# SAT / ACT Prep Online Guides and Tips

If you are looking at this syllabus, I assume you are interested in potentially taking IB Economics or you are currently enrolled in the course. In this article, I'll cover the topics covered in IB Standard Level and IB Higher Level and the number of hours dedicated to each topic, along with what the IB expects you to understand in each topic.

## IB Economics SL and HL Core

Both IB Economics SL and HL consist of the same core requirements that consist of differing number of hours. Both classes will cover the same 4 sections in the order listed below with the subtopics listed below. Note: there are more subtopics covered in Higher Level (I will explain more below):

### Section #1: Microeconomics - 35 Hours for SL and 95 Hours for HL

#### 1.1 Competitive Markets: Demand and Supply (Some Topics HL Only)

 Subtopic IB Points to Understand (SL and HL unless otherwise noted) The nature of markets Outline the meaning of the term market. The law of demand Explain the negative causal relationship between price and quantity demanded. Describe the relationship between an individual consumer’s demand and market demand. The demand curve Explain that a demand curve represents the relationship between the price and the quantity demanded of a product, ceteris paribus. Draw a demand curve. The non-price determinants of demand (factors that change demand or shift the demand curve) Explain how factors including changes in income (in the cases of normal and inferior goods), preferences, prices of related goods (in the cases of substitutes and complements) and demographic changes may change demand. Movements along and shifts of the demand curve Distinguish between movements along the demand curve and shifts of the demand curve. Draw diagrams to show the difference between movements along the demand curve and shifts of the demand curve. Linear demand functions (equations), demand schedules and graphs (HL ONLY) Explain a demand function (equation) of the form Qd = a – bP. Plot a demand curve from a linear function (eg. Qd = 60 – 5P). Identify the slope of the demand curve as the slope of the demand function Qd = a – bP, that is –b (the coefficient of P). Outline why, if the “a” term changes, there will be a shift of the demand curve. Outline how a change in “b” affects the steepness of the demand curve. The law of supply Explain the positive causal relationship between price and quantity supplied. Describe the relationship between an individual producer’s supply and market supply The supply curve Explain that a supply curve represents the relationship between the price and the quantity supplied of a product, ceteris paribus. Draw a supply curve. The non-price determinants of supply (factors that change supply or shift the supply curve) Explain how factors including changes in costs of factors of production (land, labour, capital and entrepreneurship), technology, prices of related goods (joint/competitive supply), expectations, indirect taxes and subsidies and the number of firms in the market can change supply. Equilibrium and changes to equilibrium Explain, using diagrams, how demand and supply interact to produce market equilibrium. Analyse, using diagrams and with reference to excess demand or excess supply, how changes in the determinants of demand and/or supply result in a new market equilibrium. Calculating and illustrating equilibrium using linear equations (HL ONLY) Calculate the equilibrium price and equilibrium quantity from linear demand and supply functions. Plot demand and supply curves from linear functions, and identify the equilibrium price and equilibrium quantity. State the quantity of excess demand or excess supply in the above diagrams. Resource allocation Explain why scarcity necessitates choices that answer the “What to produce?” question. Explain why choice results in an opportunity cost. Explain, using diagrams, that price has a signalling function and an incentive function, which result in a reallocation of resources when prices change as a result of a change in demand or supply conditions. Consumer surplus Explain the concept of consumer surplus. Identify consumer surplus on a demand and supply diagram. Producer surplus Explain the concept of producer surplus. Identify producer surplus on a demand and supply diagram. Allocative efficiency Explain that the best allocation of resources from society’s point of view is at competitive market equilibrium, where social (community) surplus (consumer surplus and producer surplus) is maximized (marginal benefit = marginal cost).

#### 1.2 Elasticity

 Subtopic IB Points to Understand (SL and HL unless otherwise noted) Price elasticity of demand and its determinants Explain the concept of price elasticity of demand, understanding that it involves responsiveness of quantity demanded to a change in price, along a given demand curve. Calculate PED using the following equation. PED percentage change inquantity demanded percentage chang = e in price State that the PED value is treated as if it were positive although its mathematical value is usually negative. Explain, using diagrams and PED values, the concepts of price elastic demand, price inelastic demand, unit elastic demand, perfectly elastic demand and perfectly inelastic demand. Explain the determinants of PED, including the number and closeness of substitutes, the degree of necessity, time and the proportion of income spent on the good. Calculate PED between two designated points on a demand curve using the PED equation above. Explain why PED varies along a straight line demand curve and is not represented by the slope of the demand curve. Applications of price elasticity of demand Examine the role of PED for firms in making decisions regarding price changes and their effect on total revenue. Explain why the PED for many primary commodities is relatively low and the PED for manufactured products is relatively high. Examine the significance of PED for government in relation to indirect taxes. Cross price elasticity of demand and its determinants Outline the concept of cross price elasticity of demand, understanding that it involves responsiveness of demand for one good (and hence a shifting demand curve) to a change in the price of another good. Calculate XED using the following equation: XED =  percentage change in quantity demanded of good X divided by percentage change in price of good Y Show that substitute goods have a positive value of XED and complementary goods have a negative value of XED. Explain that the (absolute) value of XED depends on the closeness of the relationship between two goods. Applications of cross price elasticity of demand Examine the implications of XED for businesses if prices of substitutes or complements change. Income elasticity of demand and its determinants Outline the concept of income elasticity of demand, understanding that it involves responsiveness of demand (and hence a shifting demand curve) to a change in income. Calculate YED using the following equation. YED percentage change inquantity demanded percentage chang = e inincome Show that normal goods have a positive value of YED and inferior goods have a negative value of YED. Distinguish, with reference to YED, between necessity (income inelastic) goods and luxury (income elastic) goods. Applications of income elasticity of demand Examine the implications for producers and for the economy of a relatively low YED for primary products, a relatively higher YED for manufactured products and an even higher YED for services. Price elasticity of supply and its determinants Explain the concept of price elasticity of supply, understanding that it involves responsiveness of quantity supplied to a change in price along a given supply curve. Calculate PES using the following equation. PES percentage change inquantity supplied percentage chang = e in price Explain, using diagrams and PES values, the concepts of elastic supply, inelastic supply, unit elastic supply, perfectly elastic supply and perfectly inelastic supply. Explain the determinants of PES, including time, mobility of factors of production, unused capacity and ability to store stocks. Applications of price elasticity of supply Explain why the PES for primary commodities is relatively low and the PES for manufactured products is relatively high.

