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IB Economics 22-24 > Microeconomics 2.1-2.9 > Flashcards

Microeconomics 2.1-2.9 Flashcards

1
Q

Define demand.

A

The quantity of goods and services consumers are willing and able to buy at a given price

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2
Q

Define the law of demand.

A

The negative causal relationship between price and quantity demanded - within a period of time, when the price of a good increases, the quantity demanded decreases, ceteris paribus

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3
Q

Outline non-price determinants that affect demand.

A

HIS AGE

  • Habits, tastes, and preferences
  • Income
  • Substitutes and complements
  • Advertising
  • Government policies
  • Economy
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4
Q

Define supply.

A

The quantity of goods or services a firm is willing and able to produce and supply to the market at different price points, ceteris paribus.

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5
Q

Outline the law of supply.

A

The positive causal relationship between price and quantity supplied - within a period of time, when the price of a good increases, the quantity supplied increases, ceteris paribus

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6
Q

Outline the non-price determinants that shift the supply curve.

A

SWITCH

  • Subsidies
  • Weather
  • ICT (Technology)
  • Taxes
  • Competitive supply
  • Hurdles (barriers to entry)
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7
Q

Define equilibrium

A

When quantity demanded is equal to quantity supplied

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8
Q

Explain the price mechanism/invisible hand.

A

Producer Signaling

  1. Producers see the signal shortage
  2. Producers have incentive to increase price from P1 to P2
  3. Producers are more willing and able to supply at P2/Q2

Consumer Signaling

  1. Consumers observe the price increases from P1 to P2
  2. Consumers have the incentive to consume less from Q3 to Q2

Conclusion: equilibrium price is reached at P2, Q2

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9
Q

Define consumer surplus.

A
  • benefits to buyers who are able to purchase a product for less than they are willing to do so
  • The highest price consumers are willing to pay for a good minus the price actually paid
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10
Q

Define producer surplus.

A

The price received by firms for selling their good minus the lowest price producers are willing to accept to produce the good

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11
Q

Outline allocative efficiency.

A

when resources are distributed so that consumers and producers get the maximum possible benefit

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12
Q

Define price elasticity of demand.

A
  • The responsiveness of the quantity demanded of a good to change in its price
  • Formula = % change in Qd / % change in P
  • elastic if PED > 1, inelastic if PED < 1
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13
Q

Outline the determinants of PED.

A

THIS

  • Time
  • Habits, addictions, tastes
  • Incomes
  • Substitutes (availability and price of)
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14
Q

Define price elasticity of supply.

A
  • The responsiveness of the quantity supplied of a good to its change in price
  • Formula = % change in QS / % change in P
  • elastic if PES > 1, inelastic if PES < 1
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15
Q

Define income elasticity.

A
  • The responsiveness of quantity demanded to changes in income for a good or service
  • Formula = % change in QD / % change in income
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16
Q

Outline the interpretation of the value of YED.

A

YED > 0

  • demand and income changes in the same direction -> normal goods

YED < 0

  • demand and income change in opposite directions -> inferior goods

0 < YED < 1

  • income inelastic: people buy a little more if income increases -> necessities

YED > 1

  • income elastic: people buy a lot more if income increases -> luxuries
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17
Q

Define direct tax.

A

Tax imposed on income, profits, and wealth

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18
Q

Define indirect tax

A

Tax imposed on spending (goods and services)

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19
Q

Define excise tax

A
  • indirect tax on a specific good or service
  • specific tax: fixed amount of tax per unit of good or service sold
  • ad valorem tax: tax calculated as a fixed percentage of the price of the good or service
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20
Q

Outline the benefits of taxation.

A
  • government revenue earned
  • redistributes income
  • corrects negative externalities to improve allocative efficiencies
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21
Q

Define subsidy

A
  • financial support to individuals or groups for reducing costs of production
  • focuses only on cash payments to firms
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22
Q

Outline the benefits of subsidies.

A
  • increases producer revenue
  • makes necessities more affordable
  • encourages production and consumption of merit goods
  • supports growth of particular industries
  • encourages exports
23
Q

Define stakeholders

A

parties that have an interest in the economic activities, which can affect or be affected by the outcome of economic activities

24
Q

Define market failure.

A
  • failure of the free market to allocate scarce resources efficiently at the socially optimum level of output
  • overallocation: too many resources allocated to a production of a good
  • under allocation: too little resource allocated to a production of a good
25
Q

Outline the determinants of PES.

A

TICS

  • Time
  • Inventory (stocks)
  • Capacity
  • Substitution (of FOP)
26
Q

Define MPB, MSB, MPC and MSC.

A
  • MPB: Marginal private benefits; the benefits to consumers for consuming one more unit
  • MSB: Marginal social benefits; the benefits to society for consuming one more unit
  • MPC: marginal private costs; the costs to producers for producing one more unit
  • MSC: marginal social costs; the costs to society for producing one more unit
27
Q

Outline conditions of a free and competitive market.

A
  • No external costs and benefits
  • MPC=MSC and MPB=MSB
  • Social welfare at maximum
  • Qd=Qs, no shortage of surplus
28
Q

Outline negative production externalities.

