IB Economics SL: Microeconomics

Scarcity
1. Opportunity Cost
  1. the cost of the next best thing forgone
2. Production Possibility Curve
  1. Capital goods/ consumer goods
  2. Move inside
    1. Law of diminishing returns
    2. Achieving productive efficiecy
  3. Shift
    1. Economic Growth
3. Utility
  1. satisfaction or pleasure gained from an economic action
4. Finite source, infinite wants
  1. What to produce? How to produce? For whom to produce?
  2. Land, Labor, Capital, Enterprise
Market - Allocation of resources
1. Demand
  1. a want backed by the willingness and ability to buy at a given price
  2. Move along
    1. Income/ Substitution effects
  3. Shift
    1. Income
    2. Population
    3. Price of complements
    4. Price of substitutes
    5. Tastes and preferences
2. Supply
  1. the quantity of a good or service producers are able and willing to supply to a market at a give price
  2. Move along
    1. Extension/ contraction
  3. Shift
    1. Cost of production
    2. New firms entering a market
    3. Indirect taxes and subsidies
    4. Price of subsitutes
    5. Technological advancement
3. Ceteris paribus
4. Market Equilibrium
  1. Equilibrium exists when Demand = Supply
    1. Equilibrium price - (Market clearing price)
  2. Disequilibrium - excess demand or supply
  3. Price Mechanism
    1. a signal, an incentive and a rationing device to allocate resources in a market
5. Market Efficiency
  1. Surpluses
    1. Producer
      1. the extra revenue gained by producers (Marginal costs)
    2. Consumer
      1. the extra utility gained by consumers (Marginal benefits)
  2. Allocative Efficiency
    1. consumer wants are satified
Elasticity
1. PED
  1. the responsiveness of the quantity demanded to a chance in price
  2. Elastic - responsive Inelastic - not responsive
  3. Determinants of PED
    1. Closeness of substitues
      1. Close subs - elastic
    2. Luxury or necessity
      1. Luxury - elastic Necessity - inelastic
    3. Percentage of income spent on the good
      1. Less spent, more inelastic
    4. Time period
      1. In the long term, demand more elastic
  4. Commodities - inelastic, few subs Manufactured - elastic, many subs
2. PES
  1. responsiveness of the quantity supplied to a change in price
  2. Determinants of PES
    1. Time Period
      1. Very SR - all fixed SR - some fixed LR - all variable
    2. Level of spare capacity
      1. Spare = PES
    3. Type of good
      1. E.g. Agriculture
    4. Level of stocks
      1. Response to demand
3. XED
  1. responsiveness of the quantity demanded of one good to a change in price of another
  2. Determine Substitutes/ Complements relationship
4. YED
  1. responsiveness of the quantity demanded to a change in the real income of consumers
  2. Determine Normal/ Inferior goods
Government Intervention
1. Minimum/ Maximum Prices
  1. Price floor (above eq point)
    1. Excess supply
      1. Shift Demand
  2. Price ceiling (under eq point)
    1. Excess demand
      1. Parallel market
      2. Shift Supply
2. Indirect taxation
  1. Tax incidence (Consumer/ Producer)
    1. Depends on PED and PES
  2. Ad valorem (% tax) Specific (fixed amount)
3. Subsidy
  1. payments by a government to producers
  2. Increase supply
4. Comment on Consumer/ Producer surplus, producer revenue, government revenue and expenditure and impact on eq price and quantity
Market Failure and Government Response
1. Externalities
  1. Negative
    1. Production
      1. MSC > MPC
        E.g. Pollution
    2. Consumption
      1. MSB < MPB
        E.g. Cigarettes
    3. Government Respose
      1. Taxation
        Disadvantages
        Difficult to estimate the spillover effect
        Price inelastic D or S have little effect
        Income inequality
        Loss of international competitiveness
        Creation of black market
        Advantages
        Direct Impact
        e.g.Carbon tax
      2. Tradable Permits
        Reduction of Pollution
        Quotas
        Incentive to be environmentally efficient
        More efficient firms buying more to produce more
      3. Regulation
        Measure and set standards for firms to comply
        However,...
        Difficult to set an optimal limit
        Cost of regulation
        Disincentive to change, when benefits from staying outweigh the costs of change
      4. Extending property rights
        Regulated through legal rights
        Not effective in ELDCs due to lack of legal system
      5. International co-operation
        UN Reduction on greenhouse gases
        Political problems
        Still 30 countries are committed to reach the outcome
  2. Positive
    1. Production
      1. MSC < MPC
        R&D in technology
    2. Consumtion
      1. MSB > MPB
        Vaccines
    3. Government Response
      1. Subsidy
        Hard to estimate MEC
        Opportunity Cost on other social benefits
        PED > 1, ineffective
      2. Free provision
        e.g Education, healthcare
        Lack of funding especially in ELDCs
      3. Information
        Educate the population
        Make informed choices
        Could be inefficient
        Government expediture
  3. the costs or benefits of production or consumption that are experienced by their parties but not by the producers and consumers who cause them
2. Merit and Demerit Goods
  1. Merit goods
    1. consumers consume too few goods and services that are seen as being good for them
      1. e.g. Education
  2. Demerit goods
    1. consumers consume too many goods and services that are seen as being bad for them
      1. e.g. alcohol
  3. Preferred solution: Education and Information on choices
3. Common Access Resources and Sustainability
  1. CAR - are resources that are available to everyone without payment, do not have a price, and are not woned bt anyone
    1. e.g. Air, biodiversity
    2. non-excludable but rivalrous
  2. Sustainability
    1. resources are used today in such a way that does not compromise their use by future generations
      1. Response similar to negative externalities
        Economic activities threatens sustainability
  3. Requires International co-operation
    1. EU emissions Trading System
4. Public Goods
  1. non-excudability
    1. even if you have paid for a good you cannot confine its use to yourself
  2. non-rivalry
    1. the consumption of a good does not reduce its availability to others
  3. "Free rider" effect
    1. e.g. National defense or street lamps
5. Why and how market fails and evaluate the solutions
6. Asymmetric info
7. Abuse of monopoly power

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IB Economics SL: Microeconomics

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