IB Economics HL cheat sheet

Scarcity: infinite wants versus finite resources (land, labour, capital, entrepreneurship); it forces choice and creates opportunity cost.

Opportunity cost = value of the next-best alternative forgone; it is not the sum of all alternatives.

PPC assumptions: fixed quantity and quality of factors, fixed technology, full efficiency, two goods only.

Points inside the PPC = unemployment or inefficiency; points on the curve = productive efficiency; points beyond = unattainable at current capacity.

PPC slope = marginal rate of transformation = opportunity cost of one more unit of the good on the horizontal axis.

A bowed-out (concave) PPC implies increasing opportunity cost because factors are not perfectly substitutable between uses.

Outward shift of PPC = economic growth from more or better factors, or improved technology; a pivot occurs when only one good's capacity changes.

Positive statements are testable claims about what is; normative statements are value judgements about what ought to be.

Ceteris paribus: all other influences held constant, allowing isolation of a single variable's effect.

Law of demand: inverse price-quantity relationship; movement along the curve is caused by price, a shift by non-price determinants (income, tastes, related-good prices, expectations, number of buyers).

Equilibrium where Qd = Qs; a surplus (price above equilibrium) pushes price down, a shortage (price below) pushes it up.

PED = %ΔQd ÷ %ΔP; |PED| > 1 elastic, < 1 inelastic, = 1 unit elastic; PED falls along a linear demand curve moving downward.

PED and total revenue: if demand is elastic, a price cut raises revenue; if inelastic, a price rise raises revenue.

PES = %ΔQs ÷ %ΔP; greater in the long run and when spare capacity and factor mobility exist.

YED > 0 normal good, YED < 0 inferior good; XED > 0 substitutes, XED < 0 complements.

Indirect tax shifts supply up by the tax; incidence falls more on the more inelastic side of the market. A subsidy shifts supply down.

Price ceiling below equilibrium causes shortage and non-price rationing; price floor above equilibrium causes surplus, requiring government purchase or quotas.

Market failure types: negative/positive externalities, public goods (non-rival, non-excludable), common pool resources, asymmetric information, monopoly power, factor immobility, inequality.

Accounting cost counts explicit payments; economic cost adds implicit (opportunity) cost; normal profit = zero economic profit.

Short run: at least one fixed factor. SRAC is U-shaped via the law of diminishing marginal returns; MC cuts AC at minimum AC.

Long run: all factors variable; LRAC is the envelope of SRAC curves; economies of scale give the downward section, diseconomies the upward.

Profit maximisation rule: MR = MC (and MC rising); revenue maximisation: MR = 0; sales maximisation: AR = AC; allocative efficiency: P = MC.

Perfect competition: many firms, homogeneous product, free entry/exit, price taker, P = MR = AR; long-run equilibrium at minimum AC with normal profit.

Monopoly: single seller, barriers to entry, downward-sloping AR, MR below AR and twice as steep for linear demand; deadweight loss versus competitive output.

Monopolistic competition: differentiated products, many firms, low barriers; short-run supernormal profit erodes to normal profit in the long run.

Oligopoly: interdependence, kinked demand curve explains price rigidity; game theory and Nash equilibrium model collusion and prisoner's dilemma.

HL: profit max where MR = MC; shut-down point is min AVC in the short run; contestable markets emphasise threat of entry over firm count.

Expenditure approach: GDP = C + I + G + (X − M); GNP = GDP + net factor income from abroad; real values are nominal deflated by a price index.

AD = C + I + G + (X − M), downward sloping due to wealth, interest rate and net export effects.

SRAS slopes upward due to sticky wages and diminishing returns; LRAS is vertical (monetarist) at potential output or kinked (Keynesian) with a spare-capacity range.

Demand-pull inflation arises from AD shifting right; cost-push from SRAS shifting left; both raise the price level but have different output effects.

Fiscal policy: expansionary = higher G or lower T, shifting AD right; automatic stabilisers dampen the cycle; crowding out and time lags are key constraints.

Monetary policy: central bank sets interest rates; lower rates raise C and I and shift AD right; transmission via credit, asset prices, confidence and exchange rate.

Unemployment types: frictional, structural, seasonal, cyclical (demand-deficient), real-wage; only cyclical responds strongly to demand management.

Costs of inflation: menu costs, shoe-leather costs, uncertainty reducing investment, redistributions between borrowers and lenders, fiscal drag.

Phillips curve trade-off and the sacrifice ratio link inflation and unemployment; NAIRU is the non-accelerating inflation rate of unemployment.

