IB Economics SL: Microeconomics

IB Economics SL: Microeconomics

1. Scarcity

   • Opportunity Cost
     • the cost of the next best thing forgone
   • Production Possibility Curve
     • Capital goods/ consumer goods
     • Move inside
       • Law of diminishing returns
       • Achieving productive efficiecy
     • Shift
       • Economic Growth
   • Utility
     • satisfaction or pleasure gained from an economic action
   • Finite source, infinite wants
     • What to produce? How to produce? For whom to produce?
     • Land, Labor, Capital, Enterprise

2. Market - Allocation of resources

   • Demand
     • a want backed by the willingness and ability to buy at a given price
     • Move along
       • Income/ Substitution effects
     • Shift
       • Income
       • Population
       • Price of complements
       • Price of substitutes
       • Tastes and preferences
   • Supply
     • the quantity of a good or service producers are able and willing to supply to a market at a give price
     • Move along
       • Extension/ contraction
     • Shift
       • Cost of production
       • New firms entering a market
       • Indirect taxes and subsidies
       • Price of subsitutes
       • Technological advancement
   • Ceteris paribus
   • Market Equilibrium
     • Equilibrium exists when Demand = Supply
       • Equilibrium price - (Market clearing price)
     • Disequilibrium - excess demand or supply
     • Price Mechanism
       • a signal, an incentive and a rationing device to allocate resources in a market
   • Market Efficiency
     • Surpluses
       • Producer
         • the extra revenue gained by producers (Marginal costs)
       • Consumer
         • the extra utility gained by consumers (Marginal benefits)
     • Allocative Efficiency
       • consumer wants are satified

3. Elasticity

   • PED
     • the responsiveness of the quantity demanded to a chance in price
     • Elastic - responsive Inelastic - not responsive
     • Determinants of PED
       • Closeness of substitues
         • Close subs - elastic
       • Luxury or necessity
         • Luxury - elastic Necessity - inelastic
       • Percentage of income spent on the good
         • Less spent, more inelastic
       • Time period
         • In the long term, demand more elastic
     • Commodities - inelastic, few subs Manufactured - elastic, many subs
   • PES
     • responsiveness of the quantity supplied to a change in price
     • Determinants of PES
       • Time Period
         • Very SR - all fixed SR - some fixed LR - all variable
       • Level of spare capacity
         • Spare = PES
       • Type of good
         • E.g. Agriculture
       • Level of stocks
         • Response to demand
   • XED
     • responsiveness of the quantity demanded of one good to a change in price of another
     • Determine Substitutes/ Complements relationship
   • YED
     • responsiveness of the quantity demanded to a change in the real income of consumers
     • Determine Normal/ Inferior goods

4. Government Intervention

   • Minimum/ Maximum Prices
     • Price floor (above eq point)
       • Excess supply
         • Shift Demand
     • Price ceiling (under eq point)
       • Excess demand
         • Parallel market
         • Shift Supply
   • Indirect taxation
     • Tax incidence (Consumer/ Producer)
       • Depends on PED and PES
     • Ad valorem (% tax) Specific (fixed amount)
   • Subsidy
     • payments by a government to producers
     • Increase supply
   • Comment on Consumer/ Producer surplus, producer revenue, government revenue and expenditure and impact on eq price and quantity

5. Market Failure and Government Response

   • Externalities
     • Negative
       • Production
         • MSC > MPC
           • E.g. Pollution
       • Consumption
         • MSB < MPB
           • E.g. Cigarettes
       • Government Respose
         • 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
         • Tradable Permits
           • Reduction of Pollution
             • Quotas
               • Incentive to be environmentally efficient
           • More efficient firms buying more to produce more
         • 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
         • Extending property rights
           • Regulated through legal rights
           • Not effective in ELDCs due to lack of legal system
         • International co-operation
           • UN Reduction on greenhouse gases
             • Political problems
               • Still 30 countries are committed to reach the outcome
     • Positive
       • Production
         • MSC < MPC
           • R&D in technology
       • Consumtion
         • MSB > MPB
           • Vaccines
       • Government Response
         • Subsidy
           • Hard to estimate MEC
           • Opportunity Cost on other social benefits
           • PED > 1, ineffective
         • Free provision
           • e.g Education, healthcare
           • Lack of funding especially in ELDCs
         • Information
           • Educate the population
             • Make informed choices
           • Could be inefficient
             • Government expediture
     • the costs or benefits of production or consumption that are experienced by their parties but not by the producers and consumers who cause them
   • Merit and Demerit Goods
     • Merit goods
       • consumers consume too few goods and services that are seen as being good for them
         • e.g. Education
     • Demerit goods
       • consumers consume too many goods and services that are seen as being bad for them
         • e.g. alcohol
     • Preferred solution: Education and Information on choices
   • Common Access Resources and Sustainability
     • CAR - are resources that are available to everyone without payment, do not have a price, and are not woned bt anyone
       • e.g. Air, biodiversity
       • non-excludable but rivalrous
     • Sustainability
       • resources are used today in such a way that does not compromise their use by future generations
         • Response similar to negative externalities
           • Economic activities threatens sustainability
     • Requires International co-operation
       • EU emissions Trading System
   • Public Goods
     • non-excudability
       • even if you have paid for a good you cannot confine its use to yourself
     • non-rivalry
       • the consumption of a good does not reduce its availability to others
     • "Free rider" effect
       • e.g. National defense or street lamps
   • Why and how market fails and evaluate the solutions
   • Asymmetric info
   • Abuse of monopoly power