#### 1.3 Government Intervention (Some Topics HL Extension, Plus One Topic HL Only)

 Subtopic IB Points to Understand (SL and HL unless otherwise noted) Specific (fixed amount) taxes and ad valorem (percentage) taxes and their impact on markets Explain why governments impose indirect (excise) taxes. • Distinguish between specific and ad valorem taxes. • Draw diagrams to show specific and ad valorem taxes, and analyse their impacts on market outcomes. • Discuss the consequences of imposing an indirect tax on the stakeholders in a market, including consumers, producers and the government. Tax incidence and price elasticity of demand and supply (HL ONLY) Explain, using diagrams, how the incidence of indirect taxes on consumers and firms differs, depending on the price elasticity of demand and on the price elasticity of supply. Plot demand and supply curves for a product from linear functions and then illustrate and/or calculate the effects of the imposition of a specific tax on the market (on price, quantity, consumer expenditure, producer revenue, government revenue, consumer surplus and producer surplus). Impact on markets Explain why governments provide subsidies, and describe examples of subsidies. Draw a diagram to show a subsidy, and analyse the impacts of a subsidy on market outcomes. Discuss the consequences of providing a subsidy on the stakeholders in a market, including consumers, producers and the government. Plot demand and supply curves for a product from linear functions and then illustrate and/or calculate the effects of the provision of a subsidy on the market (on price, quantity, consumer expenditure, producer revenue, government expenditure, consumer surplus and producer surplus). (HL ONLY) Price ceilings (maximum prices): rationale, consequences and examples Explain why governments impose price ceilings, and describe examples of price ceilings, including food price controls and rent controls. Draw a diagram to show a price ceiling, and analyse the impacts of a price ceiling on market outcomes. Examine the possible consequences of a price ceiling, including shortages, inefficient resource allocation, welfare impacts, underground parallel markets and non-price rationing mechanisms. Discuss the consequences of imposing a price ceiling on the stakeholders in a market, including consumers, producers and the government. Calculate possible effects from the price ceiling diagram, including the resulting shortage and the change in consumer expenditure (which is equal to the change in firm revenue). (HL ONLY) Price floors (minimum prices): rationale, consequences and examples Explain why governments impose price floors, and describe examples of price floors, including price support for agricultural products and minimum wages.  Draw a diagram of a price floor, and analyse the impacts of a price floor on market outcomes.  Examine the possible consequences of a price floor, including surpluses and government measures to dispose of the surpluses, inefficient resource allocation and welfare impacts.  Discuss the consequences of imposing a price floor on the stakeholders in a market, including consumers, producers and the government.  Calculate possible effects from the price floor diagram, including the resulting surplus, the change in consumer expenditure, the change in producer revenue, and government expenditure to purchase the surplus. (HL ONLY)

#### 1.4 Market Failure (Some Topics HL Only)

 Subtopic IB Points to Understand (SL and HL unless otherwise noted) Market failure as a failure to allocate resources efficiently Analyse the concept of market failure as a failure of the market to achieve allocative efficiency, resulting in an overallocation of resources (overprovision of a good) or an under-allocation of resources (under-provision of a good) The meaning of externalities Describe the concepts of marginal private benefits (MPB), marginal social benefits (MSB), marginal private costs (MPC) and marginal social costs (MSC). Describe the meaning of externalities as the failure of the market to achieve a social optimum where MSB = MSC. Negative externalities of production and consumption Explain, using diagrams and examples, the concepts of negative externalities of production and consumption, and the welfare loss associated with the production or consumption of a good or service. Explain that demerit goods are goods whose consumption creates external costs.  Evaluate, using diagrams, the use of policy responses, including market-based policies (taxation and tradable permits), and government regulations, to the problem of negative externalities of production and consumption. Positive externalities of production and consumption Explain, using diagrams and examples, the concepts of positive externalities of production and consumption, and the welfare loss associated with the production or consumption of a good or service. Explain that merit goods are goods whose consumption creates external benefits. Evaluate, using diagrams, the use of government responses, including subsidies, legislation, advertising to influence behaviour, and direct provision of goods and services. Lack of public goods Using the concepts of rivalry and excludability, and providing examples, distinguish between public goods (non-rivalrous and nonexcludable) and private goods (rivalrous and excludable). Explain, with reference to the free rider problem, how the lack of public goods indicates market failure. Discuss the implications of the direct provision of public goods by government. Common access resources and the threat to sustainability Describe, using examples, common access resources. Describe sustainability. Explain that the lack of a pricing mechanism for common access resources means that these goods may be overused/depleted/ degraded as a result of activities of producers and consumers who do not pay for the resources that they use, and that this poses a threat to sustainability. Explain, using negative externalities diagrams, that economic activity requiring the use of fossil fuels to satisfy demand poses a threat to sustainability. Explain that the existence of poverty in economically less developed countries creates negative externalities through over-exploitation of land for agriculture, and that this poses a threat to sustainability. Evaluate, using diagrams, possible government responses to threats to sustainability, including legislation, carbon taxes, cap and trade schemes, and funding for clean technologies. Explain, using examples, that government responses to threats to sustainability are limited by the global nature of the problems and the lack of ownership of common access resources, and that effective responses require international cooperation Asymmetric information (HL ONLY) Explain, using examples, that market failure may occur when one party in an economic transaction (either the buyer or the seller) possesses more information than the other party. Evaluate possible government responses, including legislation, regulation and provision of information. Abuse of monopoly power (HL ONLY) Explain how monopoly power can create a welfare loss and is therefore a type of market failure. Discuss possible government responses, including legislation, regulation, nationalization and trade liberalization.

