Economics IB S1

Capitalism

a pure free market economy, Prices are used to ration goods and services, All products in private hands

Communism

a pure command economy (government owns everything), The government provides every services for free (health care and education), All firms are owned by the government and prices are set by the government

The law of demand

a negative causal relationship between demand and price / if prices go up, demand goes down

A change in price leads to

movement along the demand curve, and you would say that there has been a change in quantity demanded

Scarcity

the limited availability of economic resources relative to society's unlimited demand for goods and services

Economics

the study of how to distribute scarce resources to a society with unlimited needs and wants. ​​We use economic systems to determine WHO gets these scarce resources

< 3 Economic Questions >

What should be produced?, How should things be produced?, Who should get the products?

Socialism

mix of free market and planned market

Economic goods

goods that are scarce

Free goods

goods that are not scarce

Opportunity cost

the real cost of choosing one thing and not another

Demand

the willingness and ability to purchase a good or service

A change in demand due to non-price determinate leads to

a shift in demand, and you would say that there has been a change in demand.

Cetris paribus

all other things remaining constant

Market

anywhere buyers and sellers of a good or service meet to carry out an exchange

Individual demand

your own level of demand for a good or service

Market demand

sum of all individuals demand for a good or service

< Non-price determinants of demand >

TIMER

Tastes and preferences

advertisements, seasons and government policies can influence the demand

Normal goods

goods that consumers prefer to purchase if their income allows it. When income goes up, demand for normal goods goes up

Inferior goods

a less desirable, cheaper good that consumers may purchase when incomes are low. When income goes up, demand for inferior goods go down

Market size

if there is an increase in population or an increase in consumers, demand will increase and shift to the right

Expectations

if consumers think that prices are going to go up in the future, they will purchase now so demand will go up

Complements

goods that are purchased and used together / If the price of a complement goes down, demand for your goods will go up

Substitutes

goods used in place of another good / If the price of a substitute goes down, demand for your good will go down

Supply

the willingness and ability of producers to produce a good or service

Law of supply

a positive causal relationship between price and supply / as price goes down, supply goes down

A change in price leads to

movement along the supply curve, and you would say that there has been a change in quantity supplied

A change in supply due to any other factor (non-price determinate) leads to

a shift in supply, and you would say that there has been a change in supply.

Individual supply

the willingness & ability for one firm to produce a good or service

Market supply

supply of all firms in a market to produce a good or service.

< Non- price determinants of supply >

STORES

Indirect taxes

a tax placed on the production of a good or service by the government / This raises the cost of the product, leading to a decrease in supply

Subsidies

payment by the government to a producer / This lowers the cost of the products, leading to an increase in supply

Technology

if advanced technology reduces the cost of production, supply will go up

Joint supply

when two or more goods are made from the same product / One of the goods' supply will go up and the other goes down

Competitive supply

when the same producer can produce two or more different products / One of the goods's production will go up and the other goes down

Resources costs

if costs go down, supply will increase

Cost

the price of the resources that firms use to produce a good or service

Factors of production

land, labor, tax, shipping

Expectations

if suppliers think that prices will go up in the future, then they will reduce supply today leading to a decrease in supply

Size of the market

if the number of firms producing a good decreases, supply will decrease

Equilibrium point

the point at which quantity supplied is equal to quantity demanded

Price rationing

free markets use prices to decide who gets the goods and services

Utility

the satisfaction gained by consumers when they consume a good or service.

Consumer surplus

the extra satisfaction (or utility) gained by consumers when paying a price lower than they were willing to pay

Producer surplus

the benefit producers receive when they receive a price above the one which they were willing to supply the good

Community surplus

consumer surplus + producer surplus

Marginal private benefit (MPB)

the utility consumers get when consuming one more unit of a good. D=MPB

Marginal social benefit (MSB)

the total benefit to society from consuming one more unit of a good. D=MSC if the good does not harm or benefit society

Marginal private cost (MPC)

the cost to a firm from producing one more unit of a good. S=MPC

Marginal social cost (MSC)

the cost to society of producing one more unit of a good. S=MSC if the good does not harm or benefit society

