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Microeconomics IB Economics Terminology
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- 1MarketAny place where transactions take place between buyers and sellers. Scarcity must exist for a market to exist.
- 2(Effective) DemandThe willingness and ability of customers to pay a certain price in a market to obtain a particular good or service at a given price in a given time period.
- 3SubstitutesProducts that can be used instead of each other, such as Coca-Cola or Pepsi and tea or coffee.
- 4ComplementsProducts that are jointly demanded, such as cinema movies and popcorn or pencils and erasers.
- 5Normal goodWhen the demand for a product increases with a rise in income, it is called a normal good. These include both necessities and luxury products.
- 6Inferior goodAn inferior good has a negative relationship between income and quantity demanded, i.e. customers switch to a superior (luxury) product as their income rises.
- 7Movements along a curve, contraction, expansionPrice fluctuations cause movements along an existing curve. A rise in price results in a contractions in quantity demanded, whereas a fall in price causes an expansion in quantity demanded.
- 8SupplyThe willingness and ability of firms to provide a good or service at a given price level, per time period.
- 9ChoiceHave the option of alternatives in the allocation of your limited financial resources.
- 10Consumer goodsProducts that are purchased for consumption by the average consumer. Alternatively called final goods, consumer goods are the end result of production and manufacturing and are what a consumer will see on the store shelf. Basic materials such as copper are not considered consumer goods because they must be transformed into usable products.
- 11Explicit costsA business expense that is easily identified and accounted for. Explicit costs represent clear, obvious cash outflows from a business.
Good examples of explicit costs would be items such as wage expense, rent or lease costs, and the cost of materials that go into the production of goods. - 12Factors of Demand (PIRATES)P - Population
I - Income
R - Related goods
A - Advertisment
T - Tastes & Preferences
E - Expected prices (in the future)
S - Seasonal - 13P of PiratesTarget group of consumers who can/want to buy the product
- 14I of PIRATESIncome.
Financial/material wealth of consumers - 15R of PIRATESRelated goods (for the consumer).
Substitute goods (exchange one for the other – inversely related, e.g. Pepsi/Coke), Complementary goods (demand for one causes demand for the other – directly related, e.g. car/fuel). - 16A of PIRATESAdvertisement.
Communication used to encourage/persuade consumers, created by the seller - 17T of PIRATESTastes & Preferences.
Trends, styles, friends’ choices, seasonal attire - 18E of PIRATESExpectation (of future prices)
Higher price next week = buy now; lower price next week = buy then; price unchanged, buy when needed - 19S of PIRATESSeasonal.
Sales session to meet changing demands (e.g. winter, summer, spring, fall, cross-over, back-to-school, etc.) - 20Factors of production (CELL)C - Capital
E - Enterpreneurship
L - Labor
L - Land - 21C of CellCapital.
Capital is all of the tools and machinery used to produce a good or service. - 22E of CELLEnterpreneurship.
The entrepreneur is the individual who takes an idea and attempts to make an economic profit from it by combining all other factors of production. The entrepreneur also takes on all of the risks and rewards of the business. - 23L of CELLLabor.
Labor is all of the work that laborers and workers perform at all levels of an organization, except for the entrepreneur - 24L of CELLLand.
Land represents all natural resources, such as timber and gold, used in the production of a good. - 25Free goodsNot limited in supply and therefore have no opportunity cost when they are consumed, e.g. regular air, salt water.
- 26Free Market SystemProducers and consumers decide what, how and for whom to produce through their exchange or trade in different goods and services. Suppliers will generate what they can sell at the highest price, as consumer choices dictate.
- 27Implicit costsA cost that is represented by lost opportunity in the use of a company's own resources, excluding cash. The implicit cost for a firm can be thought of as the opportunity cost related to undertaking a certain project or decision, such as the loss of interest income on funds.
Implicit costs can also be thought of as intangible costs that are not easily accounted for. For example, the time and effort that an owner puts into the maintenance of the company can be viewed as an implicit cost of running the business. - 28Income effectAs the price falls, the real income of customers rises, i.e. they are able to buy more products at lower prices
- 29Substitution effectAs the price of a good or service falls, more customers are able to pay, so they are more likely to buy the product, i.e. substitute it for alternative products that they might have previously bought.
- 30Diminishing marginal returnsAs people consumer more of a particular good or service, the utility (return or satisfaction) gained from the marginal unit declines, so customers will only purchase more at a lower price.