#### 1.5 Theory of the Firm and Market Structures (HL Only)

 Subtopic IB Points to Understand (SL and HL unless otherwise noted) Production in the short run: the law of diminishing returns (HL ONLY) Distinguish between the short run and long run in the context of production. Define total product, average product and marginal product, and construct diagrams to show their relationship. Explain the law of diminishing returns. Calculate total, average and marginal product from a set of data and/or diagrams. Costs of production: economic costs (HL ONLY) Explain the meaning of economic costs as the opportunity cost of all resources employed by the firm (including entrepreneurship). Distinguish between explicit costs and implicit costs as the two components of economic costs. Costs of production in the short run (HL ONLY) Explain the distinction between the short run and the long run, with reference to fixed factors and variable factors. Distinguish between total costs, marginal costs and average costs. Draw diagrams illustrating the relationship between marginal costs and average costs, and explain the connection with production in the short run. Explain the relationship between the product curves (average product and marginal product) and the cost curves (average variable cost and marginal cost), with reference to the law of diminishing returns. Calculate total fixed costs, total variable costs, total costs, average fixed costs, average variable costs, average total costs and marginal costs from a set of data and/or diagrams Production in the long run: returns to scale (HL ONLY) Distinguish between increasing returns to scale, decreasing returns to scale and constant returns to scale. Costs of production in the long run (HL ONLY) Outline the relationship between short-run average costs and long-run average costs. Explain, using a diagram, the reason for the shape of the long-run average total cost curve. Describe factors giving rise to economies of scale, including specialization, efficiency, marketing and indivisibilities. Describe factors giving rise to diseconomies of scale, including problems of coordination and communication. Total revenue, average revenue and marginal revenue (HL ONLY) Distinguish between total revenue, average revenue and marginal revenue. Draw diagrams illustrating the relationship between total revenue, average revenue and marginal revenue. Calculate total revenue, average revenue and marginal revenue from a set of data and/or diagrams. Economic profit (sometimes known as abnormal profit) and normal profit (zero economic profit occurring at the breakeven point) (HL ONLY) Describe economic profit (abnormal profit) as the case where total revenue exceeds economic cost. Describe normal profit (zero economic profit) as the case where total revenue is equal to total economic costs or the situation in which the amount of revenue earned is just sufficient to keep the firm in its current line of business. Explain that economic profit (abnormal profit) is profit over and above normal profit (zero economic profit), and that the firm earns normal profit when economic profit (abnormal profit) is zero. Explain why a firm will continue to operate even when it earns zero economic profit (abnormal profit). Explain the meaning of loss as negative economic profit arising when total revenue is less than total cost. Calculate different profit levels from a set of data and/or diagrams. Profit maximization (HL ONLY) Explain the goal of profit maximization where the difference between total revenue and total cost is maximized or where marginal revenue equals marginal cost. Alternative goals of firms (HL ONLY) Describe alternative goals of firms, including revenue maximization, growth maximization, satisficing and corporate social responsibility. Assumptions of the model (HL ONLY) Describe, using examples, the assumed characteristics of perfect competition: a large number of firms; a homogeneous product; freedom of entry and exit; perfect information; perfect resource mobility. Revenue curves  (HL ONLY) Explain, using a diagram, the shape of the perfectly competitive firm’s average revenue and marginal revenue curves, indicating that the assumptions of perfect competition imply that each firm is a price taker. Explain, using a diagram, that the perfectly competitive firm’s average revenue and marginal revenue curves are derived from market equilibrium for the industry. Profit maximization in the short run (HL ONLY) Explain, using diagrams, that it is possible for a perfectly competitive firm to make economic profit (abnormal profit), normal profit (zero economic profit) or negative economic profit in the short run based on the marginal cost and marginal revenue profit maximization rule. Profit maximization in the long run (HL ONLY) Explain, using a diagram, why, in the long run, a perfectly competitive firm will make normal profit (zero economic profit). Explain, using a diagram, how a perfectly competitive market will move from shortrun equilibrium to long-run equilibrium. Shut-down price and break-even price (HL ONLY) Distinguish between the short run shut-down price and the break-even price. Explain, using a diagram, when a loss-making firm would shut down in the short run. Explain, using a diagram, when a loss-making firm would shut down and exit the market in the long run. Calculate the short run shutdown price and the breakeven price from a set of data Efficiency (HL ONLY) Explain the meaning of the term allocative efficiency. Explain that the condition for allocative efficiency is P = MC (or, with externalities, MSB = MSC). Explain, using a diagram, why a perfectly competitive market leads to allocative efficiency in both the short run and the long run. Explain the meaning of the term productive/technical efficiency. Explain that the condition for productive efficiency is that production takes place at minimum average total cost. Explain, using a diagram, why a perfectly competitive firm will be productively efficient in the long run, though not necessarily in the short run. Monopoly: Assumptions of the model (HL ONLY) Describe, using examples, the assumed characteristics of a monopoly: a single or dominant firm in the market; no close substitutes; significant barriers to entry. Barriers to entry (HL ONLY) Describe, using examples, barriers to entry, including economies of scale, branding and legal barriers. Revenue curves (HL ONLY) Explain that the average revenue curve for a monopolist is the market demand curve, which will be downward sloping. Explain, using a diagram, the relationship between demand, average revenue and marginal revenue in a monopoly. Explain why a monopolist will never choose to operate on the inelastic portion of its average revenue curve. Profit maximization (HL ONLY) Explain, using a diagram, the short- and long-run equilibrium output and pricing decision of a profit maximizing (loss minimizing) monopolist, identifying the firm’s economic profit (abnormal profit), or losses. Explain the role of barriers to entry in permitting the firm to earn economic profit (abnormal profit). Revenue maximization (HL ONLY) Explain, using a diagram, the output and pricing decision of a revenue maximizing monopoly firm. Compare and contrast, using a diagram, the equilibrium positions of a profit maximizing monopoly firm and a revenue maximizing monopoly firm. Calculate from a set of data and/or diagrams the revenue maximizing level of output. Natural monopoly (HL ONLY) With reference to economies of scale, and using examples, explain the meaning of the term “natural monopoly”. Draw a diagram illustrating a natural monopoly. Monopoly and efficiency (HL ONLY) Explain, using diagrams, why the profit maximizing choices of a monopoly firm lead to allocative inefficiency (welfare loss) and productive inefficiency. Explain why, despite inefficiencies, a monopoly may be considered desirable for a variety of reasons, including the ability to finance research and development (R&D) from economic profits, the need to innovate to maintain economic profit (abnormal profit), and the possibility of economies of scale. Policies to regulate monopoly power (HL ONLY) Evaluate the role of legislation and regulation in reducing monopoly power. The advantages and disadvantages of monopoly compared with perfect competition (HL ONLY) Draw diagrams and use them to compare and contrast a monopoly market with a perfectly competitive market, with reference to factors including efficiency, price and output, research and development (R&D) and economies of scale. Monopolistic Competition: Assumptions of the model (HL ONLY) Describe, using examples, the assumed characteristics of a monopolistic competition: a large number of firms; differentiated products; absence of barriers to entry and exit. Revenue curves (HL ONLY) Explain that product differentiation leads to a small degree of monopoly power and therefore to a negatively sloping demand curve for the product. Profit maximization in the short run (HL ONLY) Explain, using a diagram, the short-run equilibrium output and pricing decisions of a profit maximizing (loss minimizing) firm in monopolistic competition, identifying the firm’s economic profit (or loss). Profit maximization in the long run (HL ONLY) Explain, using diagrams, why in the long run a firm in monopolistic competition will make normal profit. Non-price competition (HL ONLY) Distinguish between price competition and non-price competition. Describe examples of nonprice competition, including advertising, packaging, product development and quality of service. Monopolistic competition and efficiency (HL ONLY) Explain, using a diagram, why neither allocative efficiency nor productive efficiency are achieved by monopolistically competitive firms. Monopolistic competition compared with perfect competition and monopoly (HL ONLY) Compare and contrast, using diagrams, monopolistic competition with perfect competition, and monopolistic competition with monopoly, with reference to factors including short run, long run, market power, allocative and productive efficiency, number of producers, economies of scale, ease of entry and exit, size of firms and product differentiation. Assumptions of the model (HL ONLY) Describe, using examples, the assumed characteristics of an oligopoly: the dominance of the industry by a small number of firms; the importance of interdependence; differentiated or homogeneous products; high barriers to entry. Explain why interdependence is responsible for the dilemma faced by oligopolistic firms— whether to compete or to collude. Explain how a concentration ratio may be used to identify an oligopoly Game theory (HL ONLY) Explain how game theory (the simple prisoner’s dilemma) can illustrate strategic interdependence and the options available to oligopolies. Open/formal collusion (HL ONLY) Explain the term “collusion”, give examples, and state that it is usually (in most countries) illegal. Explain the term “cartel”. Explain that the primary goal of a cartel is to limit competition between member firms and to maximize joint profits as if the firms were collectively a monopoly. Explain the incentive of cartel members to cheat. Analyse the conditions that make cartel structures difficult to maintain. Tacit/informal collusion (HL ONLY) Describe the term “tacit collusion”, including reference to price leadership by a dominant firm. Non-collusive oligopoly (HL ONLY) Explain that the behaviour of firms in a non-collusive oligopoly is strategic in order to take account of possible actions by rivals. Explain, using a diagram, the existence of price rigidities, with reference to the kinked demand curve. Explain why non-price competition is common in oligopolistic markets, with reference to the risk of price wars. Describe, using examples, types of non-price competition. Necessary conditions for the practice of price discrimination (HL ONLY) Describe price discrimination as the practice of charging different prices to different consumer groups for the same product, where the price difference is not justified by differences in cost. Explain that price discrimination may only take place if all of the following conditions exist: the firm must possess some degree of market power; there must be groups of consumers with differing price elasticities of demand for the product; the firm must be able to separate groups to ensure that no resale of the product occurs. Draw a diagram to illustrate how a firm maximizes profit in third degree price discrimination, explaining why the higher price is set in the market with the relatively more inelastic demand.

