Table Of ContentEconomics
for the IB Diploma
Second edition
Ellie Tragakes
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CAMBRIDGE UNIVERSITY PRESS
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Cambridge University Press
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Information on this title: www.cambridge.org/9780521186407
© Cambridge University Press 2009, 2012
This publication is in copyright. Subject to statutory exception and
to the provisions of relevant collective licensing agreements, no
reproduction of any part may take place without the written permission
of Cambridge University Press.
First published 2009
Second edition 2012
Reprinted 2012
Printed in the United Kingdom at the University Press, Cambridge
A catalogue record for this publication is available from the British Library
ISBN 978-0-521-18640-7 Paperback with CD-ROM for Windows and Mac
Cambridge University Press has no responsibility for the persistence or
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or will remain, accurate or appropriate.
This material has been developed independently by the publisher
and the content is in no way connected with nor endorsed by the
International Baccalaureate Organization.
Contents
Introduction to the student and teacher
Introduction
Chapter 1 The foundations of economics
1.1 Scarcity, choice and opportunity cost
1.2 Economics as a social science
1.3 Central themes
Section 1 Microeconomics
Chapter 2 Competitive markets: demand and supply
2.1 Introduction to competitive markets
2.2 Demand
2.3 Supply
2.4 Market equilibrium: demand and supply
2.5 Linear demand and supply functions and market equilibrium (higher level topic)
2.6 The role of the price mechanism and market efficiency
Chapter 3 Elasticities
3.1 Price elasticity of demand (PED)
3.2 Cross-price elasticity of demand (XED)
3.3 Income elasticity of demand (YED)
3.4 Price elasticity of supply (PES)
Chapter 4 Government intervention
4.1 Indirect taxes
4.2 Indirect (excise) taxes: market outcomes, social welfare and tax incidence (higher level topic)
4.3 Subsidies
4.4 Subsidies: market outcomes and social welfare (higher level topic)
4.5 Price controls
Chapter 5 Market failure
5.1 The meaning of market failure: allocative inefficiency
5.2 Externalities: diverging private and social benefits and costs
5.3 Negative externalities of production and consumption
5.4 Positive externalities of production and consumption
5.5 Lack of public goods
5.6 Common access resources and the threat to sustainability
5.7 Asymmetric information (higher level topic)
5.8 Abuse of monopoly power (higher level topic)
5.9 The problem of government failure (policy failure) (supplementary material)
Contents iii
Chapter 6 The theory of the firm I: Production, costs, revenues and profit
(Higher level topic)
6.1 Production in the short run: the law of diminishing returns
6.2 Introduction to costs of production: economic costs
6.3 Costs of production in the short run
6.4 Production and costs in the long run
6.5 Revenues
6.6 Profit
6.7 Goals of firms
Chapter 7 The theory of the firm II: Market structures (Higher level topic)
7.1 Perfect competition
7.2 Monopoly
7.3 Monopolistic competition
7.4 Oligopoly
7.5 Price discrimination
Section 2 Macroeconomics
Chapter 8 The level of overall economic activity
8.1 Economic activity
8.2 Measures of economic activity
8.3 Calculations of GDP (higher level topic)
8.4 The business cycle
Chapter 9 Aggregate demand and aggregate supply
9.1 Aggregate demand (AD) and the aggregate demand curve
9.2 Short-run aggregate supply and short-run equilibrium in the AD -AS model
9.3 Long-run aggregate supply and long-run equilibrium in the monetarist/new classical model
9.4 Aggregate supply and equilibrium in the Keynesian model
9.5 Shifting aggregate supply curves over the long term
9.6 Illustrating the monetarist/new classical and Keynesian models
9.7 The Keynesian multiplier (higher level topic)
9.8 Understanding aggregate demand and the multiplier in terms of the Keynesian cross
model (supplementary material, recommended for higher level)
Supplementary materials for Chapter 9
Chapter 10 Macroeconomic objectives I: Low unemployment, low and stable rate
of inflation
10.1 Low unemployment
10.2 Low and stable rate of inflation
10.3 Topics on inflation (higher level topics)
Chapter 11 Macroeconomic objectives II: Economic growth and equity in the
distribution of income
11.1 Economic growth
11.2 Equity in the distribution of income
Chapter 12 Demand-side and supply-side policies
12.1 Introduction to demand-side policies
12.2 Fiscal policy
12.3 Monetary policy
12.4 Supply-side policies
12.5 Evaluating government policies to deal with unemployment and inflation
iv Contents
