IB Economics: Microeconomics

Scarcity

the condition that results from limited resources combined with unlimited wants

Opportunity Cost

Cost of the next best alternative use of money, time, or resources when one choice is made rather than another

Factors of Production

resources of land, labor, capital, and entrepreneurship used to produce goods and services

Land

the physical location where production occurs. Includes bodies of water as well as resources extracted from the earth.

Labor

the work done by humans that is used in the production of goods and services.

Capital

previously manufactured goods used to make other goods and services

Entrepreneurship

the process of starting, organizing, managing, and assuming the responsibility for a business

Market

a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade

Demand

The quantity of a good or service that consumers are willing and able to purchase at a given price in a given period of time.

Consumer Demand

The amount of a good or service a consumer is willing and able to purchase at a range of prices.

Market Demand

the demand by all the consumers of a given good or service

Law of Demand

the claim that, ceteris paribus, the quantity demanded of a good falls when the price of the good rises

Demand Curve

a graph of the relationship between the price of a good and the quantity demanded.The Law of Demand implies that this curve is negatively sloped.

Determinants of Demand

Anything other than price of the current item that influences consumer buying decisions, including income, tastes and preferences, price of related items (substitutes and complements), number of consumers in the market, and expected future price.

Supply

The quantity of a product that producers are willing and able to produce at a given price in a given period of time.

Market Supply

the total of all individual suppliers' products in a market at a particular time

Determinants of Supply

Anything other than price of the current item that influences production decisions, including cost of raw materials, cost of labor, level of technology used to produce, number of producers in the market, price of related products, and expected future price.

Equilibrium

a situation in which the market price has reached the level at which quantity supplied equals quantity demanded

Scarcity

when a price is below equilibrium causing quantity demanded to be greater than quantity supplied

Surplus

when a price is above equilibrium causing quantity demanded to be less than quantity supplied

Price Mechanism

price signals which determines allocation of resources through interaction of supply and demand

Price Elasticity of Demand

The responsiveness of the quantity demanded to a change in price, measured by dividing the percentage change in the quantity demanded of a product by the percentage change in the product's price.

Price elastic

The demand for a product is highly responsive to price changes. The range of a demand curve where elasticities of demand are greater than 1.0.

Price inelastic

The demand for a product is not very responsive to price changes. The range of a demand curve where elasticities of demand are less than 1.0.

Unit elastic

a given change in price causes a proportional change in quantity demanded. The point of any demand curve where revenue is maximised.

Perfectly elastic demand

Any increase in price results in all demand being eliminated.

Perfectly inelastic demand

the case where the quantity demanded is completely unresponsive to price, and the price elasticity of demand equals zero.

Cross (Price) Elasticity of Demand

a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good.

Substitutes

two goods for which an increase in the price of one leads to an increase in the demand for the other. Occurs when XED is a positive value.

Complements

two goods for which an increase in the price of one leads to a decrease in the demand for the other. Occurs when XED is a negative value.

Income Elasticity of Demand

a measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income

Normal good

a good for which demand goes up when income is higher and for which demand goes down when income is lower.

Inferior good

a good that consumers demand less of when their incomes increase. Occurs when yED is a negative value.

Price Elasticity of Supply

a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price

Specific Tax

a fixed amount that is imposed upon a product by the government; it has the effect of shifting the supply curve vertically upwards by the amount of the tax.

ad valorem tax

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

Excise tax

A tax on a good that is often meant to limit consumption of that good.

Tax incidence

the actual division of the burden of a tax between buyers and sellers in a market

Subsidies

Government payments given to certain industries to help offset some of their costs of production. It has the effect of shifting the curve vertically downwards.

Price Ceiling

a maximum price that can be legally charged for a good or service: set below equilibrium

Price Floor

a legal minimum on the price at which a good can be sold: set above equilibrium

Consumer Surplus

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

Producer Surplus

the amount a seller is paid for a good minus the seller's cost of providing it

Community Surplus

the sum of consumer and producer surplus; the total benefit to society, this is maximised at the equilibrium.

Allocative Efficiency

the apportionment of resources among firms and industries to obtain the production of the products most wanted by society (consumers); the output of each product at which its marginal cost and price or marginal benefit are equal

Externalities

economic side effects or by-products that affect an uninvolved third party; can be negative or positive

Positive externality of consumption

When there is a spillover benefit of consuming a good or service onto a third party.

Positive externality of production

when the production of a good or service creates a benefit to third parties.

Marginal Private Benefit

The benefit from an additional unit of a good or service that the consumer of that good or service receives.