### Section #2: Macroeconomics - 40 Hours for SL and 50 Hours for HL

#### 2.1 The Level of Overall Economic Activity (One Topic HL Extension)

 Subtopic IB Points to Understand (SL and HL unless otherwise noted) The circular flow of income model Describe, using a diagram, the circular flow of income between households and firms in a closed economy with no government. Identify the four factors of production and their respective payments (rent, wages, interest and profit) and explain that these constitute the income flow in the model. Outline that the income flow is numerically equivalent to the expenditure flow and the value of output flow. Describe, using a diagram, the circular flow of income in an open economy with government and financial markets, referring to leakages/ withdrawals (savings, taxes and import expenditure) and injections (investment, government expenditure and export revenue). Explain how the size of the circular flow will change depending on the relative size of injections and leakages. Measures of economic activity: gross domestic product (GDP), and gross national product (GNP) or gross national income (GNI) Distinguish between GDP and GNP/GNI as measures of economic activity. Distinguish between the nominal value of GDP and GNP/GNI and the real value of GDP and GNP/GNI. Distinguish between total GDP and GNP/GNI and per capita GDP and GNP/GNI. Examine the output approach, the income approach and the expenditure approach when measuring national income. Evaluate the use of national income statistics, including their use for making comparisons over time, their use for making comparisons between countries and their use for making conclusions about standards of living. Explain the meaning and significance of “green GDP”, a measure of GDP that accounts for environmental destruction. Calculate nominal GDP from sets of national income data, using the expenditure approach. (HL ONLY) Calculate GNP/GNI from data (HL ONLY) Calculate real GDP, using a price deflator (HL ONLY) Short-term fluctuations and long-term trend Explain, using a business cycle diagram, that economies typically tend to go through a cyclical pattern characterized by the phases of the business cycle. Explain the long-term growth trend in the business cycle diagram as the potential output of the economy. Distinguish between a decrease in GDP and a decrease in GDP growth.