Section 3 International economics
Chapter 13 International trade
13.1 The benefits of trade
13.2 Free trade: absolute and comparative advantage (higher level topic)
13.3 The World Trade Organization (WTO)
13.4 Restrictions on free trade: trade protection
13.5 Arguments for and against trade protection
Chapter 14 Exchange rates and the balance of payments
14.1 Freely floating exchange rates
14.2 Government intervention
14.3 Calculations using exchange rates (higher level topic)
14.4 The balance of payments
14.5 The balance of payments and exchange rates
14.6 Topics on exchange rates and the balance of payments (higher level topics)
Chapter 15 Economic integration and the terms of trade
15.1 Economic integration
15.2 Terms of trade (higher level topic)
Section 4 Development economics
Chapter 16 Understanding economic development
16.1 Economic growth and economic development
16.2 Measuring economic development
Chapter 17 Topics in economic development
17.1 The role of domestic factors
17.2 The role of international trade barriers
17.3 Trade strategies for economic growth and development
Chapter 18 Foreign sources of finance and foreign debt
18.1 The meaning of foreign sources of finance
18.2 Foreign direct investment and multinational corporations (MNCs)
18.3 Foreign aid
18.4 Multilateral development assistance
18.5 The role of international debt
Chapter 19 Consequences of economic growth and the balance between markets and
intervention
19.1 Consequences of economic growth
19.2 Balance between markets and intervention
Supplementary materials
Introduction to supplementary materials
Quantitative techniques
Introduction to the IB Economics exam papers
Exam practice: paper 1
Exam practice: paper 2
Exam practice: paper 3
Contents v
Important diagrams
World Bank country classification
The Nobel Prize in Economics
Glossary
Index
Acknowledgements
vi Contents
In memory of my beloved parents
Hβη and Κω′στα
who gave me the freedom to expand my horizons
Introduction to the student
and teacher
Economics is a relatively new social science that touches upon many aspects of our lives and has important effects
on the well-being of all people around the world. Studying it as a social science discipline allows us to organise the
way we think about the numerous economic problems faced by our own and other societies, and helps us make
informed and responsible choices.
The second edition of Economics for the IB Diploma, written for students of Economics in the International
Baccalaureate (IB) Diploma Programme, has been thoroughly revised to fully match the IB economics guide
published in November 2010 (for first exams in 2013). It covers the entire IB Economics syllabus at both standard
and higher levels. Each of the four parts of the book corresponds to one of the four sections of the syllabus,
and the chapters within each part correspond closely to the syllabus subsections. The book supposes no prior
knowledge of economics from the student. Every section and subsection begins with a simple presentation that
gradually progresses to a more advanced level, enabling the student to gradually master complex topics. The book
fully covers the needs of the IB economics student, in terms of both breadth and depth of coverage of all items in
the syllabus.
Note to the reader about the book
New features of the book
The new edition of the book contains the following new features:
(cid:115)(cid:0) Learning outcomes An important innovative feature of the new edition is that it contains each and every
learning outcome of the IB economics guide. Each learning outcome appears as a bullet point enclosed in a
light green box at the beginning of the section (or sub-section) of the book where it is discussed and explained.
This means that you need not ever refer to the IB economics guide to ensure that you have covered every
learning outcome. It also means that as you read the book you can focus your attention on the material that is
indicated by the learning outcomes, this way ensuring that you have understood all the essential points.
(cid:115)(cid:0) Theory of knowledge connections Another new element of the new edition is its inclusion of twenty Theory
of knowledge features. Each one of these is closely connected with material covered in the text, and
challenges you to think critically about economics as a social science, the nature of economic knowledge,
difficulties involved in acquiring economic knowledge, why economists disagree, and the roles of values,
language, ethics, beliefs and ideology in the development of economic knowledge. Each one of these
features ends with questions intended to stimulate further thinking and discussions on these important
theory of knowledge issues.
