IB Micro Economics

Scarcity

The fundamental economic problem arising due to limited resources compared to infinite human wants.

Three Economic Questions

What to produce? How to produce? For whom to produce?

Production Possibilities Curve (PPC)

A graphical representation illustrating all possible combinations of two goods that can be produced with available resources and technology.

Being 'on the curve' in a PPC

Represents maximum efficiency and full employment of resources.

Being 'inside the curve' in a PPC

Indicates underutilization of resources, suggesting inefficiencies.

Being 'outside the curve' in a PPC

Represents unattainable production levels with current resources.

Indirect Tax

Taxes employed by governments to discourage consumption of harmful goods or to regulate prices.

Subsidies in economics

Government financial aid to firms aimed at lowering production costs and increasing supply.

Market Failure

A situation where the allocation of goods and services by a free market is not efficient.

Monopolistic Competition

A market structure where many firms sell differentiated products, with some market power retained.

Oligopoly

A market structure characterized by a few firms dominating the market with interdependent pricing and output decisions.

Key objectives of Macroeconomic Policy

Growth, stability, and full employment.

Government Intervention

Actions taken by government to affect the economy through policies like taxes, subsidies, and regulations.

Specific Tax

A fixed amount charged per unit sold, often used to discourage consumption.

Ad Valorem Tax

A tax based on the percentage of the sale price of a product.

Common Access Resources

Resources available to all that can be overused leading to sustainability issues, like over-fishing.

Demand in economics

The quantity of a good or service that consumers are willing and able to purchase at various prices.

Factors causing a shift in Demand

Changes in consumer preferences, income levels, prices of substitutes or complements, and expectations of future prices.

Supply in economics

The total quantity of a good or service that producers are willing and able to sell at various prices.

Factors causing a shift in Supply

Production costs, technological advancements, number of sellers, and expectations about future prices.

Competitive Market Equilibrium

A state where the quantity demanded equals the quantity supplied, resulting in no shortage or surplus.

Critique of maximizing behavior in consumers

It assumes consumers act rationally to maximize utility, which may not consider behavioral biases or limited information.

Critique of maximizing behavior in producers

It assumes firms aim to maximize profits, which may overlook ethical considerations and market constraints.

Elasticity of Demand

A measure of how much the quantity demanded of a good changes in response to a change in price.

Types of Elasticity of Demand

Price elasticity, income elasticity, and cross elasticity of demand.

Elasticity of Supply

A measure of how much the quantity supplied of a good changes in response to a change in price.

Types of Elasticity of Supply

Price elasticity of supply and cross elasticity of supply.

Role of government in microeconomics

Governments may intervene to correct market failures, regulate monopolies, and provide public goods.

Externalities in market failure

Costs or benefits of a market activity borne by third parties, leading to over or under-consumption of goods.

Public Goods

Goods that are non-excludable and non-rivalrous, resulting in free-rider problems and under-provision.

Asymmetric Information

A situation where one party in a transaction has more information than the other, leading to market inefficiencies.

Price Elasticity of Demand (PED)

A measure of the responsiveness of quantity demanded to a change in price.

Factors determining Price Elasticity of Demand

Availability of substitutes, necessity vs luxury, proportion of income spent, and time period for adjustment.

Price Elasticity of Supply (PES)

A measure of the responsiveness of quantity supplied to a change in price.

Factors determining Price Elasticity of Supply

Production flexibility, time period, and the availability of raw materials.

Formula for Price Elasticity of Demand (PED)

PED = (% Change in Quantity Demanded) / (% Change in Price)

Negative externalities

Costs incurred by third parties who did not choose to incur that cost, often associated with pollution or other harmful effects.

Positive externalities

Benefits received by third parties who did not choose to incur that benefit, such as education or vaccination.

Negative externalities and market failure

They can cause overproduction of goods that generate external costs, leading to inefficiency and welfare loss.

Common pool resources

Resources that are available to all, such as fisheries and forests, which can be over-exploited due to lack of ownership.

Tragedy of the commons

A situation in which individuals acting in their own self-interest deplete or degrade a common resource, leading to long-term collective loss.

Solutions to common access resource problems

Potential solutions include regulation, privatization, or community management to ensure sustainable use.

Impact of externalities on consumer and producer behavior

Externalities can distort the true costs and benefits of goods, leading to decisions that do not align with overall societal welfare.

Purpose of government intervention in the case of externalities

To correct market failures by imposing taxes, subsidies, or regulations to align private costs/benefits with social costs/benefits.

Role of education in addressing externalities

Educating consumers and producers about the impacts of their actions can help reduce negative externalities and enhance positive ones.

Types of government intervention

Includes regulations, taxes, subsidies, and public goods provision.

Regulation in government intervention

A rule or directive made and maintained by an authority to manage economic activities.

How taxes function as government intervention

Taxes can discourage undesirable behaviors or behaviors that lead to negative externalities.

Purpose of subsidies

To lower production costs, encourage consumption, or support certain industries.

How government intervention addresses market failure

By implementing policies to correct inefficiencies caused by externalities or public goods.

Potential drawbacks of government intervention

Can lead to government failure, market distortions, and reduced overall efficiency.

How government intervention impacts consumer behavior

Through subsidies and regulations, government can influence prices and availability of goods.

Example of government intervention in negative externalities

Imposing a carbon tax to reduce emissions associated with pollution.

Implications of government intervention for producers

May alter production costs, demand for goods, and competitiveness of firms.

How opportunity cost relates to government intervention

Government must consider the trade-offs of resources used in interventions versus other potential uses.

How Price Elasticity of Demand (PED) is calculated

PED is calculated by dividing the percentage change in quantity demanded by the percentage change in price.

Expression for % Change in Quantity Demanded

The expression for % Change in Quantity Demanded is [(New Quantity - Original Quantity) / Original Quantity] multiplied by 100.

Expression for % Change in Price

The expression for % Change in Price is [(New Price - Original Price) / Original Price] multiplied by 100.

PED value exceeding 1 significance

A PED value greater than 1 signifies that demand is elastic, meaning that quantity demanded changes significantly with price changes.

PED value below 1 significance

A PED value less than 1 indicates that demand is inelastic, meaning that quantity demanded changes little with price changes.

PED value of 1 significance

A PED value equaling 1 indicates unitary elasticity, meaning the percentage change in quantity demanded equals the percentage change in price.

Importance of PED for businesses

Understanding PED enables businesses to effectively set prices to maximize revenue based on consumer responsiveness to price changes.

Significance of PED in tax policy

PED is crucial for tax policy as it aids governments in forecasting the effects of taxes on consumption and revenue.

How PED relates to revenue generation

In the case of elastic demand, reducing prices may boost total revenue; for inelastic demand, increasing prices may enhance total revenue.