Econ SL Summer

IB Econ Sl what you learn in DP1

Social Sciences

Academic disciplines that systematically study human behaviour from different perspectives

Social Scientific Method

The collection and analysis of data and the formulation of testable and falsifiable hypotheses about social phenomena

Luxury Goods

Non-essential goods that often have a PED and YED greater than 1

Necessity Goods

Essential goods and services required to maintain basic living standard that often have a PED and YED between 0 and 1

Primary sector

Involves the production and extraction of raw material directly from the land, sea or air

Secondary sector

Involves the manufacturing of goods from the raw ressources produced by the primary sector

Tertiary sector

Involves the part of the economy that gives services instead of producing goods and services

Microeconomics

The branch of economics concerned with individual units within the economy such as firms, consumers, or markets

Macroeconomics

The branch of economics concerned with the economy as a whole, dealing with aggregates like unemployment, total output, and the average price level

Scarcity

The fundamental problem where unlimited human wants exceed the limited resources available to fulfill them

Choice

The necessity for societies to decide between competing alternatives given that resources are scarce

Efficiency

The use of scarce resources in the best possible way to produce the combination of goods and services optimum for society

Equity

The idea of fairness, often interpreted in economics as reduced inequality in income or wealth distribution

Economic Well-Being

The living standards enjoyed by members of an economy, including income security and basic needs fulfillment

Sustainability

Meeting the needs of the present generation without compromising the ability of future generations to meet their own needs

Interdependence

The interaction between economic agents where any action by one agent impacts others

Intervention

Government involvement in the workings of markets when the market mechanism fails to achieve social objectives

Factors of Production

Resources used to produce goods and services: Land, Labour, Capital, and Entrepreneurship

Land

Inputs into production provided by nature, including raw materials and mineral deposits

Labour

The human input, both physical and mental, into production

Capital

Manufactured resources (produced means of production) such as factories and tools

Entrepreneurship

The willingness and ability to take risks and manage the other three factors of production

Opportunity Cost

Highest value alternative foregone in a decission making process

Economic Goods

Goods and services that require scarce resources to be produced and thus have an opportunity cost

Free Goods

Goods with a zero opportunity cost of production, such as seawater or air

Free Goods

G&S that dont require scarce ressources in production

Free-market Economy

An economic system where the three fundamental questions are answered by the interaction of households and firms through markets

Command Economy

An economic system where the state owns land and capital and answers the fundamental economic questions

Mixed Economy

An economic system where answers to fundamental questions are given partly by the market and partly by the state

Production Possibilities Curve (PPC)

A model showing the maximum amount of one good that can be produced for each amount of another good given fixed resources and technology

Actual Growth

An increase in an economy’s actual output, represented by a movement toward the PPC boundary

Potential Growth

An increase in an economy’s productive capacity, illustrated by an outward shift of the PPC

Circular Flow of Income

A simplified model showing interactions between households, firms, government, and the foreign sector

Leakages

Income not spent on domestic goods and services: Savings (S), Taxes (T), and Imports (M)

Injections

Expenditures on domestic goods and services not originating from households: Investment (I), Government spending (G), and Exports (X)

Positive Economics

The testing of statements that are objective, verifiable, and based on facts

Normative Economics

Statements based on value judgments, opinions, and what 'ought to be'

Ceteris Paribus

A Latin phrase meaning 'other things equal', used to isolate the relationship between two variables

Demand

The willingness and ability of consumers to pay a sum of money for a G&S at a point in time

Law of Demand

The inverse relationship stating that if the price of a good rises, quantity demanded per period will fall, ceteris paribus

Substitution Effect

A rise in price makes a good relatively more expensive than substitutes, causing consumers to switch away

Real-Income Effect

A rise in price reduces a consumer's real income (purchasing power), causing them to buy less

Law of Diminishing Marginal Utility

As one consumes additional units of a good per period, the additional satisfaction enjoyed decreases

Marginal Utility

The additional satisfaction derived from consuming an additional unit of a good

Total Utility

The sum of satisfaction derived from consuming an amount of a G&S

Market Demand

The sum of all individual quantities demanded by all consumers in a market at each price

Normal Goods

Goods for which demand increases as consumer income rises

Positive YED

Inferior Goods

Goods for which demand decreases as consumer income rises
Negative YED

Substitute Goods

Goods in competitive consumption where an increase in the price of one leads to an increase in demand for the other

Complement Goods

Goods consumed together where an increase in the price of one leads to a decrease in demand for the other

Determinants of Demand

Future expectations
Taste
Prices of related G&S
Income
Number of people

Supply

The wiilingness and ability of firms to sell a G&S for a sum of money at a point in time

Law of Supply

The positive relationship stating that if the price rises, the quantity supplied per period will increase, ceteris paribus

Joint Supply

When one good is produced, another good is automatically produced at the same time (e.g., lambs and wool)

Competitive Supply

When two goods use the same resources

Determinants of Supply

Size of market
Technological advancements
Other goods - Joint/Competitive Supply
Ressource prices
Expectation of the future
Subsidies & indirect taxes
Supply side shock

Indirect Tax

A tax on goods or services, distinguished into specific (unit) and ad valorem (percentage) taxes