(cid:115)(cid:0) Case studies The new edition also includes numerous ‘Real world focus’ features that discuss some event or
aspect of the real world discussed in the text. These are followed by questions intended to focus your attention
on important theoretical ideas and their relevance to real world situations.
Continuity with the first edition
The new edition also provides continuity with the first edition through inclusion of the following features:
(cid:115)(cid:0) Test your understanding questions Each chapter contains a series of ‘Test your understanding’ questions, which
appear at the end of every topic. These questions have been designed very specifically on the basis of the
viii Introduction to the student and teacher
preceding section’s learning outcomes, and can therefore help you review the section’s main points. They can
be used as the basis for class discussions or homework assignments. You can also use them for studying and
reviewing on your own. If you can answer these questions, it means you have understood the important points
of the section.
(cid:115)(cid:0) Standard level and higher level material The subdivision of the book’s content into two levels is clearly
demarcated. A vertical bar labelled ‘HL’ runs down the margin of all higher level material, allowing you to
easily distinguish higher level from standard level material.
(cid:115)(cid:0) Key points Material that is especially important, such as important concepts, laws, definitions and
conclusions, is highlighted in a box shaded light green. This helps you focus on key points of the chapter,
and can facilitate reviewing.
(cid:115)(cid:0) Use of bullet points There is extensive use of bullet points where there are lists of items relating to a
particular topic. These will help you keep the material well organised in your mind, and can also help you
review.
(cid:115)(cid:0) Syllabus terms and glossary All syllabus terms are highlighted in green bold font at their first appearance
in the book so that you can immediately recognise them. (You should note that when a syllabus term
reappears in a later section of the book, it is not highlighted in green bold.) At the end of the book, there is
a glossary that defines all the syllabus terms. In the glossary, terms that are part of higher level material are
demarcated using the vertical ‘HL’ bar.
(cid:115)(cid:0) Supplementary material The book includes some material that is not part of the IB Economics syllabus and that
you will not be examined on. Such material is accompanied by the heading ‘supplementary material’ so that
you can readily recognise it. It is included in the book in order to provide a more rounded view of some topics
that are not bounded by the rigid IB syllabus.
Note to the reader about the supplementary materials
Note to the reader about the supplementary materials
In this e-book version of Economics for the IB Diploma second edition the CD-ROM content is included as
‘supplementary material’. For all subsequent cross-references to the CD-ROM, please refer to the supplementary
materials. These materials are as follows:
(cid:115)(cid:0) Chapter on ‘Quantitative techniques’ This is a detailed chapter containing all the quantitative techniques you
need to understand in order to excel in your IB economics course. It enables you to review everything from
percentages and percentage changes to understanding the essentials of relationships between variables, and
interpreting and constructing diagrams and graphs. For students taking the course at higher level, it explains
everything you need to know about linear demand and supply functions, solving linear equations, and
performing all necessary calculations and constructing graphs. You will also find a detailed section on how
to use a graphic display calculator (GDC) as an aid to graphing. There are numerous cross-references between
the book and this CD-ROM chapter; as you read the textbook, you will be referred to the relevant sections of
this chapter where you can easily find important background material. This CD-ROM chapter follows the style
of the book, and has numerous ‘Test your understanding’ questions containing exercises of the type that will
appear in your exams.
(cid:115)(cid:0) Exam questions This is an extensive section of the CD-ROM consisting of four parts. The first part provides
background information on exams, including an explanation of assessment objectives (AOs), learning
outcomes and command terms as they relate to the learning outcomes and exam questions. Each of the
next three parts deals with exam papers 1, 2 and 3. You will find a very large number of exam questions for
each of these papers. The questions cover each and every learning outcome in the entire economics guide,
with the appropriate command terms at the appropriate level of assessment objectives.
(cid:115)(cid:0) Important diagrams This section of the CD-ROM, entitled ‘Important diagrams to remember’ reproduces all
the important diagrams of the textbook, organised according to chapter and topic within each chapter.
This section enables you to do a quick review of diagrams that you should ensure you understand and can
draw yourself in connection with possible questions that are likely to appear on exams.
Introduction to the student and teacher ix
