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Title: full IB micro economics notes
Description: These notes are of the highest quality, they got me a band 7, to be exact a score of 96. I was the dux of my cohort with the next highest being 84. Follow these notes precisely and I guarantee you will get a good mark.
Description: These notes are of the highest quality, they got me a band 7, to be exact a score of 96. I was the dux of my cohort with the next highest being 84. Follow these notes precisely and I guarantee you will get a good mark.
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Microeconomics
1
...
2
1
...
4
competitive markets: demand and supple
elasticity
government intervention
market failure
Topic 1: Microeconomics
1
...
Types of markets include:
Local: buyers and sellers originate from a local area – e
...
small
neighbourhood
National: buyers and sellers come from anywhere in the country – e
...
labour market
International: buyers and sellers come from anywhere in the world – e
...
oil market
Goods and services form product markets whereas resources (factors of
production form resource markets
...
Marginal benefit (MB): is the additional benefit from consuming one more unit
of output
...
g
...
They cause shifts of the demand curve, meaning the curve
moves to the right or left
The non-price determinants of demand include:
1
...
Preferences and tastes
o If preference favour the product consumers will buy more (and
vice versa)
o E
...
during rainy reason the demand for umbrellas would rise
3
...
g
...
Prices of complementary goods
o An increase in price of one complement results in a decrease in
demand for both
o Fall in price for printer → increase in quantity demanded for
printer → decrease in quantity demanded for cartridge
5
...
Government policy changes
o If government makes education compulsory market demand
increases
o Increased tax → decrease in spending → decrease demand
7
...
Seasonal changes
o More ice cream during summer than winter
Movements along and shifts of the demand curve
Distinguish between
movements along
and shifts of the
demand curve
Movement is when price changes
Shifts are caused by a determinant of demand, and means the whole curve shifts
The law of supply
Positive causal
relationship
between price and
quantity supplied
The law of supply states as the price of a good rises, the quantity supplied of the
product will usually increase, ceteris paribus
Supply is the willingness and ability of producers to produce a quantity of a good
or service at a given price in a time period
The non-price determinants of supply
Explain how factors
including changes in
costs of factors of
production,
technology, prices of
related goods,
expectation, indirect
taxes and subsidies
and number of firms
can change supply
The non-price determinants of supply include:
1
...
Technology
o New technology lowers costs of production so production
becomes more profitable → right shift
3
...
Taxes (indirect or taxes on profits)
o Means that production costs more so supply will decrease as tax
rises
5
...
Number of firms
o An increase in number of firms means supply has increased
7
...
Equilibrium is at the point where the demand curve intersects the
supply curve
...
Changes to equilibrium
Analyse using
diagrams and with
reference to excess
demand or excess
supply how changes
in the determinants
of demand or supply
result in a new
market equilibrium
Changes in equilibrium by change in demand
A change in a determinant of demand that causes the demand curve to shift
right
...
Therefore, price will increase, causing movement up D2 to point c
where excess demand is eliminated and new equilibrium is reached, where at c
there is higher equilibrium price P2, and greater equilibrium quantity Q2 given by
the intersection of D2 with S
Changes in equilibrium by change in supply
A decrease in supply is shown
...
This will cause an increase in price, which begins to
increase, causing a move to S3 until final equilibrium is reached at point c, where
excess demand has been eliminated and there is higher equilibrium price P3 and
lower quantity Q3
...
g
...
o All consumers willing to pay a higher price than Pe to get the
good received some benefit over and above what they actually
paid
...
It’s a surplus because
they receive a price higher than they are willing to sell at
Allocative efficiency
Explain best market
allocation of
resources from
society’s point of
view Is at
competitive market
equilibrium where
social surplus
(consumer and
producer) is
maximised (marginal
benefit = marginal
cost)
Allocative efficiency is when resources are allocated in the most efficient wat
from society’s point of view, and occurs when demand equals supply and supply
Social (community) surplus is the sum of the consumer and producer surplus,
maximised when MB = MC
Competitive market equilibrium is where social surplus is at its greatest where
MB>MC (greater benefit than cost), there is a shortage as it is worth more than
current price
...
Achieving social surplus results in welfare a general sense of bell-being in a
society
...
2 Elasticities
Price elasticity of Demand (PED)
Explain the concept
of price elasticity of
demand,
understanding that
it involved
responsiveness of
quantity demanded
to a change in price
along a given
demand curve
PED is a measure of how much quantity demanded of a product changes when
there is a change in price of a product
PED = % change in quantity demanded of a product
% change in price of a product
If PED = 0, change in price → No effect on quantity demanded → % change
would be 0 → PED is perfectly inelastic
...
Inelastic demand
o When PED is less than 1 and greater than 0
o Change in price → proportionally smaller change in quantity
demanded → total revenue gained by the firm increases when
price increases
2
...
Unit elastic demand
o Happens when PED = 1
o Change in price → proportionate opposite change in quantity
demanded → total revenue gained by the firm stays the same
when price increases
4
...
g
...
