IB Economics HL - Microeconomics Definitions

market

any kind of arrangement where buyers and sellers of a good or service meet to carry out an exchange

individual demand

the various quantities of a good the consumer is willing and able to buy at all possible prices at a particular time

law of demand

there is a negative relationship between the price of a good and it’s quantity demanded

market demand

the sum of all individual demands of a good

non-price determinants of demand

the variables other than price that can influence demand, changes cause shifts in the demand curve

law of diminishing marginal utility

as consumption of a good increases, marginal utility decreases with each additional unit showing a consumer will be willing to buy an additional unit only if the price falls

substitution effect

if the price of a good falls the consumer substitutes (buys more) of the now less expensive good, increasing quantity demanded.

income effect

if there is a fall in price, the consumers real income (known as purchasing power) has increased, and the quantity demanded increases

individual supply

the various quantities of a good a firm is willing and able to produce and supply to the market

law of supply

as price increases, so does supply

market supply

the total quantities of a good that firms are willing and able to supply in the market

vertical supply curve

even as the price increases, the quantity supplied cannot increase, and remains constant

short run

a time period during which at least one input is fixed and cannot be changed by the firm

long run

a time period when all inputs can be changed

total product

the total quantity of output produced by the firm

marginal product

the extra or additional output produced by one additional unit of variable input

law of diminishing marginal returns

as more units of variable input are added to one or more fixed inputs, the marginal product first increases but then begins to decrease

marginal cost

the additional cost of producing one more unit of output

price mechanism

the interaction of demand and supply in a free market

consumer surplus

the difference between the amount the consumer is willing to pay for a product and the price they have actually paid

producer surplus

the amount the producer is willing to sell a a product for and the price they actually sell at

allocative efficiency

the level of output where the marginal utility = the marginal cost such that consumers and producers get the maximum possible benefit

profit maximization rule

when marginal cost (MC) = marginal revenue (MR) then no additional profit can be extracted by producing another unit of output

revenue maximization rule

producing up to the level of output where marginal revenue (MR) = 0

sales maximization rule

the level of output where average costs (AC) = average revenue (AR)

satisficing

the pursuit of satisfactory outcomes rather than profit maximization where businesses aim to meet a minimum standard of performance

corporate social responsibility

conducting business activity in an ethical way and balancing interests of stakeholders with the wider community

price elasticity of demand

reveals how responsive the change in quantity demanded is to a change in price

perfectly inelastic

when PED = 0 the quantity demanded is completely unresponsive to a change in price

relatively inelastic

when 0 > PED < 1 the percentage change in quantity demanded is less than proportional to the percentage change in price

unitary elastic

when PED = 1 the percentage change in quantity demanded is exactly equal to the percentage change in price

relatively elastic

when PED > 1 the percentage change in quantity demanded is more than proportional to the percentage change in price

perfectly elastic

when PED is infinite the percentage change in quantity demanded will fall to 0 with any change in price

Income elasticity of demand

reveals how responsive the change in quantity demanded is to a change in income

Income inelastic (necessity good)

when 0 < YED > 1 the quantity demanded increases less than proportionally to the change in income

Income elastic (luxury good)

when YED > 1 the quantity demanded increases more than proportionally to the reveals how responsive the change in income

inferior good

when YED < 0 the quantity demanded decreases when income increases

price elasticity of supply

the responsiveness the change in quantity supplied is to a change in price

indirect tax

a tax paid on the consumption of a good only if consumers make a purchase

specific tax

a fixed tax paid per unit of output

ad valorem tax

a tax which is a percentage of the purchase price

subsidy

a per unit amount of money given to a firm by the government to increase production and provision of a good

price ceiling

a maximum price set by the government below the existing free market equilibrium price and sellers cannot legally sell at a higher price

price floor

a minimum price set by the government above the existing free market equilibrium price

legislation

the process of creating laws

regulation

the process of monitoring and enforcing laws

market failure

when there is a less-than-optimum allocation of resources from a societal viewpoint

negative externality of production

when the market is failing due to an overprovision of a good as only private costs are considered by producers

negative externality of consumption

when the market is failing due to an over-consumption of a good as only private costs are considered by consumers

positive externality of production

when the market is failing due to an under-provision of a good as only the private benefits are considered by producers

positive externality of consumption

when the market is failing due to an under-consumption of a good as only the private benefits are considered by consumers

common pool resources

resources which are non-excludable (anyone can access them) but rivalrous (finite in supply) in consumption

tragedy of commons

occurs when common pool resources are used in production in an unsustainable way

carbon tax

a tax that producers who emit greenhouse gasses have to pay for each ton of emissions

public good

goods which are beneficial to society but which will not be provided by private firms due being non-excludable (anyone can access them) and non-rivalrous (infinite supply)

free rider problem

a situation where if a firm provides public goods, customers realize they can still access goods even without paying

market structures

the characteristics of the market in which a firm or industry operates

monopolistic market

a market structure in which there are many firms offering a similar product with slight differentiation

oligopoly market

a market structure in which a few large firms dominate the industry with each firm having significant market power

monopoly market

a market structure in which there is a singular supplier of a product and has the power to influence the market supply and price

market power

the ability of a firm to influence and control the conditions in a specific market, allowing them impact on price, output and other market variables

perfect competition market

a market structure in which firms have low market power, market share and a low industry concentration ratio

firms making abnormal profit in the short-run

where the average revenue (AR) > average costs (AC)

firms making losses in the short-run

where the average revenue (AR) < average costs (AC)

loss minimization position

when the market price (AR) is below the average total cost (ATC) but above the marginal cost (MC) of production

natural monopoly

when the most efficient number of firms is one, which usually occurs in utility industries and are regulated by governments

collusive behavior

when firms cooperate to fix prices and restrict output

non-collusive behavior

when firms actively compete to maintain or increase market share

overt collusion

when firms explicitly agree to limit competition or raise prices

tacit collusion

when firms avoid formal agreements but closely monitor each others behavior usually following the lead of the largest firm, and adjust to match

game theory

a mathematical framework which is used by firms to ensure optimal decisions are made in a setting where there is a high level of interdependence

price wars

when competitors repeatedly lower prices to undercut each other in an attempt to gain market share

predatory pricing

the practice of lowering prices when a new competitor joins in order to drive them out

limit pricing

when firms set a limit on how high the price will go in the industry