IBDP Economics SL: Microeconomics Review

Comprehensive vocabulary flashcards covering Microeconomics topics: Demand, Supply, Market Equilibrium, Price Elasticity of Demand and Supply, Government Intervention, Spillover Effects (Externalities), Public Goods, and Common Pool Resources.

Market

Any mechanism that allows buyers and sellers to interact to determine the price of a good or service, whether at a physical location, a world market, or online.

Demand

The quantity of a good that consumers are willing and able to buy at various prices over a given period of time, ceteris paribus.

Willing (Demand)

A consumer's desire to purchase a good based on their tastes and preferences.

Able (Demand)

A consumer's financial capability to purchase a good, determined by price and income.

Law of Demand

The economic principle stating that as price increases, quantity demanded falls, and as price decreases, quantity demanded rises, showing an inverse relationship, ceteris paribus.

Individual Demand

The quantity of a good that a single consumer is willing and able to buy at each price over a specified time period.

Market Demand

The horizontal sum of all individual consumer demands for a good or service at each price level.

Change in Quantity Demanded

A movement along a fixed demand curve caused exclusively by a change in the good's own price.

Change in Demand

A shift of the entire demand curve to the left or right caused by a change in a non-price determinant of demand.

Normal Good

A good for which demand increases (shifting the demand curve to the right) when consumer income rises.

Inferior Good

A good for which demand decreases (shifting the demand curve to the left) when consumer income rises, typically because consumers switch to higher-quality substitutes.

Substitute Goods

Goods that satisfy the same consumer need, such that an increase in the price of one good leads to an increase in demand for the alternative good.

Complementary Goods

Goods that are consumed together, such that an increase in the price of one good causes demand for the other good to fall.

Supply

The quantity of a good that producers are willing and able to offer for sale at various prices over a given period of time, ceteris paribus.

Willing (Supply)

A producer's incentive to sell a good at a given price because it is profitable to do so.

Able (Supply)

A producer possessing the physical resources, inputs, and equipment required to produce a good.

Law of Supply

The economic principle stating that as price increases, quantity supplied increases, and as price falls, quantity supplied falls, showing a direct, positive relationship, ceteris paribus.

Individual Supply

The quantity of a good that a single firm is willing and able to offer for sale at each price.

Market Supply

The sum of the supplies offered by all individual producers in a market at each price level.

Change in Quantity Supplied

A movement along a fixed supply curve caused solely by a change in the price of the good itself.

Change in Supply

A shift of the entire supply curve to the left or right resulting from a change in a non-price determinant of supply.

Competitive Supply

A production scenario where two or more goods compete for the same resources, meaning producing more of one good forces a reduction in the supply of the other.

Joint Supply

A production scenario where two or more goods are produced together as by-products, meaning an increase in the output of one automatically increases the supply of the other.

Market Equilibrium

The state where quantity demanded equals quantity supplied ($Qd = Qs$) at the intersection of the demand and supply curves, leaving no shortage or surplus.

Surplus (Excess Supply)

A market disequilibrium condition where quantity supplied exceeds quantity demanded ($Qs > Qd$) because the current price is set above the equilibrium price.

Shortage (Excess Demand)

A market disequilibrium condition where quantity demanded exceeds quantity supplied ($Qd > Qs$) because the current price is set below the equilibrium price.

Consumer Surplus

The difference between the total amount consumers are willing and able to pay (marginal benefit) and the total amount they actually pay, shown geometrically as the area below the demand curve and above the market price.

Producer Surplus

The difference between the total revenue received by producers and the minimum amount they were willing to accept to supply the goods (marginal cost), shown geometrically as the area above the supply curve and below the market price.

Allocative Efficiency

The socially optimal allocation of resources achieved when marginal benefit equals marginal cost ($\text{MB} = \text{MC}$), maximizing social surplus ($\text{CS} + \text{PS}$).

Price Elasticity of Demand (PED)

A measure of the responsiveness of the quantity demanded of a good to a change in its own price, given by $\text{PED} = \frac{\%\Delta Qd}{\%\Delta P}$.

Price Elastic Demand

A condition where the absolute value of $\text{PED} > 1$, meaning the percentage change in quantity demanded is greater than the percentage change in price.

Price Inelastic Demand

A condition where the absolute value of $0 < \text{PED} < 1$, meaning the percentage change in quantity demanded is smaller than the percentage change in price.

Perfectly Inelastic Demand

A theoretical situation where $\text{PED} = 0$, meaning quantity demanded does not respond at all to changes in price, depicted as a vertical demand curve.

Perfectly Elastic Demand

A theoretical situation where $\text{PED} \rightarrow \infty$, meaning consumers will buy any amount at a given price but zero at any higher price, depicted as a horizontal demand curve.

Total Revenue (TR)

The total gross earnings a firm generates from selling a quantity of goods, calculated as $\text{TR} = P \times Q$.

