IB Econ Midterm

Price Elasticity of Demand (PED)

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

Income Elasticity of Demand (YED)

The measure of how much the quantity demanded of a good changes in response to a change in consumer income.

Primary Goods

Raw materials and agricultural products that are essential for production and do not have close substitutes.

Price Inelasticity of Demand

When a change in price leads to a proportionately smaller change in the quantity demanded.

Necessity Goods

Goods that are essential for survival and tend to have inelastic demand; examples include staple foods like rice.

Luxury Goods

Goods whose demand increases significantly with rising income but are sensitive to price changes; for example, Tesla cars.

Demerit Goods

Goods whose consumption is considered harmful to consumers and society, leading to government intervention through taxes.

Free Rider Problem

A situation where individuals benefit from resources, goods, or services without paying for them, leading to under-provision of public goods.

Negative Externality

A cost suffered by a third party as a result of an economic transaction; for example, pollution from industrial production.

Specific Tax

A tax imposed on a particular good or service, aimed at reducing consumption of goods that generate negative externalities.

Subsidy

Financial aid provided by the government to support or encourage the production or consumption of certain goods.

Carbon Tax

A tax based on the carbon content of fossil fuels, intended to reduce greenhouse gas emissions by making polluting activities more expensive.

Common Pool Resources

Natural resources that everyone can use but are vulnerable to overuse, such as fisheries and forests.

Market Failure

A situation where the allocation of goods and services is not efficient, often related to public goods and externalities.

Advertising as a Non-Price Determinant of Demand

When advertising shifts consumer preferences, increasing demand for a product without changing its price.

Price Inelasticity of Demand for Primary Goods

The demand for primary goods is often price inelastic due to the lack of substitutes and their essential nature for consumers and producers.

Examples of Price Inelasticity

For example, staple foods like rice have few substitutes; even if prices rise, consumers still buy them for their essential nutrition.

Income Elasticity of Demand (YED)

YED measures how much the quantity demanded of a good changes in response to changes in consumer income.

Types of Goods Based on YED

Normal goods' demand rises with income; luxury goods show significant demand increase, while inferior goods see a drop in demand as income rises.

Government Intervention via Subsidies

Subsidies can be used to reduce production costs for primary goods, ensuring affordability and sustainability.

Indirect Tax on Demerit Goods

Indirect taxes aim to reduce consumption of demerit goods like tobacco, which are harmful to individuals and society.

Government Subsidies in Agriculture

Subsidies to agricultural producers may stabilize food prices, support farmer income, and provide food security.

Market Failure and Environmental Problems

Market failure occurs when environmental issues lead to resource scarcity and damage to natural systems, affecting overall welfare.

Strategies for Environmental Market Failures

The government can utilize subsidies, carbon taxation, or direct regulation to address externalities and incentivize sustainable practices.

Advertising's Impact on Demand

Successful advertising campaigns can shift demand curves rightward, increasing the demand for products like pasta by highlighting their benefits.

Free Rider Problem

A challenge in public goods where individuals benefit without paying, leading to under-provision in a free market.

Sustainable Use of Common Pool Resources

Unregulated markets tend to over-exploit common pool resources since they are non-excludable, leading to sustainability issues.

Direct Provision of Public Goods

The government often directly provides public goods, correcting market failure but facing challenges like fiscal costs and inefficiency.