#### 2.3 Macroeconomic Objectives (Some Topics HL Extension, Plus One Topic HL Only)

 Subtopic IB Points to Understand (SL and HL unless otherwise noted) The meaning of unemployment Define the term unemployment. Explain how the unemployment rate is calculated. Explain the difficulties in measuring unemployment, including the existence of hidden unemployment, the existence of underemployment, and the fact that it is an average and therefore ignores regional, ethnic, age and gender disparities. Calculate the unemployment rate from a set of data. (HL ONLY) Consequences of unemployment Discuss possible economic consequences of unemployment, including a loss of GDP, loss of tax revenue, increased cost of unemployment benefits, loss of income for individuals, and greater disparities in the distribution of income. Discuss possible personal and social consequences of unemployment, including increased crime rates, increased stress levels, increased indebtedness, homelessness and family breakdown. Types and causes of unemployment Describe, using examples, the meaning of frictional, structural, seasonal and cyclical (demand-deficient) unemployment. Distinguish between the causes of frictional, structural, seasonal and cyclical (demand-deficient) unemployment. Explain, using a diagram, that cyclical unemployment is caused by a fall in aggregate demand. Explain, using a diagram, that structural unemployment is caused by changes in the demand for particular labour skills, changes in the geographical location of industries, and labour market rigidities. Evaluate government policies to deal with the different types of unemployment. The meaning of inflation, disinflation and deflation Distinguish between inflation, disinflation and deflation. Explain that inflation and deflation are typically measured by calculating a consumer price index (CPI), which measures the change in prices of a basket of goods and services consumed by the average household. Explain that different income earners may experience a different rate of inflation when their pattern of consumption is not accurately reflected by the CPI. Explain that inflation figures may not accurately reflect changes in consumption patterns and the quality of the products purchased. Explain that economists measure a core/underlying rate of inflation to eliminate the effect of sudden swings in the prices of food and oil, for example. Explain that a producer price index measuring changes in the prices of factors of production may be useful in predicting future inflation.  Construct a weighted price index, using a set of data provided. (HL ONLY) Calculate the inflation rate from a set of data. (HL ONLY) Consequences of inflation Discuss the possible consequences of a high inflation rate, including greater uncertainty, redistributive effects, less saving, and the damage to export competitiveness. Consequences of deflation Discuss the possible consequences of deflation, including high levels of cyclical unemployment and bankruptcies. Types and causes ofinflation Explain, using a diagram, that demand-pull inflation is caused by changes in the determinants of AD, resulting in an increase in AD. Explain, using a diagram, that cost-push inflation is caused by an increase in the costs of factors of production, resulting in a decrease in SRAS.   Evaluate government policies to deal with the different types of inflation. Possible relationships between unemployment and inflation (HL ONLY) Discuss, using a short-run Phillips curve diagram, the view that there is a possible trade-off between the unemployment rate and the inflation rate in the short run. Explain, using a diagram, that the short-run Phillips curve may shift outwards, resulting in stagflation (caused by a decrease in SRAS due to factors including supply shocks).   Discuss, using a diagram, the view that there is a longrun Phillips curve that is vertical at the natural rate of unemployment and therefore there is no trade-off between the unemployment rate and the inflation rate in the long run. Explain that the natural rate of unemployment is the rate of unemployment that exists when the economy is producing at the full employment level of output. The meaning of economic growth Define economic growth as an increase in real GDP. Calculate the rate of economic growth from a set of data. (HL ONLY) Causes of economic growth Describe, using a production possibilities curve (PPC) diagram, economic growth as an increase in actual output caused by factors including a reduction in unemployment and increases in productive efficiency, leading to a movement of a point inside the PPC to a point closer to the PPC. Describe, using a PPC diagram, economic growth as an increase in production possibilities caused by factors including increases in the quantity and quality of resources, leading to outward PPC shifts. Describe, using an LRAS diagram, economic growth as an increase in potential output caused by factors including increases in the quantity and quality of resources, leading to a rightward shift of the LRAS curve. Explain the importance of investment for economic growth, referring to investment in physical capital, human capital and natural capital. Explain the importance of improved productivity for economic growth. Consequences of economic growth Discuss the possible consequences of economic growth, including the possible impacts on living standards, unemployment, inflation, the distribution of income, the current account of the balance of payments, and sustainability. The meaning of equity in the distribution of income Explain the difference between equity in the distribution of income and equality in the distribution of income. Explain that due to unequal ownership of factors of production, the market system may not result in an equitable distribution of income. Indicators of income equality/inequality Analyse data on relative income shares of given percentages of the population, including deciles and quintiles. Draw a Lorenz curve and explain its significance. Explain how the Gini coefficient is derived and interpreted. Poverty Distinguish between absolute poverty and relative poverty. Explain possible causes of poverty, including low incomes, unemployment and lack of human capital. Explain possible consequences of poverty, including low living standards, and lack of access to health care and education. The role of taxation in promoting equity Distinguish between direct and indirect taxes, providing examples of each, and explain that direct taxes may be used as a mechanism to redistribute income. Distinguish between progressive, regressive and proportional taxation, providing examples of each.  Calculate the marginal rate of tax and the average rate of tax from a set of data. (HL ONLY) Other measures to promote equity Explain that governments undertake expenditures to provide directly, or to subsidize, a variety of socially desirable goods and services (including health care services, education, and infrastructure that includes sanitation and clean water supplies), thereby making them available to those on low incomes. Explain the term transfer payments, and provide examples, including old age pensions, unemployment benefits and child allowances The relationship between equity and efficiency Evaluate government policies to promote equity (taxation, government expenditure and transfer payments) in terms of their potential positive or negative effects on efficiency in the allocation of resources.

