Economic Methodology

The IB Economics 2022+ syllabus is structured around 9 key concepts that should appear throughout your analysis. They are the lens through which the IB wants you to view every topic.

Concept	Question it asks
Scarcity	Are resources limited relative to wants? How does this shape choices?
Choice	What is being chosen and at what cost?
Efficiency	Are resources being used in the best way?
Equity	Is the outcome fair? Who gains and who loses?
Economic well-being	Are people better off — in income, health, leisure, security?
Sustainability	Can the choice be maintained without damaging future capacity?
Change	What's happening over time? How are conditions evolving?
Interdependence	How are agents, markets, and countries connected?
Intervention	When and how should governments intervene?

How to use them in essays. Top-band Paper 1 answers explicitly reference key concepts. E.g. "A tariff on imported steel creates change in domestic prices that helps domestic producers (equity for steel workers) but reduces efficiency in global production and may have sustainability costs if subsidising less-clean producers."

Rational choice theory (the traditional foundation of economics) assumes consumers and producers maximise utility / profit using all available information.

This is a useful simplification — it lets us derive demand and supply curves, predict price responses, etc. — but it doesn't describe how people actually behave.

Behavioural economics integrates psychology to explain deviations from rationality:

• Bounded rationality — limited cognitive resources mean people use simplifying rules of thumb (heuristics).
• Cognitive biases — anchoring, availability, loss aversion, status quo bias.
• Framing effects — the same choice can be presented to produce different decisions.
• Nudges — small design changes (default settings, ordering) change behaviour without changing options. Used by governments (e.g. auto-enrolment in pensions).

Examples:

• People are LOSS-AVERSE (Kahneman & Tversky) — losses hurt about twice as much as equivalent gains.
• Consumers don't compute compound interest — leading to bad credit-card decisions.
• "Save More Tomorrow" plans auto-increase pension contributions on pay rises — exploits status-quo bias to improve retirement saving.

Implications for policy. Information disclosure, default rules, and behavioural nudges can be cheaper and more effective than taxes or bans for shaping behaviour.

Equity vs efficiency. A central tension in policy.

Efficiency — using resources to maximise total output / consumer + producer surplus. The free market often achieves this in competitive conditions.

Equity — fairness of how outcomes (income, wealth, opportunities) are distributed.

The market can be efficient AND highly unequal. Redistribution improves equity but may reduce incentives → less efficiency. Most policy involves trading off the two.

Other key trade-offs:

• Short-run gains vs long-run costs (e.g. burning fossil fuels for cheap energy).
• Growth vs sustainability.
• National interests vs global interdependence (e.g. tariffs).