Income Elasticity of Demand (YED)

A measure of the responsiveness of quantity demanded to a change in consumer income, calculated as $\text{YED} = \frac{\%\Delta Qd}{\%\Delta \text{Income}}$.

Price Elasticity of Supply (PES)

A measure of the responsiveness of the quantity supplied of a good to a change in its own price, calculated as $\text{PES} = \frac{\%\Delta Qs}{\%\Delta P}$, which is always positive.

Spare Capacity

Unused physical capital, machinery, or factory space that allows a producer to expand output rapidly without substantial cost increases when price rises.

Stocks (Inventories)

Finished goods stored in warehouses that can be rapidly released onto the market in response to a price increase, increasing supply elasticity.

Labour Mobility

The ease and speed with which a producer can recruit, train, and employ workers to expand production.

Primary Product

A raw good derived directly from the land, agriculture, livestock, or mining (e.g., wheat, copper, cashmere), typically characterized by low price elasticity of supply.

Manufactured Product

A finished good produced in factories using industrial processes (e.g., clothing, furniture, phones), typically exhibiting high price elasticity of supply.

Price Ceiling (Maximum Price)

A legally imposed maximum price set below the market equilibrium price to protect consumers by making necessities affordable, which creates persistent market shortages.

Price Floor (Minimum Price)

A legally imposed minimum price set above the market equilibrium price to protect producers' incomes, which creates persistent market surpluses.

Indirect Tax

A tax levied on the sale of goods and services rather than directly on income, which increases production costs and shifts the supply curve upward/leftward.

Specific Tax

A fixed monetary tax amount charged per physical unit of a good sold, shifting the supply curve vertically upward by a constant, parallel amount.

Ad Valorem Tax

An indirect tax levied as a fixed percentage of the retail price of a good, causing the post-tax supply curve to tilt and become steeper.

Subsidy

A financial payment made by the government to domestic producers per unit of output to reduce production costs, lower consumer prices, and expand output.

Black Market (Parallel Market)

An illegal market where buyers and sellers conduct transactions above a legally mandated price ceiling or outside official government regulations.

Minimum Wage

A legal price floor applied to the labour market establishing the lowest hourly or monthly wage an employer may pay workers, which can lead to surplus labour (unemployment) among unskilled workers.

Market Failure

The failure of the free market price mechanism to allocate resources efficiently, causing over-allocation or under-allocation of goods relative to the social optimum.

Externality

A side effect of the production or consumption of a good that affects a third party who is neither the buyer nor the seller, without any financial compensation changing hands.

Third Party

An individual, household, or community outside a market transaction who is affected by the economic decisions of buyers and sellers.

Marginal Private Benefit (MPB)

The additional satisfaction or utility gained by an individual consumer from consuming one more unit of a good, represented by the demand curve.

Marginal Private Cost (MPC)

The extra cost incurred by a private firm to produce one additional unit of output, represented by the supply curve.

Marginal Social Benefit (MSB)

The total benefit to society of consuming one extra unit of a good, calculated as marginal private benefit plus marginal external benefit ($\text{MSB} = \text{MPB} + \text{external benefit}$).

Marginal Social Cost (MSC)

The total cost to society of producing one extra unit of a good, calculated as marginal private cost plus marginal external cost ($\text{MSC} = \text{MPC} + \text{external cost}$).

Welfare Loss

The loss of total social surplus that occurs when a market produces an output level where marginal social benefit does not equal marginal social cost.

Merit Good

A socially desirable product that yields positive consumption externalities and is under-consumed in a free market because individuals fail to account for social benefits.

Demerit Good

A product that causes negative consumption externalities and is over-consumed in a free market because private individuals ignore the social costs imposed on others.

Non-excludable Good

A good or service where it is impossible or prohibitively costly to exclude non-payers from consuming it once it has been provided.

Rivalrous Good

A good where consumption by one individual reduces the availability or quantity remaining for other people to consume.

Public Good

A good that is non-excludable and non-rivalrous in consumption (such as street lights, flood dams, or national defence), leading to zero provision in a free market.

Common Pool Resource

A resource that is non-excludable but rivalrous in consumption (such as pastures, fish in open waters, and forests), making it vulnerable to overuse.

Club Good

A good that is excludable through subscription or admission fees but non-rivalrous in consumption up to capacity (such as Netflix, gyms, or cinemas).

Private Good

A good that is both excludable and rivalrous in consumption (such as a bought pizza, a phone, or a purchased clothing item).

Free Rider Problem

A market failure where rational individuals consume a non-excludable public good without paying for it, preventing private firms from generating revenue and producing the good.

Missing Market

A complete failure of the free market mechanism where society values and desires a public good, but private enterprise produces zero units due to non-excludability.

Tragedy of the Commons

The degradation or depletion of a shared common pool resource that occurs when individual users act independently according to their own self-interest, taking all private gains while spreading the environmental cost across society.

Sustainability

The ability to meet present economic needs without compromising or harming the ability of future generations to meet their own needs.