A

MSC=MPC+External costs

29
Q

Outline ways to solve negative production externality.

A
  1. Market-based interventions e.g. policies that rely on the market
  2. Government regulations e.g. Carbon tax
  3. Education for awareness creation
30
Q

Define merit goods.

A
  • Goods that benefit consumers but are under-provided by the market
  • Under-consumed because consumers ignore the benefits or are unable to realize the greater benefits to society
31
Q

Define demerit goods.

A
  • Goods that create a negative consumption externality
  • Over-provided in the market
  • Over-consumed because consumers ignore the negative effects or are unaware of the harmful effects on others
32
Q

Outline ways of evaluating government intervention.

A
  • Cost
  • Technical difficulties
  • Firm complacency
  • Opportunity costs
  • Difficulty of achieving social optimum level
  • Ineffective on its own
33
Q

Outline features of public goods.

A
  • Non-rivalrous: Consumption by one person does not reduce consumption for another
  • Non-excludable: Impossible to prevent people who have not paid for the good from having access to it
  • E.g. street lights, public benches
34
Q

Define common pool resources.

A
  • Rivalrous but non-excludable
  • Not owned by anyone so there is no price for use
35
Q

Outline the consequences of the tragedy of the Commons.

A
  • Over-used by private individuals who enjoy the short-term benefits while ignoring the long term depletion
  • Depletion of natural resources for future generations
  • Unbalanced distribution
  • Soil erosion
  • Contamination
36
Q

Outline sustainability.

A
  • Environment: environmental preservation
  • Economy: preservation of humankind’s ability to provide G&S to satisfy needs and wants
  • Sustainable development: development that meets the needs of the present without compromising the ability of future generations to meet their own needs
37
Q

Outline special cases of PED.

A
  • Unit elastic demand: PED=1, percentage change in quantity demanded equals percentage change in price
  • Perfectly inelastic demand: PED=0, quantity demanded is completely unresponsive to price
  • Perfectly elastic demand: PED=infinite, quantity demanded is infinitely responsive to price
38
Q

Explain sticky goods.

A

The quantity demanded will be the same even if income changes

39
Q

Outline possible actions to improve responses to price change.

A
  • Invest in extra capacity
  • Increase storage to keep stock
  • Invest in new equipment, procedures and workers
  • Training workers to become more mobile
40
Q

Define externalities.

A

Actions of consumers or producers that give rise to negative or positive side-effects on those not part of the transaction (third-party)

  • Private benefits: Consumer’s benefits upon consumption
  • Social benefits: Private benefits + External benefits
  • Private costs: Producer’s costs of production
  • Social costs: Private costs + External costs
41
Q

Outline market-based policies that can correct negative production externalities.

A

Carbon tax

  • tax on pollutants
  • short run: increase costs of production
  • long run: incentives for producers to use less polluting or non-polluting energy sources

Tradable permits

  • gives firms permission to pollute
  • can be traded on the free market
  • supply is fixed (perfectly inelastic)
  • short run: higher cost from trade permits increases MPC
  • long run: incentive to producers to switch to less polluting resources
42
Q

Define substitutes

A

products that can be used instead of each other, such as Coca Cola and Pepsi

43
Q

Define complements

A

products that are jointly demanded, such as pencil and erasers

44
Q

Define normal goods

A
  • quantity demanded increases with a rise in income
  • includes necessities and luxury goods
45
Q

Define inferior goods

A
  • quantity demanded decreases with a rise in income
  • consumers tend to switch to superior products as income rises
46
Q

Outline price determinants of demand

A
  • price rise causes contraction in Qd
  • price fall causes expansion in Qd
47
Q

Define price ceiling.

A

when the government sets a maximum price below the market equilibrium price to encourage output and consumption

48
Q

Define price floor

A

when the government imposes a minimum price above the market equilibrium price to encourage supply of a certain good or service

49
Q

Outline examples of market failure.

A
  • under-provision of merit goods
  • under-provision of public goods
  • over-provision of demerit goods
  • abuse of monopoly power
50
Q

Define external costs

A

Costs incurred by a third party in an economic transaction for which no compensation is paid

51
Q

Define external benefit

A

Benefits enjoyed by a third party from an economic transaction

52
Q

Outline pros and cons of imposing a tax

A

Pros

  • increases price, decreases quantity demanded
  • creates tax revenue for the government

Cons

  • demand for demerit goods tend to be price inelastic, may have little impact on consumption
  • tax may be regressive, greater impact on low-income earners
  • encourage smuggling or unofficial market activity
53
Q

Outline pros and cons of imposing rules and regulations to correct market failure

A

Pros

  • consumption of demerit good reduced
  • increased awareness of negative impacts of demerit goods

Cons

  • underground markets may develop
  • some may break the rules
  • fine or punishment for ignoring the ban must be enforced and set high enough
54
Q

Outline pros and cons of education and advertising.

A

Pros

  • behavior and consumption patterns of individuals and firms change
  • positive cultural change in behavior

Cons

  • not all are effective
  • takes a long time to be effective
  • opportunity cost of government expenditure

IB Economics 22-24 (16 decks)

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