vs Macroeconomics

IB Economics divides the discipline into two broad branches based on the scope of the question being studied: microeconomics focuses on small-scale individual decision-making, while macroeconomics focuses on the economy as a whole.

**Branches of Economics** — The core split of economics based on scope: microeconomics studies individual agents and markets, while macroeconomics studies the aggregate economy.

- - **Microeconomics**: Topics include consumer behavior, firm pricing, individual market supply and demand, international trade, and market failure.
- - **Macroeconomics**: Topics include inflation, unemployment, economic growth, fiscal and monetary policy, and global economic development.

**Worked example:** Classify each question as microeconomics or macroeconomics: (1) How will a tax on sugary drinks affect soda sales? (2) How will a national sales tax affect the overall unemployment rate?

1. 1. For question 1, the question focuses on the specific market for sodas, an individual market. This is a microeconomics question.
2. 2. For question 2, the question asks about the overall unemployment rate of the entire national economy. This is a macroeconomics question.

> **Exam tip**
>
> In multiple choice questions, to classify a topic ask: does it look at one specific market or the whole economy? This will always get you the correct answer.

## Common pitfalls

- **Wrong:** Claiming opportunity cost is the sum of all alternatives you give up.
  - Why it fails: Opportunity cost only counts the *next best* (highest-valued) alternative, not every possible alternative you did not choose.
  - Correct: Only include the value of the single highest-valued option you did not choose when calculating opportunity cost.
- **Wrong:** Confusing scarcity with a temporary shortage of a good.
  - Why it fails: A shortage is a temporary condition where demand exceeds supply at the current price. Scarcity is a permanent, universal condition of limited resources vs unlimited wants.
  - Correct: Remember that scarcity exists even if there is no shortage of any specific good in the market.
- **Wrong:** Claiming that rich people do not face scarcity.
  - Why it fails: Even billionaires have limited time and unlimited wants, so they still must make choices between competing options.
  - Correct: Scarcity applies to all people and societies, regardless of their total income or accumulated wealth.
- **Wrong:** Thinking opportunity cost is only measured in money.
  - Why it fails: Opportunity cost measures value, which often includes non-monetary benefits like time, experience, or enjoyment.
  - Correct: Always consider non-monetary alternatives when identifying opportunity cost in exam questions.

## Cheatsheet

| Concept | Core Definition |
| --- | --- |
| Scarcity | Unlimited wants exceed limited resources, core economic problem |
| Choice | Required due to scarcity; every choice involves trade-offs |
| Opportunity Cost | Value of the next best alternative foregone |
| Microeconomics | Study of individual agents and specific markets |
| Macroeconomics | Study of the aggregate economy as a whole |

## What's next

The concepts of scarcity, choice and opportunity cost you learned here are the foundation for every other topic you will study in IB Economics SL. All economic analysis, from supply and demand to fiscal policy, starts from the core assumption that scarcity forces trade-offs between competing options. Next, you will build on these concepts to study factors of production and the production possibilities frontier (PPF), a graphical model that illustrates opportunity cost and trade-offs for an economy. Mastering these basic concepts now will make all more advanced topics much easier to understand, as you will recognize the core logic that ties all of economics together.

- [How economists approach the world](https://www.owlsprep.com/study/ib-economics-sl-u1-how-economists-approach-the-world/)
- [Microeconomics](https://www.owlsprep.com/study/ib-economics-sl-u2-overview/)
- [Demand](https://www.owlsprep.com/study/ib-economics-sl-u2-demand/)

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