IB Economics Paper 3 Formulas

Percentage Change (%Δ)

%Δ = (New - Old / Old) x 100

Demand Function

Qd = a - bP

a: Qd at 0

b: slope of the curve

Qd: Quantity Demanded

P: Price

Supply Function

Qs = C + dP

C: Qs at 0

d: slope of the curve

Qs: Quantity Supplied

P: Price

Market Equilibrium

When Qd = Qs

PED (Price Elasticity of Demand)

%Δ in Qd of the product / %Δ in P of the product

XED (Cross Elasticity of Demand)

%Δ in Qd of product A / %Δ of P of product B

YED (Income Elasticity of Demand)

%Δ in Qd of the product / %Δ in the income of the consumer

PES (Price Elasticity of Supply)

%Δ in Qs of the product / %Δ in P of the product

PED Indicators (Values)

PED > 1 - Price Elastic

PED < 1 - Price Inelastic

PED = 1 - Unit Elastic

PED = 0 - Perfectly Inelastic

PED = ∞ - Perfectly Elastic

XED Indicators (Values)

Positive Value - Substitutes

Negative Value - Complements

YED Indicators (Values)

YED < 0 - Inferior Good

YED > 0 - Normal Good

YED > 1 - Luxury Good

PES Indicators (Values)

PES > 1 - Supply Elastic

PES < 1 - Supply Inelastic

PES = 0 - Vertical Supply Curve (inelastic), 0 response to ΔP

PES = ∞ - Horizontal Supply Curve (elastic)

GDP (Gross Domestic Product)

GDP = C + I + G + (X - M)

C: Consumption

I: Investment

G: Government Expenditure

X: Exports

M: Imports

AD (Aggregate Demand)

AD = C + I + G + (X - M)

C: Consumption

I: Investment

G: Government Expenditure

X: Exports

M: Imports

GDP Per Capita

GDP / Population

Nominal GDP

Quantity of goods x Price

or

Real GDP x GDP Deflator

GNI (Gross National Income)

GNI = GDP + (Income from abroad - Income sent abroad)

GDP Deflator

GDP Deflator = Nominal GDP / Real GDP

Real GDP

Real GDP = Nominal GDP / GDP Deflator

or

Quantity x Base Year Price

or

Money GDP x ( Price Index in a Base Year / Price Index in the Current Year)

NNP (National Net Product)

NNP = GNI - Depreciation

Green GDP / GGDP

Green GDP = GDP - Environmental Costs of Production

GNP (Gross National Product)

GNP = GDP + NPIA (Net Property of Income from Abroad)

Keynesian Multiplier

1 / MPS + MPT + MPM

or

1 / 1-MPC

or

Changes in Real GDP / Initial Change in Spending

MPC (Marginal Propensity to Consume)

MPC = Change in Consumption / Change in Income

MPS (Marginal Propensity to Save)

MPS = Change in Savings / Change in Income

MPT (Marginal Propensity to Tax)

MPT = Change in Tax / Change in Income

MPM (Marginal Propensity to Import)

MPM = Change in Imports / Change in Income

CPI (Consumer Price Index)

CPI = ( Price of Goods in Specific Year / Price of Goods in the Base year ) x 100

Inflation Rate

Inflation Rate =

( CPI new - CPI old / CPI old ) x 100

Weighted Price Index

( Cost of Basket in a specific year / Cost of Basket in the base year ) x 100

Gini Coefficient

Area between the Line of Equality and Lorenz Curve / Entire area underneath the Line of Equality

or

A / A + B

(Refer to Lorenz Curve)

Unemployment Rate

( Number of Unemployed People / Total Labour Force ) x 100

Total Labour Force

Labour Force = Total Number of Employed People + Total Number of Unemployed people

TR (Total Revenue)

TR = p x q

AR ( Average revenue)

AR = TR / q

AR = (pxq) /q

so... AR = p

MR (Marginal Revenue)

Rate of Change in TR

∆TR / ∆Q

AP (Average Product)

The output produced on average by each worker (variable factor)

TP / V

Total Product / Quantity of Labour (or other variable factor employed)

MP (Marginal Product)

The extra output produced by using an extra worker (variable factor)

Rate of Change in TP

TC (Total Cost)

TFC + TVC

Total fixed costs + Total variable costs

AC * Q

Average Cost * Quantity

AFC (Average Fixed Cost)

The fixed cost per unit of output

TFC / q

q = level of output

AFC falls as output is increased

AVC (Average Variable Cost)

The variable cost per unit of output

TVC / q

q = level of output

AVC tends to fall as output is increased

ATC or AC (Average Total Cost)

The total cost per unit of output

TC / q

q = level of output

MC (Marginal Cost)

The total cost of producing an extra unit of output

change in TC / change in q

q = level of output

TFC (Total Fixed Costs)

Total Costs - Total Variable Costs

TVC (Total Variable Costs)

Total Costs - Total Fixed Costs

AVC * C

Terms of Trade

PED index of average export prices/ PED index of average import prices *100

Rate of Change of Currency Value

Current Account + Capital Account + Financial Account + Errors = 0

Marshall Lerner Condition

PED of Exports + PED of Imports > 1

Has to be elastic in order to have auto-correction of a trade deficit.

Profit

TR - TC

Supernormal (Abnormal) Profit

Occurs when AR>AC

Subnormal Profit

Occurs when AR

Profit Maximization

MR=MC

Revenue Maximization

MR=0

When price is at AC=AR...

Normal Profits, Sales Maximized, Break Even, Entry Limit Price.

Allocative Efficiency

D=S

MSB=MSC

P=MC

Productive Efficiency

Minimum point on AC

AC=MC

X Efficiency occurs when...

At any point on AC

E.g X efficiency at point__

Dynamic Efficiency

LR Abnormal Profits

Minimum Efficient Scale

At the lowest quantity when AC stops decreasing

Shutdown Condition

May Occur when AR=AVC

Will occur when AR

Average Utility

Total Utility / Q

Marginal Utility

∆TU / ∆Q

Utility Max

MU = 0

Social Cost

Private Costs + External Costs

Can be positive or negative

Social Benefit

Private Benefits + External Benefits

Profit Maximization in the Labour market

Marginal Revenue Product = Marginal Cost of Labour