IB Economics HL – Unit 2: Microeconomics Definitions

42 definitions from the Unit 2 Quizlet linked in IB Economics HL Canvas. Covers demand, supply, equilibrium, consumer/producer surplus, and elasticities.

Market

A market is where buyers and sellers come together to carry out economic transactions. Goods and services are exchanged for money.

Market demand

The horizontal sum of the individual demand curves for a product of all the consumers in a market.

Market supply

The horizontal sum of the individual supply curves for a product of all the producers in a market.

Demand

Demand is the quantity of a good or service that consumers are willing and able to buy at a given price in a given time period, ceteris paribus.

Law of demand

As the price of a good falls, the quantity demanded will normally increase.

Law of supply

As the price of a good rises, the quantity supplied will normally rise.

Demand curve

A curve that shows the relationship between the price of a product and the quantity of the product demanded

Complementary goods

Products that are often purchased together. They are used in combination with each other (joint demand). For example, digital cameras and memory cards. As the price of one rises, consumers decrease the demand for the other good, and vice versa.

Substitute goods

Good in competitive demand which can be used in place of each other, for example, Adidas running shoes and Nike running shoes. As the price of one rises, consumers switch their demand to cheaper similar goods.

Normal good

A good where the demand for it increases as income increases, and vice versa.

Inferior goods

A good where the demand for it decreases as income increases and more superior goods are purchased, and vice versa.

Quantity demanded

The quantity of a good or service demanded at a particular price over a given time period.

Supply

The quantity of a good or service that producers are willing and able to supply at a given price in a given time period, ceteris paribus.

Supply curve

This shows the relationship between the price of a good or service and the quantity supplied. It is normally upward sloping.

Quantity supplied

The quantity of a good or service supplied at a particular price over a given time period.

Joint supply

Goods which are produced together, or where the production of one good involves the production of another product (for example, as a by-product of production). Example: A rise in the price of beef will cause an increase in quantity supplied of beef, but will also result in an increase in supply of hide (the supply curve for hide will shift to the right).

Indirect taxes

Taxes levied on spending to buy goods and services.

Subsidy

A sum of money (grant) paid to firms to lower firms' costs of production and lead to increased production.

Equilibrium

This occurs where demand equals supply and is a state of rest, self-perpetuating in the absence of any outside disturbance.

Equilibrium price

The price at which the quantity demanded equals the quantity supplied

Equilibrium quantity

The quantity bought and sold at the equilibrium price

Disequilibrium

Any price or quantity not at equilibrium; when quantity supplied is not equal to quantity demanded in a market

Excess demand

A situation of disequilibrium. It is the amount by which quantity demanded exceeds quantity supplied.

Excess supply

A situation of disequilibrium. It is the amount by which quantity supplied exceeds quantity demanded.

Price mechanism

Describes the means by which millions of decisions taken by consumers and businesses interact to determine the allocation of scarce resources between competing uses. Price has 3 functions: the signalling function, the incentive function and the rationing function.

Consumer surplus

The extra satisfaction (utility) gained by consumers from paying a price that is lower than that which they are prepared to pay. It is illustrated as the area below the demand curve and above the market price.

Producer surplus

The excess of actual earnings that a producer makes from a given quantity of output, over and above the amount the producer would be prepared to accept for that output. It is illustrated as the area above the supply curve and below the market price.

Allocative efficiency

Resources are allocated in the most efficient way from society's point of view. It occurs when a market is in equilibrium with demand equalling supply and community surplus is maximised. It occurs when MSC=MSB (Marginal Social Cost = Marginal Social Benefit).

Efficiency

In general, involves making the best use of scarce resources. May refer to producing at the lowest possible cost (productive efficiency) or to allocative efficiency where marginal social costs are equal to marginal social benefits (where community surplus is maximised).

Competitive market

A market with many firms acting independently where no firm has the ability to control the price.

Competitive market equilibrium

Occurs if in a free competitive market, quantity demanded is equal to quantity supplied.

Community Surplus

This is the total benefit to society. It equals consumer surplus + producer surplus.

Price elasticity of demand

Measure of the responsiveness of quantity demanded to a change in price. The formula is: PED = %ΔQd/%ΔP

Income elasticity of demand

Measures the responsiveness of quantity demanded to changes in income. The formula is: YED = %ΔQd/%ΔY

Price elasticity of supply

Measures the responsiveness of quantity supplied to a change in price. The formula is: PES = %ΔQs/%ΔP

Price elastic demand

Where a change in the price of a good or service leads to a proportionately larger change in the quantity demanded of the good or service. (PED is greater than one.)

Price inelastic demand

Where a change in the price of a good or service leads to a proportionately smaller change in the quantity demanded of the good or service. (PED is less than one.)

Income elastic demand

Where a change in income will lead to a proportionally larger change in quantity demanded.

Income inelastic demand

Where a change in income will lead to a proportionally smaller change in quantity demanded.

Price elastic supply

Where a change in the price of a good or service leads to a proportionately larger change of the quantity supplied of the good or service. (PES is greater than one).

Price inelastic supply

Where a change in the price of a good or service leads to a proportionately smaller change of the quantity supplied of the good or service. (PES is less than one).

Primary commodities

Raw materials that are produced in the primary sector. Examples include agricultural products, metals and minerals.