#### 2.4 Fiscal Policy

 Subtopic IB Points to Understand (SL and HL unless otherwise noted) Sources of government revenue Explain that the government earns revenue primarily from taxes (direct and indirect), as well as from the sale of goods and services and the sale of state-owned (governmentowned) enterprises. Types of government expenditures Explain that government spending can be classified into current expenditures, capital expenditures and transfer payments, providing examples of each. The budget outcome Distinguish between a budget deficit, a budget surplus and a balanced budget. Explain the relationship between budget deficits/ surpluses and the public (government) debt. Fiscal policy and short-term demand management Explain how changes in the level of government expenditure and/or taxes can influence the level of aggregate demand in an economy. Describe the mechanism through which expansionary fiscal policy can help an economy close a deflationary (recessionary) gap. Construct a diagram to show the potential effects of expansionary fiscal policy, outlining the importance of the shape of the aggregate supply curve. Describe the mechanism through which contractionary fiscal policy can help an economy close an inflationary gap. Construct a diagram to show the potential effects of contractionary fiscal policy, outlining the importance of the shape of the aggregate supply curve. The impact of automatic stabilizers Explain how factors including the progressive tax system and unemployment benefits, which are influenced by the level of economic activity and national income, automatically help stabilize short-term fluctuations. Fiscal policy and its impact on potential output Explain that fiscal policy can be used to promote long-term economic growth (increases in potential output) indirectly by creating an economic environment that is favourable to private investment, and directly through government spending on physical capital goods and human capital formation, as well as provision of incentives for firms to invest. Evaluation of fiscal policy Evaluate the effectiveness of fiscal policy through consideration of factors including the ability to target sectors of the economy, the direct impact on aggregate demand, the effectiveness of promoting economic activity in a recession, time lags, political constraints, crowding out, and the inability to deal with supplyside causes of instability.

#### 2.5 Monetary Policy

 Subtopic IB Points to Understand (SL and HL unless otherwise noted) Interest rate determination and the role of a central bank Describe the role of central banks as regulators of commercial banks and bankers to governments. Explain that central banks are usually made responsible for interest rates and exchange rates in order to achieve macroeconomic objectives. Explain, using a demand and supply of money diagram, how equilibrium interest rates are determined, outlining the role of the central bank in influencing the supply of money. Monetary policy and short-term demand management Explain how changes in interest rates can influence the level of aggregate demand in an economy. Describe the mechanism through which easy (expansionary) monetary policy can help an economy close a deflationary (recessionary) gap. Construct a diagram to show the potential effects of easy (expansionary) monetary policy, outlining the importance of the shape of the aggregate supply curve. Describe the mechanism through which tight (contractionary) monetary policy can help an economy close an inflationary gap.   Construct a diagram to show the potential effects of tight (contractionary) monetary policy, outlining the importance of the shape of the aggregate supply curve. Monetary policy and inflation targeting Explain that central banks of certain countries, rather than focusing on the maintenance of both full employment and a low rate of inflation, are guided in their monetary policy by the objective to achieve an explicit or implicit inflation rate target. Evaluation of monetary policy Evaluate the effectiveness of monetary policy through consideration of factors including the independence of the central bank, the ability to adjust interest rates incrementally, the ability to implement changes in interest rates relatively quickly, time lags, limited effectiveness in increasing aggregate demand if the economy is in deep recession and conflict among government economic objectives.

#### 2.6 Supply-Side Policies

 Subtopic IB Points to Understand (SL and HL unless otherwise noted) Supply-side policies and the economy Explain that supply-side policies aim at positively affecting the production side of an economy by improving the institutional framework and the capacity to produce (that is, by changing the quantity and/or quality of factors of production). State that supply-side policies may be market-based or interventionist, and that in either case they aim to shift the LRAS curve to the right, achieving growth in potential output. Investment in human capital Explain how investment in education and training will raise the levels of human capital and have a short-term impact on aggregate demand, but more importantly will increase LRAS. Investment in new technology Explain how policies that encourage research and development will have a short-term impact on aggregate demand, but more importantly will result in new technologies and will increase LRAS. Investment in infrastructure Explain how increased and improved infrastructure will have a short-term impact on aggregate demand, but more importantly will increase LRAS. Industrial policies Explain that targeting specific industries through policies including tax cuts, tax allowances and subsidized lending promotes growth in key areas of the economy and will have a short-term impact on aggregate demand but, more importantly, will increase LRAS. Policies to encourage competition Explain how factors including deregulation, privatization, trade liberalization and antimonopoly regulation are used to encourage competition. Labour market reforms Explain how factors including reducing the power of labour unions, reducing unemployment benefits and abolishing minimum wages are used to make the labour market more flexible (more responsive to supply and demand). Incentive-related policies Explain how factors including personal income tax cuts are used to increase the incentive to work, and how cuts in business tax and capital gains tax are used to increase the incentive to invest. The strengths and weaknesses of supplyside policies Evaluate the effectiveness of supply-side policies through consideration of factors including time lags, the ability to create employment, the ability to reduce inflationary pressure, the impact on economic growth, the impact on the government budget, the effect on equity, and the effect on the environment.

### Section #3: International Economics - 25 Hours for SL and 45 Hours for HL

#### 3.2 Exchange Rates (Some Topics HL Extension)

 Subtopic IB Points to Understand (SL and HL unless otherwise noted) Determination of freely floating exchange rates Explain that the value of an exchange rate in a floating system is determined by the demand for, and supply of, a currency. Draw a diagram to show determination of exchange rates in a floating exchange rate system. Calculate the value of one currency in terms of another currency. (HL ONLY) Calculate the exchange rate for linear demand and supply functions. (HL ONLY) Plot demand and supply curves for a currency from linear functions and identify the equilibrium exchange rate. (HL ONLY) Using exchange rates, calculate the price of a good in different currencies. (HL ONLY) Causes of changes in the exchange rate Describe the factors that lead to changes in currency demand and supply, including foreign demand for a country’s exports, domestic demand for imports, relative interest rates, relative inflation rates, investment from overseas in a country’s firms (foreign direct investment and portfolio investment) and speculation. Distinguish between a depreciation of the currency and an appreciation of the currency. Draw diagrams to show changes in the demand for, and supply of, a currency.  Calculate the changes in the value of a currency from a set of data. (HL ONLY) The effects of exchange rate changes Evaluate the possible economic consequences of a change in the value of a currency, including the effects on a country’s inflation rate, employment, economic growth and current account balance. Fixed exchange rates Describe a fixed exchange rate system involving commitment to a single fixed rate. Distinguish between a devaluation of a currency and a revaluation of a currency. Explain, using a diagram, how a fixed exchange rate is maintained. Managed exchange rates (managed float) Explain how a managed exchange rate operates, with reference to the fact that there is a periodic government intervention to influence the value of an exchange rate. Examine the possible consequences of overvalued and undervalued currencies Evaluation of different exchange rate systems Compare and contrast a fixed exchange rate system with a floating exchange rate system, with reference to factors including the degree of certainty for stakeholders, ease of adjustment, the role of international reserves in the form of foreign currencies and flexibility offered to policy makers.

