IB Economics in a Nutshell (2)

What is Scarcity?

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

What are the Three Economic Questions?

1. What to produce? 2. How to produce? 3. For whom to produce?

What is the Production Possibilities Curve (PPC)?

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

What does being 'on the curve' in a PPC indicate?

Represents maximum efficiency and full employment of resources.

What does being 'inside the curve' in a PPC indicate?

Indicates underutilization of resources, suggesting inefficiencies.

What does being 'outside the curve' in a PPC indicate?

Represents unattainable production levels with current resources.

What is Indirect Tax?

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

What are Subsidies in economics?

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

What is Market Failure?

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

What is Monopolistic Competition?

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

What is Oligopoly?

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

What are the key objectives of Macroeconomic Policy?

Growth, stability, and full employment.

What is Government Intervention?

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

What is a Specific Tax?

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

What is Ad Valorem Tax?

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

What are Common Access Resources?

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

What is Demand in economics?

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

What factors can cause a shift in Demand?

Factors include changes in consumer preferences, income levels, prices of substitutes or complements, and expectations of future prices.

What is Supply in economics?

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

What factors can cause a shift in Supply?

Factors include production costs, technological advancements, number of sellers, and expectations about future prices.

What is Competitive Market Equilibrium?

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

What is the critique of maximizing behavior in consumers?

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

What is the critique of maximizing behavior in producers?

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

What is Elasticity of Demand?

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

What are the types of Elasticity of Demand?

Includes price elasticity, income elasticity, and cross elasticity of demand.

What is Elasticity of Supply?

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

What are the types of Elasticity of Supply?

Includes price elasticity of supply and cross elasticity of supply.

What role does government play in microeconomics?

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

What are externalities in the context of market failure?

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

What are Common Access Resources?

Resources that are available to all and can be overused, such as fisheries or forests.

What are Public Goods?

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

What is Asymmetric Information?

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

What is Price Elasticity of Demand (PED)?

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

What factors determine Price Elasticity of Demand?

Factors include availability of substitutes, necessity vs luxury, proportion of income spent, and time period for adjustment.

What is Price Elasticity of Supply (PES)?

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

What factors determine Price Elasticity of Supply?

Factors include production flexibility, time period, and the availability of raw materials.

What is the formula for Price Elasticity of Demand (PED)?

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

What are negative externalities?

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

What are positive externalities?

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

How can negative externalities lead to market failure?

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

What are common pool resources?

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

What is the 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.

What are solutions to common access resource problems?

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

What is the 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.

What is the 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.

What is the 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.

What are the types of government intervention?

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

What is a regulation in government intervention?

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

How do taxes function as government intervention?

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

What is the purpose of subsidies?

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

How does government intervention address market failure?

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

What are the potential drawbacks of government intervention?

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

How can government intervention impact consumer behavior?

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

What is an example of government intervention in the case of negative externalities?

Imposing a carbon tax to reduce emissions associated with pollution.

What are the implications of government intervention for producers?

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

How does the concept of opportunity cost relate to government intervention?

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

How is Price Elasticity of Demand (PED) calculated?

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

What is the expression for % Change in Quantity Demanded?

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

What is the expression for % Change in Price?

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

What does a PED value exceeding 1 signify?

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

What does a PED value below 1 signify?

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

What does a PED value of 1 signify?

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

Why is PED important for businesses?

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

What significance does PED hold in tax policy?

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

How does PED relate to revenue generation?

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