IB 1 Economics Unit 4 to 6

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IB 1 Economics Unit 4 to 6. 4. Elasticities 5. Government intervention 6. Market failure
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IB 1 Economics Unit 4 to 6
1 Market Failure (Externalities)
1.1 Tax solution
1.1.1 Positive externalities
1.1.2 Negative externality
1.2 Advertisement
1.2.1 Positive
1.2.2 Negative
1.3 Legislation
1.3.1 Positive
1.3.2 Negative
2 Government intervention
2.1 Minimum Price
2.1.1 No Equilibrium, it is distorted. Supply greater than Demand
2.1.2 No equilibrium. Reduced producer surplus. Triangle equilibrium Qeq with Peq
2.1.3 Waste v self sufficiency, produce on larger scale, average cost per unit reduces. Economy of scale prove, is this economic development?
2.2 Maximum Price
2.2.1 Distorts equilibrium, D is greater than S
2.2.2 C & P surplus much reduced due to black market, represented by the
2.2.3 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
2.3 3 factor
2.3.1 Consumer
2.3.2 Producer
2.3.3 Government
3 Elasticities
3.1 PED = %∆QD / %∆P
3.2 YED = %∆QD / %∆Y
3.3 PES = %∆QS / %∆P
3.4 XED = %∆QD(Corp A) / %∆P (Corp B)
3.5 Determinants of PED
3.5.1 Numbers of substitudes
3.5.2 Proportion of income (Y)
3.5.3 Luxury or necessity
3.5.4 Addictive or not
3.5.5 Time to responde
3.6 Examples:
3.6.1 New Kitchen: Elastic, - Luxurious, highly influenced by income - Not addictive - Many subsidies
3.6.2 Fruits: Inelastic Necessity Lack of substitudes
3.7 Impacts of elasticities for stakeholders
3.7.1 Consumer Inelastic P∆% more than Qd Might be put off by big prices, result in price instability. Y is inelastic, Y increases, demand unaffected. Elastic More competition. Increased R&D better quality and lower price. %D more than %P Conclusion Secondary products offer more choices to consumers, more price stability, consumers can plan how to use their income.
3.7.2 Governmnet Elastic Stable price and advance in technology, competitiveness advantage Inelastic Price instability: limited growth in development, lower standards of living. Higher tax revenue Conclusion A price elasticity, competitivity. This is why LEDC (Less developed country) are encouraged to diversify their primary commodity.
3.7.3 Producer Elastic Substitutes drive Price and Profit down. Easier to supply, better efficiency Can share stocks incase of shortage can easy respond to increase in D easily Inelastic Price instability: difficult to plan ahead Quantity D Limited, Y (profit) inelastic Conclusion Elastic. More price stability, quality product, can become very rich, make lots of profit
3.7.4 Price instability (Most in primary goods) Demand inelastic, large effect on price. Higher: Increase in consumer burden Lower: Lower TR on producers
3.8 Primary Inelastic - eg: Pineapples in philippines
3.8.1 Explanation: No specific substitutes for pineapple, price inelastic
3.8.2 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. In the end, Total revenue will go down because of extra supply. inefficiency of resources. (Use PPF graph)
3.9 Secondary, Elastic - eg: iPhone
3.9.1 Explanation: Many others substitutes, and new, better technology. Latest iPhone quickly outdated.
3.9.2 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.
3.9.3 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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