IB SL Microeconomics

AO1/2 - no diagrams or RWEs

Law of Demand

The quantity demanded of a product will fall if the price rises, and vice versa, ceteris paribus.

Income Effect

As the price of a product falls, the real income of customers increases, meaning they are able to buy more products at lower prices, creating more demand.

Substitution Effect

As the price of a good or service falls, the product will become more attractive than more expensive rival products, and customers will switch over, creating more demand.

Law of Diminishing Marginal Utility

As consumption of a good or service increases, the additional gain of consuming one more diminishes, so consumers are only willing to pay lower prices.

Individual Demand

The quantity of a good or service that a single consumer is willing and able to purchase at various price levels.

Market Demand

The total quantity of a good and service demanded by all consumers in a market at various price levels.

Market

A place where transactions between buyers and sellers take place.

Non-Price Determinants of Demand

All the factors that affect demand for a good or service, not including the price. Cause shifts in the demand curve.

Normal Goods

Goods for which demand increases when consumer income increases.

Inferior Goods

Goods for which demand decreases when consumer income increases.

Complementary Goods

Goods jointly demanded (e.g., phones and phone cases).

Substitute Goods

Goods competing against each other for demand.

Supply

The quantity of goods and services that firms are willing and able to provide/sell in a given time period.

Law of Supply

There is a positive relationship between quantity supplied and price, ceteris paribus.

Law of Diminishing Marginal Returns

As factors of production increase to produce more supply, the added return of an additional resource diminishes.

Increasing Marginal Costs

The added productive gain of employing more workers decreases, but their costs do not; hence the cost of each new resource will increase.

Individual Supply

The quantity of a good or service that a single producer is willing and able to produce at various price levels.

Market Supply

The total quantity of a good or service supplied by all producers in a market at various price levels.

Non-Price Determinants of Supply

All the factors that cause shifts in the supply of a good or service.

Joint Supply

When the production of one good automatically aids the production of another good.

Competitive Supply

When the production of one good competes with the production of another good.

Indirect Taxes

Taxes on consumption rather than income. They increase the cost of producing products and will therefore shift supply to the left.

Subsidies

Government financial assistance that reduces the cost of production and therefore shifts supply to the right.

Market Equilibrium

The point where supply and demand meet; when the exact number of goods/services demanded is also supplied.

Excess Supply

When the price is higher than the equilibrium price.

Excess Demand

When the price is lower than the equilibrium price.

Price Mechanism

Explains how prices adjust to balance supply and demand in a market economy, efficiently allocating scarce resources.

Signalling Function

Prices act as signals to producers and consumers about market conditions.

Incentive Function

Prices create incentives for behavioral changes.

Rationing Function

Prices ration scarce goods when demand exceeds supply.

Consumer Surplus

The gain of all consumers who can consume a product at a lower price than what they were willing and able to pay.

Producer Surplus

The gain of all producers who can produce a product at a higher price than what they were willing and able to earn.

Social/Community Surplus

The sum of consumer and producer surplus.

Allocative Efficiency

The situation where the social surplus is maximized; no one can be better off without others being worse off.

Elasticity of Demand

Refers to how responsive the quantity demanded is for a good or service when price or income changes.

Price Elasticity of Demand (PED)

Refers to how responsive the quantity demanded is for a good or service when price changes.

Income Elasticity of Demand (YED)

Refers to how responsive the quantity demanded is for a good or service when the income of consumers changes.

Elasticity of Supply

Refers to how responsive the quantity supplied is for a good or service when price changes.

Price Floor

Legal minimum price set by the government for a particular good or service. Sellers cannot charge less than the specified price.

Price Ceiling

Legal maximum price set by the government for a particular good or service. Sellers cannot charge more than the specified price.

Indirect Taxes

Taxes on producers and firms paid to the government, but some of the burden is passed on to consumers. Taxes on consumption rather than on income.

Subsidies

Forms of monetary government assistance for firms, make goods or services cheaper by lowering the costs of production.

Direct Provision of Services

Also known as state provision, when the government itself supplies goods or services directly to consumers, rather than relying on private firms or markets.

Command and Control Regulation and Legislation

The use of laws and rules by governments to directly dictate what is permitted and what is illegal in economic activities.

Market Failure

The inefficient allocation of resources in a free market, resulting in sub-optimal economic outcomes.

Externality

Any impact the production of consumption of a good or service has on a third party (third party spillover).

Merit Goods

Goods and services that cause positive externalities when consumed.

Demerit Goods

Goods and services that cause negative spillover costs when consumed.

Common Pool Resources

Natural or human-made resources characterized by non-excludability and rivalry.

Tradable Permits

"Permission slips" that firms can get in order to be allowed to pollute. These permits are then able to be bought and sold amongst companies.

Public Goods

Goods that are non-excludable and non-rivalrous.

Free-Rider Problem

Because firms are not guaranteed being paid, there will be an under provision of the public good.