- 31Law of demandThe quantity demanded for a good or service falls as its price rises, ceteris paribus.
- 32Law of increasing opportunity costs- For every additional unit of one product made, more units of the other product are foregone than for the previous one.
- ACDC Econ example: making one robot only sacrifices 1 pizza, making the second gives up 4 more, making the third robot means additional 10 pizzas less, making the fourth means an extra 15 less pizzas (i.e. none are being made anymore) – every additional robot costs more pizzas than the previous one.
- Concave PPC due to that. - 33Law of supplyThe law of supply states that as quantity supplied increases as the price increases, ceteris paribus.
- 34Market EquilibriumOccurs when the quantity demanded for a product is equal to the quantity supplied of the product, i.e. there are nor shortages or surpluses.
- 35Opportunity CostWhat you give up in order to have something else or the next best alternative foregone when an economic decision is made.
- 36PPCProduction Possibilities Curve or Frontier; a curve depicting all maximum output possibilities for two or more goods given a set of inputs (resources, labor, etc.). The PPF assumes that all inputs are used efficiently.
- 37Price mechanismPrice (high or low) signals what consumers want and will influence profit-seeking producers.
- 38Private sectorMade up of all the organizations and firms owned by members of the general public, including private individuals and voluntary organizations. They own (buy or hire) the resources and decide how to use them.
- 39Public sectorResources for production are owned and controlled by a government; consists of government organizations and goods&services provided by the government, such as the state education, roads, public parks, armed forces, the legal system.
- 40ScarcityWhen goods are finite but wants are infinite. Everything that has a price is scarce relative to people’s demand for it. The ability to purchase a good/service is determined by the amount of money the consumer has and the price set by the provider.
- 41Supply shifters (TIGRESS)T - Technology
I - Input prices
G - Government policies
R - Related goods' prices
E - Expectations of future prices
S - Suppliers
S - Shocks & Weather - 42T of TIGRESSAnything that enables faster, better, and cheaper production, i.e. raises productivity levels; e.g. training workers to be more efficient, breakthrough advances in research & development.
- 43I of TIGRESSInput prices.
Changes in the cost of resources needed to produce a good affect the supply for that good inversely, e.g. wages make workers more expensive, which will shift the supply curve to the left. - 44G of TIGRESSGovernment policies.
Per-unit tax (supply shifts left): As suppliers have to collect and transfer the tax to the government, it means they will need a higher price than before in order to be willing to provide the same quantity of the good for sale. Per-unit subsidy (supply shifts right): as the government adds an amount to the amount paid by the consumer, the seller receives market price plus the subsidy payment and can thus sell the same quantity at a lower market price. - 45R of TIGRESSRelated goods' prices.
In the production process, substitutes in production are made form the same inputs (e.g. peanut butter, peanut bars) which enables the supplier to trade production of one for the other; as the price for one rises, production will shift to that one and decrease the supply of the other. Complements in production are produced together, or one is a by-product of the other (e.g. beef producer can make leather, saw mills make boards and also produce wood chips as by-product); as one increases, so does the other. - 46E of TIGRESSExpectations of future prices.
If a good’s value is expected to decrease, flood the market now; if you think it will catch a higher price later, increase inventory and wait for a higher market price. - 47S of TIGRESSSuppliers.
Number of producers/suppliers/sellers in the market. - 48S of TIGRESSShocks & Weather.
Unexpected, uncontrolled events outside the producer’s control, e.g. blizzard, earth quake, war, draught, disease. - 49Price Elasticity of Demand (PED)Measures the degree of responsiveness of quantity demanded for a product following a change in its price.
- 50PED ValuesPrice inelastic - less than 1
Price elastic - more than 1
Perfectly price inelastic - 0
Perfectly price elastic - Infinity
Unit elastic demand - 1 - 51Determinants of PED (THIS)T - Time
H - Habits, addictions and tastes
I - Income
S - Substitutes - 52T of THISPeople need time to change their habits and preferences. PED is price inelastic in SR and price elastic in LR.
- 53H of THISHabits, addictions and tastes
If something is habit forming or highly fashionable, PED is price inelastic - 54I of THISIncome
The greater the proportion of income spent on a good or service, the more price elastic it is - 55S of THISSubstitutes (availability and price of)
The greater the number/availability/price of close substitutes, the higher the value of PED. - 56Relationship between PED and total revenueIf PED is price inelastic, a firm must increase the price of a good to increase total revenue.