#### 3.3 The Balance of Payments (One Topic HL Extension, Plus Some Topics HL Only)

 Subtopic IB Points to Understand (SL and HL unless otherwise noted) The meaning of the balance of payments Outline the role of the balance of payments. Distinguish between debit items and credit items in the balance of payments. The components of the balance of payments accounts Explain the four components of the current account, specifically the balance of trade in goods, the balance of trade in services, income and current transfers. Distinguish between a current account deficit and a current account surplus. Explain the two components of the capital account, specifically capital transfers and transaction in non-produced, non-financial assets. Explain the three main components of the financial account, specifically, direct investment, portfolio investment and reserve assets  Calculate elements of the balance of payments from a set of data. (HL ONLY) The relationships between the accounts Explain that the current account balance is equal to the sum of the capital account and financial account balances (see the appendix, “The balance of payments”). Examine how the current account and the financial account are interdependent. The relationship between the current account and the exchange rate Explain why a deficit in the current account of the balance of payments may result in downward pressure on the exchange rate of the currency. Implications of a persistent current account deficit (HL ONLY) Discuss the implications of a persistent current account deficit, referring to factors including foreign ownership of domestic assets, exchange rates, interest rates, indebtedness, international credit ratings and demand management. Methods to correct a persistent current account deficit (HL ONLY) Explain the methods that a government can use to correct a persistent current account deficit, including expenditure switching policies, expenditure reducing policies and supply-side policies, to increase competitiveness. Evaluate the effectiveness of the policies to correct a persistent current account deficit. The Marshall-Lerner condition and the J-curve effect (HL ONLY) State the Marshall-Lerner condition and apply it to explain the effects of depreciation/devaluation. Explain the J-curve effect, with reference to the MarshallLerner condition. The relationship between the current account and the exchange rate Explain why a surplus in the current account of the balance of payments may result in upward pressure on the exchange rate of the currency Implications of a persistent current account surplus Discuss the possible consequences of a rising current account surplus, including lower domestic consumption and investment, as well as the appreciation of the domestic currency and reduced export competitiveness.

### Section #4: Development Economics - 30 Hours for SL and HL

#### 4.1 Economic Development

 Subtopic IB Points to Understand (SL and HL unless otherwise noted) Economic growth and economic development Distinguish between economic growth and economic development.  Explain the multidimensional nature of economic development in terms of reducing widespread poverty, raising living standards, reducing income inequalities and increasing employment opportunities. Explain that the most important sources of economic growth in economically less developed countries include increases in quantities of physical capital and human capital, the development and use of new technologies that are appropriate to the conditions of the economically less developed countries, and institutional changes. Explain the relationship between economic growth and economic development, noting that some limited economic development is possible in the absence of economic growth, but that over the long term economic growth is usually necessary for economic development (however, it should be understood that under certain circumstances economic growth may not lead to economic development). Common characteristics of economically less developed countries Explain, using examples, that economically less developed countries share certain common characteristics (noting that it is dangerous to generalize as there are many exceptions in each case), including low levels of GDP per capita, high levels of poverty, relatively large agricultural sectors, large urban informal sectors and high birth rates. Explain that in some countries there may be communities caught in a poverty trap (poverty cycle) where poor communities are unable to invest in physical, human and natural capital due to low or no savings; poverty is therefore transmitted from generation to generation, and there is a need for intervention to break out of the cycle. Diversity among economically less developed nations Explain, using examples, that economically less developed countries differ enormously from each other in terms of a variety of factors, including resource endowments, climate, history (colonial or otherwise), political systems and degree of political stability International development goals Outline the current status of international development goals, including the Millennium Development Goals.

#### 4.2 Measuring Development

 Subtopic IB Points to Understand (SL and HL unless otherwise noted) Single indicators Distinguish between GDP per capita figures and GNI per capita figures.  Compare and contrast the GDP per capita figures and the GNI per capita figures for economically more developed countries and economically less developed countries.  Distinguish between GDP per capita figures and GDP per capita figures at purchasing power parity (PPP) exchange rates. Compare and contrast GDP per capita figures and GDP per capita figures at purchasing power parity (PPP) exchange rates for economically more developed countries and economically less developed countries. Compare and contrast two health indicators for economically more developed countries and economically less developed countries. Compare and contrast two education indicators for economically more developed countries and economically less developed countries. Composite indicators Explain that composite indicators include more than one measure and so are considered to be better indicators of economic development. Explain the measures that make up the Human Development Index (HDI). Compare and contrast the HDI figures for economically more developed countries and economically less developed countries. Explain why a country’s GDP/ GNI per capita global ranking may be lower, or higher, than its HDI global ranking.