Allocative efficiency

when the cost to society equals the benefit to society/ MSB=MSC

Signaling

the increase in price

Incentive

the change to make greater profits

The substitution effect

if the price of a good goes down, consumers will switch from other substitute goods to this good because the price is comparatively low

The income effect

if prices go down, then our real income has increase because we can buy more goods and services

Real income

income that is adjusted to price changes

The law of diminishing marginal utility

as we consume additional units of something, the utility we derive from each unit decreases

Increasing marginal cost

increasing the output of a good or service, marginal costs will go down at first then go up

The law of diminishing marginal returns

at first when you add labor, the output per worker will go up, but if you keep hiring workers the output per worker will go down

PED

Measures how much demand for a product will change if the price changes / % change in quantity demanded of the product / % change in price of the product

Inelastic demand

when a % change in price results in a lower % change in demand / PED < 1

Elastic demand

when a % change in price results in a greater change in demand / PED > 1

Unit elastic demand

when a % change in price results in an equal % change in demand / PED=1

Perfectly inelastic demand

when change in price results in no change in quantity demanded / PED = 0

Perfectly elastic demand

when the quntity demanded of a good changes infinitely with any change in price / PED = ∞

Number & closeness of substitutes

the more substitutes a good has and the closer the substitute is, the more elastic demand is.

Degree of necessity

if a good is a need then many consumers will continue to purchase the good even if prices go up, so it's inelastic demand

Proportion of income spent

the larger the portion of your income you spend on a good, the more elastic demand will be

Time

the longer a consumer takes to make a purchase, the more elastic demand will be

YED

a measure of how much demand will change, if income changes / % change in quantity demanded / % change in income

Income-inelastic demand

demand changes very little when income changes / YED < 1 / the good is a necessity

Income-elastic demand

demand will rise noticeably when income rises / YED > 1 / the good is a normal or luxury

YED is (-)

demand decreases as income increases / the good is an inferior good

The Engel Curve

shows the relationship between demand and income over time

PES

a measure of how much supply will change if prices change / % change in quantity supplied / % change in the price

Perfectly inelastic supply

a change in price will have no effect on supply / PES=0

Inelastic supply

a change in the price of a product leads to less change in supply / PES < 1

Elastic supply

a change in the price leads to a greater change in supply / PES >1

Unit-elastic supply

a change in the price results in an equal change in supply / PES=1

Perfectly elastic supply

any decrease in price will result in NO supply / PES=∞

Time

over time if there has been an increase in prices, supply will become more elastic

Unused capacity

If a firm can increase production easily, supply will be more elastic

Mobility of factors of production

the easier it is to change from one line of production to another, the more elastic supply is

Manufactured goods

more elastic than agricultural goods

Primary commodities

inelastic supply

Ability to store

products that can be sotred easily when demand is low tend to have a more elastic supply

Rate of cost increase

if the costs of increasing production are low, supply will be elastic

< Three sectors of the economy >

primary, secondary, tertiary

Primary

commodities and natural resources ex) agriculture, fishing / YED values tend to be less < 1

Secondary

manufactured goods ex) computer, clothes / YED values tend to be > 1

Tertiary

Services ex) education, law firms, banking / YED values tend to be > 1

Market failure

failure of market to achieve allocative efficiency

< Causes of market failure >

The over-provision of demerit goods (negative externalities of consumption), The under-provision of merit goods & public goods, The overuse of common access resources, The under-provision of positive externalities of production, A threat to sustainability (negative externalities of production), Asymmetric information, Monopolies

Demerit goods

goods which are bad for the consumer and for society as a whole ex) Cigarettes, hard drugs, and alcohols

Merit goods

goods which benefit the consumer as well as society as a whole ex) education, health care

Public goods

goods that benefit society and are non-rivalrous and non-excludable

Quasi-public goods

goods that don't neatly fit the description of non-rivalrous and non-excludable but might serve a public good ex) public parks, museum

Common access resources

goods that are free and non-excludable but rivalrous ex) water resources, fisheries