- 57Cross Elasticity of Demand (XED)Measures the degree of responsiveness of demand for one product following a change in the price of another product.
- 58ComplementsProducts that are jointly demanded - for example, cars and petrol.
- 59SubstitutesProducts that can be used as alternatives - for example, Apple iPhones or Samsung Galaxy smartphones
- 60XED ValuesComplements - negative value
Substitutes - positive value
Unrelated - 0
The stronger the relationship the higher the coefficient. - 61Income elasticity of demand (YED)Measures the degree of responsiveness of demand following a change in income
- 62Normal goods (in the context of YED)Products that customers tend to buy more of as their income level increases. They comprise necessities such as food and luxuries such as cars.
- 63Inferior goods (in the context of YED)Products with a negative income elasticity of demand, i.e. the demand for such products falls when consumer income levels rise.
- 64Luxury goods (in the context of YED)Superior goods and services as their demand is highly income elastic, i.e. an increase in income leads to a proportionally greater increase in the demand for luxuries.
- 65Price elasticity of supply (PES)Measures the degree of responsiveness of quantity supplied of a product following a change in its price along a given supply curve.
- 66YED valuesNormal goods - positive value
Necessities - less than 1, inelastic
Luxuries - more than 1, elastic
Inferior goods - negative value - 67PES valuesPES > 1 - elastic, responsive
PES < 1 - inelastic, unresponsive
PES = 0 - perfectly inelastic
PES = infinity - perfectly elastic
PES = 1 - unitary price elasticity (curve starts at the origin) - 68Determinants of PES (TICS)T - Time
I - Inventory (stocks)
C - Capacity
S - Substitution (of factors of production) - 69T of TICSTime
Inelastic in SR, e.g. of fresh fruits > takes time to harvest. In LR, firms can adjust levels of production - 70I of TICSInventory (stocks)
High inventory, relatively price elastic supply - 71C of TICSCapacity
A firm with plenty of spare capacity can increase supply with relative ease (without increasing costs of production) so supply is relatively price elastic - 72S of TICSSubstitution (of factors of production)
Ease and cost of factor substitution. The easier it is to substitute FoP, the more price elastic supply tends to be. - 73Indirect taxA government levy on the sale of certain goods and services. Examples include specific taxes and ad valorem taxes.
- 74Specific taxImposes a fixed amount of tax on each product. Examples include taxes on cigarettes and road tolls.
- 75Ad valorem taxImposes a percentage tax on the value of a good or service. Examples include tariffs and sales taxes.
- 76SubsidyFinancial assistance from the government to encourage output, to reduce the price of certain merit goods (such as education), or to keep down the cost of living. Also used to protect industries and to prevent a decline in unemployment.
- 77Price ceiling/Maximum priceOccurs when the government sets a price below the market equilibrium price to encourage output and consumption
- 78Price floor/Minimum priceThe imposition of a price guarantee set above the market price to encourage supply of a certain good or service.
- 79Market failureWhen the price mechanism (the market force of demand and supply) allocates scarce resources in an inefficient way, i.e. there is either over-provision or under-provision of certain goods and services.
- 80ExternalitiesThe external costs or benefits of an economic transaction. The market fails to achieve a social optimum level of output, where marginal social benefits equal marginal social costs (MSB = MSC)
- 81Marginal private benefit (MPB)The additional value enjoyed by households and firms from the consumption or production (output) of an extra unit of a particular good or service.
- 82Marginal private cost (MPC)The additional cost of production for firms or the extra charge paid by customers for the output or consumption of an extra unit of a good or service.
- 83Negative externalities/External costsCosts incurred by a third party in an economic transaction for which no compensation is paid. For example second-hand smoking, air pollution caused by factories, and noise pollution.
- 84Positive externalities/External benefitsBenefits enjoyed by a third party from an economic transaction, for which no money is paid directly by the beneficiary. For example, national defence, law and order systems, street lighting, light houses, and public parks, libraries, and museums.
- 85Marginal social benefit (MSB)The added benefit to society from the production or consumption of an extra unity of output, i.e. the sum of MPC and marginal external costs.
- 86Marginal social costs (MSC)The extra cost of an economic transaction to society, i.e. the sum of MPB and marginal external benefits.
- 87Demerit goodsProducts that create negative externalities to society. Their production and consumption result in social costs being greater than private costs of production and consumption, i.e. MSC > MPC
- 88—
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- IB Economics Terms (Microeconomics)
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- Christine Laurich
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