IB Economics Review

Factors of Production

1) Land / Natural Resources

2) Capital / Tools & Machinery

3) Entrepreneurship / Businesses

4) Labor

What causes a change in supply?

The Factors of Production

Scarcity

Limited / Costly Resources

Major conflict creator in economics

Sustainability

Meeting the needs of present generation without compromising the future

Opportunity Cost

Giving something up in order to gain something

Next best alternative

Free Market System

Laissez-faire

Hands free economy

Resources allocated freely

Founder of Free Market System

Adam Smith

Planned Economy

Governmental controls all

Centrally planned economy

Founder of Planned Economy / Criticized Free Market System

Karl Marx

Mixed Economy

Free market ideas with some governmental control

Production Possibilities Curve (PPC)

Graph that shows opportunity cost

Circular Flow of Income Model

Households spend money on firms

Firms give income to households

Related to GDP measurement

Laissez-Faire

No governmental intervention

Keynesian Revolution

More governmental management

Post Great Depression

John Keynes

Circular Economy

Waste becomes resource

Sustainable economy

Law of Demand

Price goes up, quantity goes down

Demand Curve

Graph showing change in quantity’s affect on price

Affects consumers

Change in Demand

Change in quantity bought

Shift of demand curve

Non-price determinants of demand

1) Income

2) Taste

3) Preferences

4) Future price expectations

5) Price of related goods

Law of Supply

Quantity goes up, price goes up

Supply Curve

Graph showing change of price’s affect on quantity

Represents producers

Change in Supply

Changes in price of good

Shift of supply

Non-price of determinants of supply

1) Changes in F.O.P

2) Indirect tax/subsidies

3) Change in technology

4) Future price expectations

Market equilibrium

Price and quantity of where supply and demand meet

Price Mechanism

Changes in supply and demand led to changes in price and quantity

Community Surplus

Benefits resulting from a market

Consumers save, producers make profit

Resource Allocation

Choice of what gets made and who gets it

Allocative Efficiency

At equilibirum, quantity demanded = quantity supplied

Marginal Benefit

The gain of producing one more product

Marginal Cost

The cost of producing one more product

Total Revenue

NOT profit

Total money collected from a sale

Profit - spendings = revenue

Elasticity

The degree of responsiveness to price changes

Price elasticity of demand (PED)

Final Value - Initial Value / Initial Value

Determinants of PED

Necessity

Lack of substitutes

Proportion of income

Time to response

Income elasticity of demand (YED)

How consumers react to change in income

Engel curve

YED Diagram, quantity of goods consumed v. income

Normal goods

People buy more when income increases

Inferior goods

People buy less when income increases

Price elasticity of supply (PES)

How much more/less firms produce in response to a change of price

Determinants of PES

Mobility of factors of production

Unused capacity

Ability to store

Time to respond

Price ceiling

The maximum price on a good

E.g. rent, gas, drugs

Price floor

The minimum price on a good

E.g. minimum wage

Indirect tax

Taxes included in the price

ad valorem = percentage and

specific = set amount per unit

Subsidy

Money provided by government to a firm

Encourage production

Direct provision

Government produces a product instead/ in addition to private goods

Regulation

Rules and limitations placed on a product/ production by government

Shortage

Price below equilibrium

Lower quantity supplied than demanded

Oversupply

Price above equilibrium

Lower quantity demanded than supplied

Socially optimal output

Equilibrium price and quantity when social costs and benefits are taken into account

Marginal social benefit

Level of demand when social costs and benefit are taken into account

Marginal social cost (MSC)

Total cost to society of producing one additional unit of a good or service

Positive externalities of production

Unaccounted positive outcomes from production

Benefits gained by a third party

E.g. Bee Keeping

Negative externalities of production

Unaccounted negative outcomes from production

Costs that affect a third party

E.g. Pollution

Positive externalities of consumption

Benefits gained by non producers when a good/service is consumed

Negative externalities of consumption

Consequences faced by consumers and non producers when a good or service is consumed

Merit Goods

Gives long term benefits to consumer

Creates positive externalities

Demerit Goods

Causes harm to the consumer

Welfare loss / Deadweight loss

Lost benefits or harm resulting from a market not in equilibrium

Common pool resources

Non-excludable, causes rivalry

Tradegy of the commons

Exhausting common pool resources

Self interest undermines a better outcome for society

Pigouvian Tax

An indirect tax on a demeri good to discourage its use

Carbon Tax

Tax per unit of carbon emission by producer

Tradable Permits

Method of regulating emissions

Issue a permit to sellers and they can buy or sell them

Collective self-governance

When regulations are placed on the industry itself

Public Goods

Non-rivalrous, non-excludable

E.g. town road, park, or school

Free-rider problem

Tendency to avoid paying for a product when everybody else could have it for free