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IB Economics > Topic 2 - Microeconomics > Flashcards

Topic 2 - Microeconomics Flashcards

1
Q

What is a market?

A

A market is where a buyer and seller come together to carry out an economic transaction

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2
Q

What are the non-price determinants of demand?

A
  • Income
  • Price of substitutes
  • Price of complementary goods
  • Tastes and preferences
  • Future price expectations
  • Number of consumers
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3
Q

What is price elasticity of demand?

A

A measure of the sensitivity of quantity demanded to changes in price of a good or service

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4
Q

Formula for PED

A

(Percentage change in quantity demanded)/(Percentage change in price)

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5
Q

What are the determinants of PED?

A
  • The number and closeness of substitutes
  • Necessity of the product (width of definition)
  • Proportion of income spent on the good
  • Time period considered
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6
Q

What is income elasticity of demand (YED)?

A

A measure of how the demand for a product changes when income changes

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7
Q

Formula for YED

A

(Percentage change in quantity demanded)/(Percentage change in income)

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8
Q

What are the non-price determinants of supply?

A
  • Cost of factors of production
  • Price of related goods
  • Taxes and subsidies
  • Expectation of future prices
  • Changes in technology
  • Weather or natural disasters
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9
Q

What are the determinants of PES?

A
  • How much costs rise as output is increased
  • Time period considered (more elastic over time)
  • The ability to store stock
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10
Q

What is consumer surplus?

A

The extra utility gained by consumers from paying a price that is lower than that which they are prepared to pay

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11
Q

What is producer surplus?

A

The actual earnings that a producer makes from a given quantity of output, over and above the amount the producer would be prepared to accept for that output

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12
Q

What is community surplus?

A

Producer surplus + consumer surplus - the total benefit to society when a market is in equilibrium

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13
Q

What is indirect tax?

A

A tax imposed on expenditure on goods and services

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14
Q

Advantages of indirect tax

A
  • Increased government revenue

- Limits consumption of demerit goods

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15
Q

Disadvantages of indirect tax

A
  • Lower consumer disposable income

- Little effect on PED inelastic goods

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16
Q

Indirect Tax diagram

A

Textbook pg. 110

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17
Q

Who pays what share of indirect tax?

A

If PED is elastic: producers pay more

If PED is inelastic: consumers pay more

18
Q

What is a subsidy?

A

An amount of money paid by the government to a firm, per unit of output

19
Q

Advantages of a subsidy

A
  • Lowers price of goods (more disposable income)
  • Guarantees supply of necessary products
  • Improves employment
  • Enable competition with foreign producers
20
Q

Disadvantages of a subsidy

A
  • Government expenditure
  • Little effect on PED inelastic goods
  • Firms don’t have an incentive to improve efficiency
  • Requirement of taxes to fund subsidy
  • Foreign producers unable to compete - dumping
21
Q

What are price ceilings?

A

Price ceilings are maximum prices set by the government below the equilibrium price for a certain set of goods

22
Q

Price ceiling diagram

A

Textbook pg. 120

23
Q

Subsidy diagram

A

Texbook pg. 116

24
Q

Advantages of a price ceiling

A
  • Decreased price (higher disposable incomes)

- Promotes consumption of merit goods

25
Q

Disadvantages of a price ceiling

A
  • Shortage (Demand > Supply)
  • Possible emergence of Black Market
  • Unemployment due to reduced revenue
26
Q

What are price floors?

A

Minimum prices set by the government above the equilibrium price for a certain set of goods and services

27
Q

Advantages of price floors

A
  • Raise incomes for producers
  • Protects workers
  • Reduces consumption of demerit goods
28
Q

Disadvantages of price floors

A
  • Surplus (Supply > Demand)

- High prices lead to lower disposable incomes

29
Q

Why do governments intervene in markets?

A
  • More merit goods, less demerit goods
  • Promote sustainability
  • Promote equity and economic well-being
30
Q

What is an externality?

A

An externality occurs when the production or consumption of a good or service has a spillover effect upon a third party

31
Q

What causes a negative externality of production?

A

MSC > MPC

32
Q

What causes a negative externality of consumption?

A

MPB > MSB

33
Q

What causes a positive externality of consumption?

A

MSB > MPB

34
Q

What causes a positive externality of production?

A

MPC > MSC

35
Q

How can a government fix a positive externality of consumption?

A
  • Subsidies
  • Public awareness campaigns
  • Legislation (vaccines)
36
Q

How can a government fix a positive externality of production?

A
  • Subsidies

- Direct provision (government becomes producer)

37
Q

How can a government fix a negative externality of consumption?

A
  • Indirect taxes
  • Legislation/regulation
  • Education/raising awareness
38
Q

What are common pool resources?

A

Natural resources, such as fishing grounds, forests, and pastures, which are non-excludable, but rivalrous. In the absence of management, common pool resources are inevitably downgraded

39
Q

What is the Tragedy of the Commons?

A

The cumulative effect of all rational producers acting in their own self-interest, and degrading common pool resources

40
Q

What is the free-rider problem?

A

Those who do not change their behavior to account for the Tragedy of the Commons benefit from those who do

41
Q

How can the Tragedy of the Commons be reduced?

A
  • International Agreements
  • Tradeable permits
  • Carbon tax
  • Legislation
  • Subsidies (increase use of renewable, decrease the use of fossil fuel)
  • Collective self-governance (working together)
42
Q

Why must governments provide public goods?

A

Public goods are non-excludable and non-rivalrous, meaning that private producers have no incentive to provide them. Hence, governments must do it themselves.

IB Economics (2 decks)

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