IB Economics SL cheat sheet

Scarcity: unlimited wants exceed the finite resources (land, labour, capital, entrepreneurship) available to satisfy them; scarcity forces choice and is the foundation of the discipline.

Opportunity cost = value of the next best alternative forgone; it is measured in real terms (units of the sacrificed good), not in money, and excludes sunk costs.

Three basic questions every economy answers: what to produce, how to produce it, and for whom to produce it.

Free market: resources allocated by price signals and self-interest; command economy: state ownership and central planning; mixed economy: private sector plus government provision and regulation.

PPC shows maximum combinations of two goods producible with given resources and technology; points on the curve are productively efficient, inside are inefficient, outside are currently unattainable.

PPC slope reflects increasing opportunity cost when resources are not perfectly substitutable between uses; a straight-line PPC implies constant opportunity cost.

Outward shift of the PPC = economic growth from more or better resources or improved technology; a movement along the curve is a reallocation of existing resources.

Ceteris paribus = holding all other influences constant; used to isolate the effect of one variable in economic models.

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

Law of demand: price and quantity demanded are inversely related, ceteris paribus; a price change causes movement along the curve, while income, tastes, prices of substitutes/complements and expectations shift the curve.

Law of supply: price and quantity supplied are directly related; changes in costs of production, technology, taxes, subsidies and number of firms shift the supply curve.

Equilibrium price clears the market; above it a surplus (excess supply) pushes price down, below it a shortage (excess demand) pushes price up.

PED = % change in quantity demanded ÷ % change in price; |PED| > 1 elastic, < 1 inelastic, = 1 unit elastic; PED tends to be higher with more substitutes, longer time horizon and larger share of income.

PES = % change in quantity supplied ÷ % change in price; supply is more elastic in the long run and when spare capacity exists.

Cross elasticity (XED) positive for substitutes, negative for complements; income elasticity (YED) positive for normal goods, negative for inferior goods, > 1 for luxury goods.

Total revenue test: if price rises and TR falls, demand is elastic; if TR rises, demand is inelastic; TR is maximised where PED = 1.

Consumer surplus = area below the demand curve and above price; producer surplus = area above the supply curve and below price; total surplus is maximised at competitive equilibrium.

Allocative efficiency occurs where marginal social benefit = marginal social cost, i.e. where the demand and supply curves intersect; any quantity away from equilibrium creates deadweight loss.

Negative production externality (e.g. pollution): marginal social cost exceeds marginal private cost, output is above the social optimum, and a welfare loss triangle appears; a Pigouvian tax equal to the marginal external cost internalises it.

Positive externality (e.g. education, vaccination): marginal social benefit exceeds marginal private benefit, output is below the social optimum; a subsidy or direct provision can raise output toward the optimum.

Merit and demerit goods involve information failure; public goods are non-rival and non-excludable, so the free-rider problem causes underprovision by private markets.

Common access resources are rival but non-excludable; without property rights they are overused, producing the tragedy of the commons - remedies include quotas, tradable permits and regulation.

Price ceiling below equilibrium creates excess demand, shortages, queues and black markets; price floor above equilibrium creates surpluses, requiring government purchase or storage.

Indirect tax shifts supply up by the tax per unit; the burden split depends on PED and PES - the more inelastic side bears the larger share; deadweight loss is smaller when demand is inelastic.

Subsidy shifts supply down; it lowers price to consumers, raises quantity, and costs the government subsidy × new quantity; effectiveness is limited if PED is inelastic.

Government failure: intervention can worsen allocation through poor information, administrative cost, unintended incentives or regulatory capture.

AD = C + I + G + (X − M); the AD curve slopes downward because of wealth, interest-rate and net-export effects.

SRAS slopes upward because of sticky wages and prices; a shift in SRAS comes from changes in input costs, taxes on firms or supply shocks.

LRAS is vertical at potential output (full employment, natural rate of unemployment); only supply-side factors shift it.

Macroeconomic objectives: price stability (low, stable inflation), low unemployment, economic growth, and a sustainable balance of payments; conflicts exist, e.g. growth versus inflation.

Inflation measured by CPI: weighted average price change of a basket; demand-pull inflation comes from AD growth, cost-push from rising input costs.

Unemployment types: frictional, structural, seasonal, cyclical (demand-deficient); the natural rate covers frictional plus structural.

Output gap = actual GDP − potential GDP; a negative gap means recessionary spare capacity, a positive gap means inflationary pressure.

Real GDP per capita is the standard measure of living standards but ignores income distribution, environmental costs and non-market activity.

Expansionary fiscal policy: raise government spending or cut taxes to shift AD right; contractionary fiscal policy does the reverse; the multiplier = 1 ÷ (1 − MPC).

Fiscal policy automatic stabilisers (progressive taxes, unemployment benefits) dampen the cycle without discretionary action; discretionary policy faces recognition and implementation lags.

Monetary policy: central bank sets the policy interest rate; lower rates reduce borrowing costs, raise C and I, and depreciate the currency, shifting AD right.

Transmission of monetary policy works through consumption, investment, net exports and asset prices; it is weaker in a liquidity trap or when confidence is very low.

Expansionary monetary policy risks inflation and asset bubbles; contractionary policy risks recession and higher unemployment.

Supply-side policies: market-based (deregulation, privatisation, labour-market flexibility, lower corporate tax) versus interventionist (education, training, infrastructure) - both aim to shift LRAS right.

Supply-side policies reduce inflation pressure without sacrificing growth but act slowly and may widen inequality.

Policy mix matters: fiscal expansion with tight monetary policy raises interest rates and can crowd out private investment.

Comparative advantage: a country gains from specialising where its opportunity cost of production is lower; absolute advantage alone does not determine gains from trade.

Free trade raises total output and consumer choice but can harm import-competing industries; protection tools include tariffs, quotas, subsidies and administrative barriers.

A tariff raises domestic price, cuts imports, creates deadweight loss and transfers surplus from consumers to producers and government.

Exchange rate: price of one currency in another; appreciation makes exports dearer and imports cheaper, worsening the trade balance if the Marshall-Lerner condition (|PEDx| + |PEDm| > 1) holds.

Fixed exchange rate requires the central bank to use reserves or interest rates to defend the peg; floating rates adjust automatically but bring volatility.

Balance of payments: current account (goods, services, income, transfers) plus capital and financial accounts must sum to zero; a current account deficit is financed by inflows on the financial account.

Economic integration stages in ascending order: free trade area, customs union, common market, monetary union; deeper integration means more sovereignty transferred.

Trading bloc effects: trade creation (switching to a lower-cost partner) versus trade diversion (switching from a cheaper non-member to a member).

Development is broader than growth: it includes income per capita, health, education and inequality, captured by the HDI (life expectancy, education, GNI per capita).

Sources of growth in developing economies: investment in human capital, infrastructure, institutions, technology transfer and stable macroeconomic policy.

Poverty traps: low income limits saving and investment, which keeps income low; breaking the cycle needs external finance, aid or institutional reform.

Barriers to development: dependence on primary commodities and volatile prices, debt burden, capital flight, weak institutions, conflict and brain drain.

Aid (bilateral, multilateral, humanitarian) can finance investment but may create dependency, be tied to donor interests or be absorbed by corruption.

Globalization: growth of trade, FDI, capital flows and information exchange; benefits include access to markets and technology, costs include vulnerability to shocks and pressure on wages and the environment.

Multinational corporations bring capital, jobs and technology but may repatriate profits, exploit weak regulation and crowd out local firms.

Sustainable development requires growth that does not deplete natural capital, aligning with the trade-off between current consumption and future welfare.