IB Microeconomics definitions

opportunity costs

value forgone of the next best alternative

production possibility frontiers (PPF/PPC)

curve that shows the maximum combinations of 2 goods that ca be produced when all available resources are fully efficient

ceteris paribus

all else being the same

4 factors of production

Capital, Land, Labour, enterprise

market

any arrangement that allows buyers and sellers to exchange goods or services

demand

quantity of a good/service that consumers are willing to buy to be able to purchase at various prices during a specific time period. ceteris paribus

law of demand

as price increases, quantity demanded decreases

market demand

the sum of all the individual demands for a particular good or service

law of diminishing marginal utility

the benefit of consuming an additional unit will fall if consumed too much

contraction

When price rises on the demand curve or price falls on the supply curve

Expansion

when price falls on the demand curve or price rises on the supply curve

income effect

if consumers are spending less of their income for a good

substitution effect

when the price of a good falls it is now cheaper than the alternative item

supply

the quantity of a good/service that producers are willing and able to offer at various prices at a specific time period. ceteris paribus

Law of supply

As price increases, quantity supplied increases

market supply

sum of all individual suplies of a product at every price

equilibrium

where the supply and demand curve crosses

disequilibrium

when quantity demanded doesnt equal to quantity supplied. it is temporary as along as price changes

surplus/excess supply

any price above the equilibrium price, when quantity supplied is greater than quantity demanded

shortage/excess demand

any price beow the equilibrium where quantity demanded is greater than quantity supplied

price mechanism

The system where the forces of demand and supply determine the prices of products in a free market

allocative efficiency

resources are allocated in the most efficient way in an optimal point of view, satisfying consumers and producers maximizing social surplus

social surplus

total benefit gained by society when market is at equilibrium — the sum of producer and consumer surplus

consumer surplus

benefit consumers recieve for paying alower actual price than the highest price they are willing/able to buy

producer surplus

benefit from selling an amount at a higher price than the lowest price they are willing to sell for

Elasticity

the responsiveness of 1 variable to a change to another

price elasticity of demand (PED)

measure of responsiveness of quantity demanded of a good to a change in price of a good

perfectly elastic

responsiveness: infinity

relatively elastic

responsiveness: >1

unitary elastic

responsiveness: = 1

relatively inelastic

responsiveness: <1

perfectly inelastic

responsiveness: 0

cross elasticity of demand (XED)

how quantity demanded for one good is impacted by a change in price of another good

Complementary goods

Goods that are often bought together like bread and butter

Substitute goods

Goods with similar characteristics that could replace other goods

Price elasticity of supply (PES)

measurement of how much the quantity supplied of a good changed when there is a change in the price

income elasticity of demand

measure of how the quantity of a good changes in response to consumer income

inferior good

a good that consumers demand less of when their incomes increase

normal good

A good that consumers demand more when their income rises

necessity

goods people buy regardless of their income levels

market failure

a situation in which a market left on its own fails to allocate resources efficiently from a society's point of view

Merit goods

goods that are undersupplied and underconsumed.

demerit goods

goods that are oversupplied and overconsumed

externalities

effect on third parties due to actions of consumers or producers

wellfare loss

loss of social surplus to society when resources are not allocatively efficient

negative externality of production

when the production of a good/service generates a negative effect on a third party or society as a whole

positive externality of production

when production of a good/service generates a positive effect on third party/society

negative externality of consumption

individual consumption of a good generates a negative effect on third parties that were not factored into the decision to consume that good

positive externalities of consumption

when consumption of a good/service generates a positive effect on third parties/society as a whole

cap and trade system

market-based pollution control system in which the government sets an overall limit on how much of a pollutant is acceptable and issues vouchers to pollute to each company

carbon tax

A tax per unit of carbon emissions of fossil fuels.

public good

a good that is non-excludable and non-rival

free rider problem

no one is incentivised to pay for the good as everyone can use it without paying. Therefore the good is provided by the government

common pool resources

non-excludable and rivalrous

tragedy of the commons

the tendency of a shared

legislation

a law or set of laws

price ceilings

a maximum price set below the equilibrium to prevent producers from selling their products above it

price floor

a minimum price set above the equilibrium to prevent producers from selling their products below it

Indirect taxes on expenditure

taxes paid indirectly by consumers when they purchase a good. normally included in the price of the good

specific tax

Fixed tax amount per unit sold.

ad valorem tax

an indirect tax where a percentage is added to the selling price of each unit.

subsidy

per unit payment that are used to decrease production costs and increase the output of a market

short term

the period of time in which at least 1 factor of production is fixed or constant

long term

a period of time in which all factors of production a variable

fixed costs

costs that remain constant as output changes

variable costs

costs that vary when output changes

total product (TP)

total output produced by the firm. fixed + variable factor

average product (AP)

the average amount produced by each unit of a variable factor of production. TP/Variable factor

Marginal Product (MP)

the extra amount of output that can be produced when the firm uses an additional unit of an input

explicit costs

costs directly related to production/payment of the 4 factors of production what producers do not own

implicit costs

opportunity cost of doing business with factors that the firm already own. ex: decisions to employ someone

economic cost

explicit cost + implicit cost

normal profit

the breaking even point

Total costs (TC)

fixed costs + variable costs

Average Total Cost (ATC)

The cost per unit of output. TC/output

Marginal cost (MC)

increase in total cost when producing an extra unit of output

Total revenue (TR)

Price x quantity. Total amount of money a firm receives from selling a certian amount of product in a certain time period

Average revenue (AR)

Revenue per unit of sale

Marginal revenue (MR)

Extra revenue firm gains for selling 1 extra unit of given time period

Point of profit maximization

When MR=MC

Market power

The ability of a firm to set its own prices

perfect competition market

a market structure in which a large number of companies all produce an identical product and sell it for the same price

monopoly market

a market structure with only one seller that influences the market supply and price and is the market

oligopoly market

market structure in which a few large sellers dominate and have large amounts of market power

Monopolistic competition Market

a market structure in which many companies sell products that are similar but not identical

market structure

the characteristics of a market that determine the behaviour of firms in the market

Losses in the short tun

when Average revenue (AR) is lower than average total costs (ATC)

profits in short run

when average revenue (AR) is larger than average total cost (ATC)

natrual monopoly

a market that runs most efficiently when one large firm supplies all of the output

economies of scale

factors that cause a producer's average cost per unit to fall as output rises

Collusive behaviour

When firms agree to work together on something

formal collusion

An agreement between firms (usually in oligopoly) to limit output or fix prices in order to restrict competition— is likely to involve the formation of a cartel

informal collusion

Collusion without formal agreement

non-price competition

a way to attract customers through style

anti-competitive behaviour

when a firm lowers its price so much that they make a loss to push out new entrant

price wars

involve businesses competing by a series of intensive price cuts to threaten the competitiveness of rival firms

Abnormal profit

When a firm's average revenue is greater than its average costs

Adverse selection

When one sides has more knowledge about the quality of the product sold than the other

Asymmetric information

When 1 party in a transaction has more information than another party

Efficiency

Making the best possible use of scarce resources to avoid welfare loss