Short-run Phillips curve shows inverse inflation-unemployment trade-off; long-run Phillips curve is vertical at the natural rate (NAIRU).

Friedman-Phelps expectations argument: expansionary policy works only if inflation is unanticipated; once expectations adjust, unemployment returns to NAIRU.

Monetarism: money supply growth drives inflation in the long run; quantity theory MV = PY; rule-based policy preferred to discretion.

New classical: rational expectations and market clearing mean anticipated policy has no real effect; only surprise policy changes output.

Keynesian: prices and wages sticky, economy can settle below full employment; activist fiscal policy justified; LRAS kinked.

New Keynesian: micro-founded sticky prices (menu costs, contracts) justify short-run monetary policy effectiveness.

Growth models: Harrod-Domar (growth depends on saving rate and capital-output ratio), Solow (convergence via capital deepening, diminishing returns), endogenous growth (human capital, R&D, institutions).

Real GDP per capita growth rate ≈ nominal growth minus inflation minus population growth; rule of 70 gives doubling time.

Lorenz curve plots cumulative population against cumulative income; Gini coefficient = area between Lorenz curve and diagonal ÷ total area under diagonal, from 0 to 1.

Comparative advantage: a country gains by specialising where its opportunity cost is lower, even without absolute advantage; terms of trade = export price index ÷ import price index × 100.

Protectionist tools: tariffs, quotas, subsidies, voluntary export restraints, administrative and technical barriers; effects include consumer loss, producer gain, government revenue, deadweight loss.

Arguments for protection: infant industry, national security, anti-dumping, employment protection, revenue; counterarguments: retaliation, inefficiency, higher consumer prices.

Floating exchange rate determined by demand and supply of the currency; appreciation reduces import prices and raises export prices, hurting net exports.

Fixed exchange rate requires reserves or interest rate defence; devaluation restores competitiveness at the cost of imported inflation.

Marshall-Lerner condition: devaluation improves the current account only if |PEDx| + |PEDm| > 1; J-curve shows the short-run worsening first.

Balance of payments: current account (goods, services, income, transfers) + capital account + financial account + errors and omissions = 0.

Integration levels: free trade area, customs union (common external tariff), common market (factor mobility), monetary union, full economic union.

Trading bloc effects: trade creation (efficient new trade) versus trade diversion (switching to a higher-cost partner).

Growth = rise in real GDP per capita; development = multidimensional improvement in living standards, measured by HDI (health, education, income) and other composite indices.

GDP per capita in PPP terms adjusts for price-level differences; it omits inequality, environmental damage and non-market activity.

Barriers to development: low savings and capital, poor infrastructure, weak institutions and corruption, human capital deficits, primary-product dependence, conflict, debt overhang.

Poverty trap: low income → low saving → low investment → low growth → low income; requires external or public injection to break.

Import substitution: protect domestic industry to replace imports; risks inefficiency, rent-seeking and small markets. Export promotion: outward orientation, exploit comparative advantage, but exposed to external shocks.

Foreign aid types: bilateral, multilateral, tied/untied, humanitarian, project and programme; effectiveness depends on governance, absorptive capacity and conditionality.

Debt: HIPC and multilateral relief; debt service crowds out health and education spending; odious debt and moral hazard arguments.

SDGs: 17 goals adopted 2015 with a 2030 target, integrating poverty, hunger, health, education, gender, water, energy, growth, inequality, cities and climate.

Sustainable development balances present needs against future generations; environmental Kuznets curve hypothesises pollution rises then falls with income.

Three commentaries, each based on a different section of the syllabus (one micro, one macro, one global economy); each must use a distinct news article published within the 12 months before writing.

Each commentary is worth 14 marks: 5 for diagrams, 4 for terminology, 5 for application and analysis; the portfolio is capped at 45 marks.

Article must be included in full and be from a recognised news source; blogs, company press releases and textbooks are not acceptable.

Diagrams must be fully labelled (axes, curves, equilibrium points, shifts with arrows) and explicitly explained in the text, not merely pasted.

Definitions must be used in context: define the term, then apply it to the specific article rather than listing textbook definitions.

Analysis requires a chain of reasoning linking the article's facts to the diagram and to a consequence, ideally with a welfare or stakeholder effect.

Evaluation is not required for IA marks but strong application shows awareness of magnitude, time frame and ceteris paribus limits.

Word limit 750 words per commentary, excluding diagrams, labels, headings and the article; excess words are penalised.

Use the article's own data (prices, quantities, rates) as evidence to demonstrate genuine application.