IB Economics Unit 2

Market

any kinds of arrangement where buyers and sellers of goods, services, or resources are linked together to carry out an exchange.

Competition

a process in which rivals compete in order to achieve some objective

Market power

the control that a seller has over the price of the product it sells - high competition = low market power

Law of demand

there is a negative relationship between the price of a good and its quantity demanded (price goes up, quantity demanded falls - vice versa).

Market demand

the sum of all individual demands for a good - market demand curve illustrates the law of demand

Non price determinants of demand

variables OTHER than price that can influence demand - changes in these cause shifts in the demand curve

Utility

the satisfaction consumers gain from consuming something

Total utility

the total satisfaction consumers get from consuming something

Law of diminishing marginal utility

as consumption of a good increases, marginal utility decreases with each additional unit consumed - this reinforces the law of demand, as it shows that a consumer will be willing to buy an additional unit of a good only if its price falls.

The substitution effect

if the price of a good falls, the consumer substitutes (buys more) of the now less expensive good (quantity demanded rises) - always a negative relationship between price and quantity demanded due to this effect.

The income effect

a fall in price = consumer's real income (purchasing power) increases - quantity demanded of the good then increases

Law of Supply

there is a positive relationship between the quantity of a good supplied and its price (as price of a good increases, the quantity of the good supplies also increases - vice versa).

Market supply

the sum of all individual firms' supplies for a good

Vertical supply curve

Two reasons for this:

- There is a fixed quantity of the good supplied because there is no time to produce more of it (e.g. the # of seats in a theatre = fixed # of tickets, so no matter the price you can't increase the # of seats).

- There is a fixed quantity of the good because there is no possibility of ever producing more of it (e.g. original antiques or original paintings).

Short run

a time period during which at least one input is fixed and cannot be changed by the firm.

Long run

a time period when all inputs can be changed

Total product

the total quantity of output produced by the firm

Marginal product

the extra output produced by one additional unit of a variable input

Law of diminishing marginal returns

as more and more units of a variable input (such as labor) are added to one or more fixed inputs (such as land), the marginal product of the variable input first increases, but there comes a point when it begins to decrease.

Total cost

all costs of production incurred by a firm

Marginal cost

the extra cost of producing one more unit of output - it tells us by how much total costs increase if there is an increase in output by one unit.

Excess supply (surplus)

when there is more supply than the quantity demanded - producers try to lower price to encourage consumers to buy more (downward pressure on price), falling until market equilibrium.

Excess demand (shortage)

when there is more demand than the quantity of supply - producers will raise the price, causing quantity demanded to fall and quantity supplied to rise (upward pressure on price)

Market equilibrium

when the quantity demanded is equal to the quantity supplied

Competitive market equilibrium

quantity demanded = quantity supplied, and there is no tendency for the price to change.

Signals

prices communicate information to decision-makers

Incentives

prices motivate decision-makers to respond to the information

Allocative efficiency

producing the quantity of goods mostly wanted by society - it answers the what/how much to produce question (MB = MC)

Marginal benefit

the extra benefit that you get from each additional unit of something you buy

Consumer surplus

the highest price consumers are willing to pay for a good minus the price actually paid

Producer surplus

the price received by firms for selling the good minus the lowest price that they are willing to accept to produce the good

Social surplus

the sum of consumer surplus and producers surplus - it is maximum when MB = MC (allocative efficiency)

Welfare

the amount of consumer and producer surplus - is max when MB = MC

Satisficing

the idea that firms try to achieve a satisfactory level of profits together with satisfactory results for many more objectives, rather than optimal or 'best' results for any one objective.