IB 1 Economics Unit 4 to 6

Market Failure (Externalities)
1. Tax solution
  1. Positive externalities
  2. Negative externality
2. Advertisement
  1. Positive
  2. Negative
3. Legislation
  1. Positive
  2. Negative
Government intervention
1. Minimum Price
  1. No Equilibrium, it is distorted. Supply greater than Demand
  2. No equilibrium. Reduced producer surplus. Triangle equilibrium Qeq with Peq
  3. Waste v self sufficiency, produce on larger scale, average cost per unit reduces. Economy of scale prove, is this economic development?
2. Maximum Price
  1. Distorts equilibrium, D is greater than S
  2. C & P surplus much reduced due to black market, represented by the
  3. Less people have access to the resources, reduction of consumer surplus. Government didn't archive its main object, fewer people access to the house. Decrease of quality of life
3. 3 factor
  1. Consumer
  2. Producer
  3. Government
Elasticities
1. PED = %∆QD / %∆P
2. YED = %∆QD / %∆Y
3. PES = %∆QS / %∆P
4. XED = %∆QD(Corp A) / %∆P (Corp B)
5. Determinants of PED
  1. Numbers of substitudes
  2. Proportion of income (Y)
  3. Luxury or necessity
  4. Addictive or not
  5. Time to responde
6. Examples:
  1. New Kitchen: Elastic,
    1. - Luxurious, highly influenced by income
    2. - Not addictive
    3. - Many subsidies
  2. Fruits: Inelastic
    1. Necessity
    2. Lack of substitudes
7. Impacts of elasticities for stakeholders
  1. Consumer
    1. Inelastic
      1. P∆% more than Qd
      2. Might be put off by big prices, result in price instability.
      3. Y is inelastic, Y increases, demand unaffected.
    2. Elastic
      1. More competition. Increased R&D better quality and lower price.
      2. %D more than %P
    3. Conclusion
      1. Secondary products offer more choices to consumers, more price stability, consumers can plan how to use their income.
  2. Governmnet
    1. Elastic
      1. Stable price and advance in technology, competitiveness advantage
    2. Inelastic
      1. Price instability: limited growth in development, lower standards of living.
      2. Higher tax revenue
    3. Conclusion
      1. A price elasticity, competitivity. This is why LEDC (Less developed country) are encouraged to diversify their primary commodity.
  3. Producer
    1. Elastic
      1. Substitutes drive Price and Profit down.
      2. Easier to supply, better efficiency
      3. Can share stocks incase of shortage can easy respond to increase in D easily
    2. Inelastic
      1. Price instability: difficult to plan ahead
      2. Quantity D Limited, Y (profit) inelastic
    3. Conclusion
      1. Elastic. More price stability, quality product, can become very rich, make lots of profit
  4. Price instability (Most in primary goods)
    1. Demand inelastic, large effect on price.
      1. Higher: Increase in consumer burden
      2. Lower: Lower TR on producers
8. Primary Inelastic - eg: Pineapples in philippines
  1. Explanation: No specific substitutes for pineapple, price inelastic
  2. Effect on revenue: Revenue increase because supply decrease. Long term, producer will react by supply increase in pineapple will increase because price will go up.
    1. In the end, Total revenue will go down because of extra supply. inefficiency of resources. (Use PPF graph)
9. Secondary, Elastic - eg: iPhone
  1. Explanation: Many others substitutes, and new, better technology. Latest iPhone quickly outdated.
  2. Effects on revenue: Apple will decrease price to increase total revenue. Price is elastic. Price goes down, Quantity demanded goes up, Total revenue goes up.
  3. YED: Since iPhone is elastic product, if Y increases, D will increase, result in higher revenue when demand curve shifts to right. Will significantly influence quality of life.

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IB 1 Economics Unit 4 to 6

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