IB Economics Study Guide: HL and SL, Diagrams, Data Response, and the Internal Assessment

IB Economics rewards students who can think with economic concepts rather than just recall them. The subject content — supply and demand, market failure, macroeconomic models, development economics — is the toolkit. What the exam tests is whether you can use those tools to analyse specific economic situations, construct arguments with evidence, and evaluate policy trade-offs.

The most important distinction: every answer should combine a diagram (correctly drawn and labelled) with economic reasoning applied to the specific context in the question. Generic theory without context scores poorly; context-specific analysis with relevant diagrams scores well.

Microeconomics: markets, failure, and intervention

Demand and supply: Law of demand (price ↑ → quantity demanded ↓, ceteris paribus) and law of supply (price ↑ → quantity supplied ↑). Demand shifters: income, prices of substitutes/complements, tastes, expectations, population. Supply shifters: input costs, technology, number of sellers, expectations, natural events.

Elasticities: Price elasticity of demand (PED) = %ΔQd / %ΔP. Elastic (|PED| > 1): revenue falls when price rises. Inelastic (|PED| < 1): revenue rises when price rises. Income elasticity of demand (YED) = %ΔQd / %ΔY: positive for normal goods, negative for inferior goods, >1 for luxury goods. Cross-price elasticity of demand (XED): positive for substitutes, negative for complements.

Market failure: Negative externalities: private costs < social costs → overproduction (production is where MSC = MSB, not where MPC = MPB — market produces where supply = demand, missing the social optimum). Diagram: show the divergence between MPC and MSC (or MPB and MSB), the market equilibrium, the socially optimal output, and the deadweight welfare loss triangle.

Government interventions: Indirect taxes: ad valorem (percentage of price — parallel shift in supply curve) vs specific (per unit — parallel shift). Subsidies: shift supply right, reduce price, increase quantity. Price ceilings (below equilibrium → shortage, reduces producer surplus, may create black markets). Price floors (above equilibrium → surplus — example: minimum wage debates).

Market structures (HL): Perfect competition (many sellers, identical products, free entry/exit, price takers → normal profit in long run). Monopoly (one seller, barriers to entry, price maker, sets MR = MC, higher price and lower output than competitive market → deadweight loss). Monopolistic competition (many sellers, differentiated products, some price-making power, normal profit in long run). Oligopoly (few large sellers, interdependence, kinked demand curve model, game theory, collusion).

Use the Cornell Notes Tool for each market structure: main column = diagram, cue column = key features (number of sellers, product type, barriers to entry, profit type), summary = welfare analysis and implications.

Macroeconomics: the AD/AS framework

Aggregate Demand (AD) components: C + I + G + (X − M). AD curve slopes downward (wealth effect, interest rate effect, international trade effect). AD shifts with: fiscal policy (G and T changes), monetary policy (interest rate and money supply), consumer/business confidence.

Aggregate Supply (AS): Short-run AS (SRAS) slopes upward — firms produce more as price level rises in short run. Long-run AS (LRAS) is vertical at potential output (Yp) — in long run, output is determined by productive capacity, not the price level. LRAS shifts with: changes in quantity or quality of factors of production, improvements in technology, institutional improvements.

Macroeconomic equilibrium: Where AD intersects SRAS (short-run) or LRAS (long-run). Demand-pull inflation: AD shifts right, price level rises. Cost-push inflation: SRAS shifts left, price level rises. Deflationary gap: equilibrium below Yp (recession). Inflationary gap: equilibrium above Yp (short-run, self-correcting in long run via wage inflation).

Policy tools: Fiscal policy (government spending and taxation — expansionary: increase G, cut T; contractionary: cut G, increase T). Monetary policy (central bank interest rate — expansionary: lower rates to stimulate investment and consumption; contractionary: raise rates to reduce inflation). Evaluate trade-offs: expansionary policy reduces unemployment but may increase inflation; contractionary policy reduces inflation but may increase unemployment (Phillips curve relationship).

Development economics

Measuring development: GDP per capita (income measure, ignores distribution); Human Development Index (HDI = income + health + education); Gini coefficient (income inequality); Multidimensional Poverty Index. The gap between measures reveals different aspects of development — a country can have rising GDP per capita with worsening inequality (rising Gini coefficient).

Barriers to development: Poverty cycle (low income → low savings → low investment → low growth → low income), lack of infrastructure, weak institutions and governance, brain drain, geography (landlocked, disease burden, natural disaster risk), terms of trade deterioration for commodity exporters.

Development strategies: Import substitution (protect domestic industries from foreign competition — Argentina, Brazil in mid-20th century — criticism: inefficiency, retaliation), export-led growth (invest in internationally competitive export sectors — East Asian tigers), microfinance (Grameen Bank model — small loans to rural poor, especially women), conditional cash transfers (Brazil's Bolsa Família — cash to poor families conditional on school attendance and health checks).

The Internal Assessment: commentary technique

The 800-word limit is strict — you must be precise and analytical rather than descriptive. For each commentary:

Article selection: Choose an article that illustrates a specific economic concept that you can analyse in depth within 800 words. Avoid articles about multiple economic events — you will lack space to analyse any one of them well.

Diagram: Draw it clearly, label every element (axes, curves, equilibrium points, shifts, areas), and reference it explicitly in your text ("As shown in Figure 1, the negative externality creates a divergence between MPC and MSC...").

Evaluation section: This is where most marks are earned or lost. Evaluate: will the policy achieve its stated aims? What are the trade-offs? What are the limitations of the economic model being used? Are there long-run vs short-run differences? What are the distributional effects?

The Spaced Repetition Flashcard Tool is effective for learning all required diagram types — one card per diagram with a description of all required labels. Build a diagram library and redraw each from memory regularly. The Pomodoro Timer helps for timed essay practice under Paper 1 conditions.