Subsidy

A payment by the government to firms to decrease production costs and increase output/consumption

Equilibrium

A market state where quantity demanded equals quantity supplied and there is no tendency for price to change

Shortage (Excess Demand)

Occurs when quantity demanded exceeds quantity supplied at a given price

Qd > Qs

Surplus (Excess Supply)

Occurs when quantity supplied exceeds quantity demanded at a given price

Signalling Function of Price

Price changes communicate information to market participants about changing conditions

Incentive Function of Price

Price changes motivate producers and consumers to respond to information

Rationing Function of Price

The market price guarantees that those willing and able to pay end up with the good

Consumer Surplus

The difference between how much consumers are willing at most to pay and how much they actually pay

Producer Surplus

The difference between the minimum producers are willing to receive and what they actually receive

Social (Community) Surplus

The sum of consumer surplus and producer surplus in a market

Allocative Efficiency

Achieved when the allocation of ressources maximises social welfare

Price Elasticity of Demand (PED)

A measure of the responsiveness of quantity demanded to a change in price

Determinants of PED

Wealth
Habits
Income
Number and Closeness of substitutes
Time to adjust

Income Elasticity of Demand (YED)

A measure of the responsiveness of demand to a change in income

Price Elasticity of Supply (PES)

A measure of the responsiveness of quantity supplied to a change in price

Price Ceiling (Maximum Price)

Highest legal price set below equilibrium to protect consumers against high prices

Price Floor (Minimum Price)

Lowest legal price set above equilibrium to protect certain producers

Market Failure

Occurs when the market mechanism fails to reach the socially efficient outcome

Externality

Occurs if an economic activity imposes costs or creates benefits for third parties who do not pay/get compensated

Marginal Private Costs (MPC)

The additional costs a firm incurs from producing an additional unit of a good

Marginal Social Costs (MSC)

The total costs of producing an additional unit borne by society (MPC + External Costs)

Marginal Private Benefits (MPB)

The additional benefits individuals enjoy from consuming an additional unit

Marginal Social Benefits (MSB)

The total benefits society enjoys from consuming an additional unit (MPB + External Benefits)

Policies for negative externalities of production

Indirect Taxes
Tradable Permits
Legislation & Regulation
Reducing Demand (Education, Nudges, subsidiesing alternatives)

Policies for negative externalities of consumption

Indirect Taxes
Tradable Permits
Legislation & Regulation
Reducing Demand (Education, Nudges, subsidiesing alternatives)

Policies for positive externalities of production

Subsidies
Gov. Provision

Policies for positive externalities of consumption

Subsidies
Gov. Provision
Increasing Demand (Education, Nudges)
Legislation & Regulation

Policies for common-pool ressources

Regulation by the goverment
International agreements
Self governance
Education

Adv. & Dis. Self governance

Adv:
- Local knowledge can help create good policies
- Low costs
- More willingness to follow
Dis:
- Time-consuming
- Situational
- Requires enforcement

Adv. & Dis. Indirect Taxes

Adv:
- Collects money that can be used to compensate externalities
Dis:
- Affects Low-Income more
- Decrease buisness profits leading to a shrinking market
- Can cause Inflation
- Hurts international competitivness

Adv. & Dis. Tradable permits

Adv:
- Creates monetary incentive to reduce externalities
- Incentivises Innovation and Development
Dis:
- Costly to set up
- Add to business costs
- Low impact on national level

Adv. & Dis. Regulation -

Adv:
- Can target more specifically the negative externality
- Less likely to lead to an increased price
Dis:
- Cost of implementing and enforcing
- Arising of parallel markets often controlled by criminal organizations
- Potentially increase costs if difficult to impement

Adv. & Dis. Reducing demand

Adv.
- Does not increase business costs
- Can have effective long term impact
Dis:
- They cost money to the goverment
- Effectiveness can be questionable

Adv. & Dis. Subsidies

Adv:
- Strengthens the market
- Benefits low-income consumers
- Increases international competitiveness
Dis:
- Costs money to the goverment
- Draws ineffitient producers into the market

Adv. & Dis. State Provision

Adv:
- Increases consumption substancually
- Benefits low-income households
Dis:
- Costs money to the goverment
- State inefficiency
- Political influence

Adv. & Dis. Regulation +

Adv:
- Can target more specifically the positive externality
- Cheaper than subsidies
Dis:
- Cost of implementing and enforcing
- increase business costs
- Can be avoided
- Forces state regulation

Adv. & Dis. Increasing Demand

Adv.
- Does not increase business costs
- Can have effective long term impact
Dis:
- They cost money to the goverment
- Effectiveness can be questionable

Demerit Goods

Goods that create significant negative externalities or whose costs individuals may not be aware of

Merit Goods

Goods that create significant positive externalities or whose benefits individuals may not be aware of

Common Pool Resources

Non-excludable but rivalous ressources

Tragedy of the Commons

The overexploitation of non-excluadble, rivalous goods by self-interested individuals

Public Goods

Goods that are both non.rivalrous and non-excludable

Free-rider problem

Market failure where consumers can benefit from a public good without paying for it. Therefore underallocation by the private sector