1 What is economics?

Icon Key concept Description

Scarcity Scarcity is a central concept in economics. Scarcity refers to the limited availability of economic
resources relative to society's unlimited demand for goods and services. Thus, economics may be
defined as the science that studies human behaviour as a relationship between ends and scarce
resources which have alternative uses.
Choice Since resources are scarce, economics is a study of choices. It is clear that not all needs and wants
can be satisfied. This necessitates choice and the idea of opportunity cost. Economic decision
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makers continually have to make choices between competing alternatives. Economics studies the
consequences of these choices, both present and future.

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Efficiency Efficiency is a quantifiable concept, determined by the ratio of useful output to total input.
Allocative efficiency refers to making the best possible use of scarce resources to produce the
combinations of goods and services that are optimum for society, thus minimizing resource waste.

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Equity In contrast to equality, which describes situations in which economic outcomes are similar for
different people or different social groups, equity refers to the concept or idea of fairness. Fairness
is a normative concept as it means different things to different people. In economics, inequity
is often interpreted to refer to inequality which may apply to the distribution of income, wealth
or economic opportunity. Irrespective of economic system, inequity [or inequality) remains a
significant issue both within and between societies.
Economic well being Economic well being is a multi-dimensional concept relating to the level of prosperity and the

& quality of living standards enjoyed by members of an economy. It includes:

• present and future financial security
• the ability to meet basic needs
• the ability to make economic choices permitting achievement of personal satisfaction
• the ability to maintain adequate income levels over the long term.
There are broad disparities in economic well being both within and across nations.

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Sustainability Sustainability in economics refers to the ability of the present generation to meet its needs without
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◄ � compromising the ability of future generations to meet its own needs. It refers to limiting the degree
;..,.� to which the economic activities of the current generation create harmful environmental outcomes.
These might involve resource depletion or degradation that will negatively affect future generations.
Sustainability is proving increasingly important in all economic analysis as planetary boundaries
are pushed to the limit.
Change An understanding of the concept of change is essential in economics. The economic world is in a
continual state of flux, and economists must be aware of this and adapt their thinking accordingly.
The concept of change is important both in economic theory and in the empirical world that
economics studies. In economic theory, economics focuses not on the level of the variables it
investigates, but on their change from one situation to another. Empirically, the world that is studied
by economists is always subject to continuous and profound change at institutional, structural,
technological, economic and social levels.

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Interdependence Consumers, firms, households, workers and governments [all economic actors) interact with each
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( ). other within and, increasingly, across nations in order to achieve economic goals. The greater
the level of interaction, the greater the degree of interdependence. In a highly interdependent
economic world, decisions by certain economic actors will generate many, and often unintended,
economic consequences for other actors. A consideration of possible economic consequences of

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interdependence is essential when conducting economic analysis.
Intervention Intervention in economics usually refers to government involvement in the workings of markets.
While markets are considered the most efficient mechanism to organize economic activity, it is
often recognized that they may fail to achieve certain societal goals, such as equity, economic well
being or sustainability. Failure to achieve such goals may be considered to be sufficient reason
for government intervention. In the real world, there is often disagreement among economists and
policymakers on the need for, and extent of, government intervention.

� Table 1.1 The nine central concepts in 1B Economics, IB Economics Guide [2020], International Baccalaureate Organisation