IBDP Microeconomics

Market

Any kind of arrangement where buyers and sellers of a particular good, service or resource are linked together to carry out an exchange.

Competition

Occurs when there are many buyers and sellers acting independently, so that no one has the ability to influence the price at which the product is sold in the market.

Market Demand

Refers to the sum of all individual consumer demands for a good or service.

Non-price determinants of demand

The variables (other than price) that can influence demand, and that determine the position of a demand curve; a change in any determinant of demand causes a shift of the demand curve.

List non-price determinants of demand

Income (differs for normal and inferior goods through)

Preferences and tastes

Price of substitutes

Price of complementary goods

Number of consumers

Market supply

Refers to the sum of all individual firm supplies of a good or service.

Non-price determinants of supply

The variables (other than price) that can determine supply, and that determine the position of a supply curve; a change in any determinant of supply causes a shift of the supply curve.

List non-price determinants of supply

Cost of factors of production

Technology

Competitive Supply

Joint Supply

Producer price expectations (if expected to rise, may restrict supply to sell in the future)

Indirect taxes

Subsidies

The number of firms

Shocks or sudden unpredictable events

Competitive Supply

In the case of two goods, refers to production of one or the other by a firm; in other words the two goods compete with each other for the same resources. (e.g: if farmer produces both corn and wheat but the price of corn increases, the farmer may increase supply of corn because it is more profitable)

Joint supply

Refers to production of two or more goods that are derived from a single product, so that it is not possible to produce more of one without producing more of the other

Subsidy

Money paid by the government to firms for various reasons (reduce production costs and increase supply/lower costs for consumers, or prevent industry from failure, or protect from foreign competition)

Competitive market equilibrium

The equilibrium that emerges at the point where the demand curve intersects the supply curve in a free competitive market (where there is no government intervention).

Price mechanism

The system where prices are determined by demand and supply in competitive markets, resulting from the free interaction of buyers (demanders) and sellers (suppliers); these interactions determine the allocation of resources.

Functions of price mechanism

Signalling, incentive, rationing

Allocative efficiency

An allocation of resources that results in producing the combination and quantity of goods and services mostly preferred by consumers. The condition for allocative efficiency is given by MSB = MSC (marginal social benefit = marginal social cost or P = MC (price is equal to marginal cost); alternatively it is when social surplus is maximum.

Marginal benefit

The extra or additional benefit received from consuming one more unit of a good.

Marginal costs

The extra or additional cost of producing one more unit of output.

Consumer surplus

Refers to the difference between the highest prices consumers are willing to pay for a good and the price actually paid. In a diagram, it is shown by the area under the demand curve and above the price paid by consumers up to quantity purchased.

Producer surplus

Refers to the difference between the price received by firms for selling their good and the lowest price they are willing to accept to produce the good. In a diagram, it is shown as the area under the price received by producers and above the supply curve up to the quantity sold.

Community/social surplus

The sum of consumer and producer surplus; it is maximum in a competitive market with no market failures.

(Social) welfare

In microeconomics, it is measured by the amount of social surplus (consumer and producer surplus) that is generated in a market. Welfare is greatest, i.e. social surplus is greatest, in competitive market equilibrium when there are no externalities, and marginal social benefits are equal to marginal social costs (MSB = MSC).

Human capital

Any two of the following:

• factor of production (labour)

• skills

• abilities

• knowledge/qualifications

• level of health (that make a labour force productive).

(skill, knowledge, and experience possessed by an individual, viewed in terms of its value to an organization)