#### 4.3 The Role of Domestic Factors

 Subtopic IB Points to Understand (SL and HL unless otherwise noted) Domestic factors With reference to a specific developing economy, and using appropriate diagrams where relevant, examine how the following factors contribute to economic development: a. Education and health b. The use of appropriate technology c. Access to credit and micro-credit d. The empowerment of women e. Income distribution

#### 4.4 The Role of International Trade (One Topic HL Extension)

 Subtopic IB Points to Understand (SL and HL unless otherwise noted) Trade problems facing many economically less developed countries With reference to specific examples, explain how the following factors are barriers to development for economically less developed countries. a. Over-specialization on a narrow range of products b. Price volatility of primary products c. Inability to access international markets. With reference to specific examples, explain how the following factor is a barrier to development for economically less developed countries. a. Long-term changes in the terms of trade (HL ONLY) Trade strategies for economic growth and economic development With reference to specific examples, evaluate each of the following as a means of achieving economic growth and economic development. a. Import substitution b. Export promotion c. Trade liberalization d. The role of the WTO e. Bilateral and regional preferential trade agreements f. Diversification

#### 4.5 The Role of Foreign Direct Investment (FDI)

 Subtopic IB Points to Understand (SL and HL unless otherwise noted) The meaning of FDI and MNCs Describe the nature of foreign direct investment (FDI) and multinational corporations (MNCs). Explain the reasons why MNCs expand into economically less developed countries. Describe the characteristics of economically less developed countries that attract FDI, including low cost factor inputs, a regulatory framework that favours profit repatriation and favourable tax rules. Advantages and disadvantages of FDI for economically less developed countries Evaluate the impact of foreign direct investment (FDI) for economically less developed countries.

#### 4.6 The Roles of Foreign Aid and Multilateral Development Assistance

 Subtopic IB Points to Understand (SL and HL unless otherwise noted) Classifications and types of aid Explain that aid is extended to economically less developed countries either by governments of donor countries, in which case it is called official development assistance (ODA), or by nongovernmental organizations (NGOs). Explain that humanitarian aid consists of food aid, medical aid and emergency relief aid. Explain that development aid consists of grants, concessional long-term loans, project aid that includes support for schools and hospitals, and programme aid that includes support for sectors such as the education sector and the financial sector. Explain that, for the most part, the priority of NGOs is to provide aid on a small scale to achieve development objectives. Explain that aid might also come in the form of tied aid. Explain the motivations of economically more developed countries giving aid. Compare and contrast the extent, nature and sources of ODA to two economically less developed countries Evaluation of foreign aid Evaluate the effectiveness of foreign aid in contributing to economic development. Compare and contrast the roles of aid and trade in economic development. The roles of the International Monetary Fund (IMF) and the World Bank Examine the current roles of the IMF and the World Bank in promoting economic development

#### 4.7 The Role of International Debt

 Subtopic IB Points to Understand (SL and HL unless otherwise noted) Foreign debt and its consequences Outline the meaning of foreign debt and explain why countries borrow from foreign creditors. Explain that in some cases countries have become heavily indebted, requiring rescheduling of the debt payments and/or conditional assistance from international organizations, including the IMF and the World Bank. Explain why the servicing of international debt causes balance of payments problems and has an opportunity cost in terms of foregone spending on development objectives. Explain that the burden of debt has led to pressure to cancel the debt of heavily indebted countries.

#### 4.8 The Balance Between Markets and Intervention

 Subtopic IB Points to Understand (SL and HL unless otherwise noted) Strengths of market-oriented policies Discuss the positive outcomes of market-oriented policies (such as liberalized trade and capital flows, privatization and deregulation), including a more efficient allocation of resources and economic growth. Weaknesses of market-oriented policies Discuss the negative outcomes of market-oriented strategies, including market failure, the development of a dual economy and income inequalities. Strengths of interventionist policies Discuss the strengths of interventionist policies, including the provision of infrastructure, investment in human capital, the provision of a stable macroeconomic economy and the provision of a social safety net. Weaknesses of interventionist policies Discuss the limitations of interventionist policies, including excessive bureaucracy, poor planning and corruption. Market with government intervention Explain the importance of good governance in the development process. Discuss the view that economic development may best be achieved through a complementary approach, involving a balance of market oriented policies and government intervention.

### Internal Assessment - 20 Hours for SL and HL

Hopefully, your portfolio will look better than this!

#### Portfolio of Three Commentaries

 Overall Requirements Both SL and HL economics students produce a portfolio of three commentaries based on articles from published news media. Each article must be based on a different section of the syllabus (microeconomics, macroeconomics, international economics and development economics), and each commentary must not exceed 750 words. Article Requirements The articles may be from a newspaper, a journal or the internet, but must not be from television or radio broadcasts. If a student includes a relatively lengthy article, which is very much discouraged, the student must highlight the section(s) of the article upon which the commentary is based. Individual Work Requirement Students must select their own articles to discuss. It may happen that more than one student bases his or her commentary on the same article, but the article must not be given to the class by the teacher, and the production of the commentary must be each student’s individual work. A commentary must not be prepared collaboratively. Focus of the Commentary Explain the linkages between the article and economic theory taken from the section of the syllabus on which the article is based Demonstrate economic insights into the implications of the article (that is, it should provide evidence of the student’s ability to discuss current events from the point of view of an economist). On each commentary students must record: the title of the article, the source of the article (including date of access to the site if from the internet), the date the article was published, the date the commentary was written, the word count of the commentary, the section of the syllabus to which the article relates. Rubric Requirements Each article must not exceed 750 words. Note: moderators will not read beyond 750 words.  The following are not included in the word count: Acknowledgments, Contents page, Diagrams, Labels—of five words or fewer, Headings on diagrams—of 10 words or fewer, Tables of statistical data, Equations, formulae and calculations, Citations (which, if used, must be in the body of the commentary), and References (which, if used, must be in the footnotes/endnotes). Please note that footnotes/endnotes may be used for references only. Definitions of economic terms and quotations, if used, must be in the body of the work and are included in the word count. Please note that a citation is a shorthand method of making a reference in the body of the commentary, which is then linked to the full reference in the footnotes/endnotes. Each article must be based on a different section of the syllabus. Students must use a different source for each commentary. Students need to look for articles relating to current events and these must be published no earlier than one year before the writing of the commentary. Each portfolio must contain: a summary portfolio coversheet, a commentary coversheet for each commentary, and three commentaries, accompanied in each case by the relevant article.

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