Marginal Social Benefit

The true benefit to society of a one unit increase in the production of a good or service

Marginal Private Cost

the cost of producing an additional unit of a good or service that is borne by the producer of that good or service

Marginal Social Cost

the true cost borne by society when the production of a good or service is increased by one unit

Merit Good

a good or service considered as beneficial for people and that would be under provided by the market and so under consumed

Demerit Good

a good or service considered to be harmful for people who consume them and society as a whole. If left to the market forces or private enterprise, they would be over-produced and thus over consumed

Tradable Permits

licenses to emit limited quantities of pollutants that can be bought and sold by polluters (AKA Cap and Trade)

Deadweight loss

the reduction in economic surplus resulting from a market not being in competitive equilibrium

Public Good

A good that is neither excludable nor rivalrous in consumption

Free Rider Problem

tendency for people to refrain from contributing to the common good when a resource is available without requiring any personal cost or contribution

Common Access Resource

a resource that is owned by no one, but is available to all users at little or no charge

Sustainability

providing the best outcomes for human and natural environments both in the present and for the future

Asymmetric Information

situations in which buyers and sellers are not equally well informed about the characteristics of goods and services for sale in the marketplace

Short Run

a period of time sufficiently short that at least one of the firm's factors of production cannot be varied

Long Run

A period of sufficient time to alter all factors of production used in the productive process - all inputs can be changed.

Total Product

all the goods and services produced by a business during a given period of time with a given amount of input

Law of Diminishing Marginal Returns

As more of a variable resource is added to a given amount of a fixed resource, marginal product eventually declines and could become negative

Economic Costs

The total opportunity costs of production to a firm, including the opportunity cost of entrepreneurship.

Fixed Costs

Costs that do not vary with the quantity of output produced

Variable Costs

Costs that vary directly with the level of production

Average Costs

Total Costs divided by quantity. ATC = TC/Q

Increasing returns to scale

When long-run average total cost declines as output increases. Economies of scale outweigh diseconomies of scale

Economies of Scale

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

Diseconomies of Scale

factors that cause a producer's average cost per unit to rise as output rises in the long run

Total Revenue

the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold

Economic profit

Total revenue minus total cost, including both explicit and implicit costs - accounting profit minus the opportunity costs.

Normal Profit

the payment made by a firm to obtain and retain entrepreneurial ability; the minimum income entrepreneurial ability must receive to induce it to perform entrepreneurial functions for a firm

Profit Maximization

Refers to a firm earning as much sales revenue as possible while, at the same time, keeping costs to a minimum. Profit maximisation is the most common goal for a firm. Occurs at the quantity of output where MR=MC

Revenue Maximization

An alternative goal of some firms: to produce the output level yielding the highest value of sales (MR=0)

Growth Maximization

An alternative goal of some firms: to expand output as quickly as possible

Satisficing

Choosing an option that is acceptable, although not necessarily the best or perfect.

Perfect Competition

a market structure in which a large number of firms all produce the same product and no single seller controls supply or price and barriers to entry are low

Necessity Goods

products that have income elasticity between 0 and 1. When consumer income grows, quantity demanded rises by less than the rise in income.

Luxury Goods

goods that have income elasticities greater than 1. when consumer income grows, quantity demanded of luxury goods rises more than the rise in income

Negative externality of consumption

when a good or service consumed by individuals adversely affects third parties

Negative externality of production

when the production of a good or service adversely affects third parties

Average product

the average amount produced by each unit of a variable factor of production

Marginal product

The increase in output that arises from an additional unit of input

Marginal Cost

the extra cost of producing one more unit of output

Total Costs

the sum of the fixed and variable costs for any given level of production

Productive efficiency

the production of a good in the least costly way: occurs at ATC minimum.

Decreasing returns to scale

when long-run average total cost increases as output increases: diseconomies of scale outweigh economies of scale

Constant returns to scale

the property whereby long-run average total cost stays the same as the quantity of output changes

Average Revenue

Revenue per unit produced. It is calculated by dividing TR by the output. NOTE: This is always equals Price if there is no price discrimination.

Marginal Revenue

the additional income from selling one more unit of a good; sometimes equal to price

Shutdown

a short-run decision not to produce anything during a specific period of time because of current market conditions. This would minimize losses for the firm if AVC > AR at Qpm. The firm would only be losing it's fixed costs.

Operate at a loss

a short-run decision to continue operating in spite of losses. Losses would be minimized with this decision if AR>AVC at Qpm. In other words, the revenue would be paying for all of the variable costs and some portion of the fixed costs.

Product Differentiation

a strategy that firms use to achieve market power. Accomplished by producing products that have distinct positive identities in consumers' minds.