Unit elastic demand
o Demand is infinitely responsive to price
Determinants of PED
Explain the
determinants of PED
including number
and closeness of
substitutes, the
degree of necessity,
time and the
proportion of income
spent on the good
Determinants of PED include:
Number and closeness of substitutes:
o More substitutes for a product → more elastic the demand for
the product
o Products with fewer subsidies → inelastic demand for the
product
o The closer to substitutes are the greater responsiveness there
will be to price (e
...
coke and Pepsi)
Necessities against luxuries:
o Necessity products such as food and water → demand is inelastic
o Products that are people’s wants → demand is elastic
Length of time to make a decision
o Longer the consumer takes to make a purchasing decision, the
more elastic the demand
o They have time to see if they really want it and consider other
alternatives
Proportion of income spent on a good
o The larger proportion of income needed the more elastic the
demand will be
Applications of Price Elasticity of demand
Examine the role of
PED for firms in
making decisions
regarding price
changes and their
effect on total
revenues
Explain why PED for
primary products is
relatively low and
PED for
manufactured
products is high
Examine the
significance of PED
for government in
Circumstances for firms:
Demand for the good is price elastic
o An increase in price will case a fall in total revenue
Demand for the good is price inelastic
o An increase in price will cause an increase in total revenue
Demand is unit elastic
o A change in price doesn’t change total revenue
o The point where demand is unit elastic is where total revenue is
maximum
Primary commodities have a low PED as they are necessities and have no
substitutes
Because of inelasticity their demand curve is steeper so a change in
supply can cause problems for producers in terms of profit
PED if manufactured products is higher as they usually have substitutes and are
not always necessary, normally long time to think about decision
Usually luxury goods
Governments can place taxes on specific goods
Lower the price elasticity of demand for a taxed good the greater the
government tax revenues
The tax shifts supply curve to left meaning new and higher price is made
relation to indirect
taxes
Cross price elasticity of demand (XED)
Underline the
concept of cross
price elasticity of
demand,
understanding that
it involves
responsiveness of
demand for one
good to a change in
the price of another
good
Cross price elasticity od demand is a measure of how much the demand for a
product changes when there is a change in price of another product
XED = % change in quantity demanded of product X
% change in price of product Y
When XED is positive (XED>0)
o Means they are substitutes
o When demand for a good changes in the same direction
o The larger the number the stronger the substitutes
When XED is negative (XED<0)
o Demand for a good changes in the reverse direction (as price of
one goes up, demand for the other goes down)
o They are complements
o Larger the number, stronger the complements
When XED = 0
o Two products are independent of each other
Applications of Cross price Elasticity of demand
Examine the
implications of XED
for businesses if
prices of substitutes
or complements
change
Applications of cross price elasticity of demand include
Substitutes made by the same business (e
...
coke and sprite)
o PED for coke must be assessed to find the effect of a price cut
o If they have high substitutability a price cut could greatly effect
Pepsi as they would avoid it
Substitutes produced by rivals (Coke and Pepsi)
o Knowing the XED of the goods allows them to plan ahead with
their price cuts and reserves
Substitutes and mergers between firms
o Businesses with close substitutes with a high XED should consider
merging → eliminates competition
Complementary goods
o For strong complements reducing the price of one can result in a
large increase in sales of the complement
o Different firms can collaborate to take advantage of this
o XED can determine the impact of taxes on a good and its effect
on its complements (petrol and cars)
Income Elasticity of Demand (YED)
Examine the
implications of XED
for businesses if
prices of substitutes
or complements
change
Income elasticity of demand (YED) is a measure of how much the demand for a
product changes when there is a change in consumers income
YED = % change in quantity demanded of the product
% change in customer’s income
o
o
If YED is positive it is a normal good
Low positive → Necessity, such as food
High positive → Superior good, luxury products
If YED is negative it is an inferior good
Applications of income elasticity of demand
Examine the
implications for
producers and
economy of a
relatively low YED
for primary products
and relatively high
YED for
manufactured
products and an
A high YED means that a firm can expand more as society’s income increases,
however if there is a recession they are hard hit
...
YED and primary products
o Agriculture is income inelastic, meaning that as a society’s
income grows, they will experience little increase in demand
YED and manufactured products
o Usually YED>1 so as society’s income grows they experience
more demand
even higher YED for
services
YED for services
o Means that people have the money to make others do their work
o Even higher YED than manufactured products
Price elasticity of supply (PES)
Explain the concept
of price elasticity of
supply,
understanding that
it involves
responsiveness of
quantity supplied to
a change in price
along a given supply
curve
Price elasticity of supply is a measure of how much the supply of a product
changes when there is a change in the price of the product
...
PES = % change in quantity supplied of a product
% change in price of the product
A higher PES means that a change in price will cause a large change in the
amount supplied
...
Agricultural goods are inelastic
o Manufactured goods take a shorter time to produce while
agricultural goods take longer time to produce
Unused capacity
o Using idle equipment to increase supply, the more unused
capacity, the higher the PES
Mobility of factors of production
o Quicker resources can be shifted out of one line of production
and into another, the greater responsiveness of supply and
higher PES
Short run vs Long run
o In the short run, capacity cannot be changed but in the long run
it can
o There is new technology in the long run
Applications of price Elasticity of supply
Explain the concept
of price elasticity of
supply,
understanding that
it involves
responsiveness of
quantity supplied to
a change in price
along a given supply
curve
Primary commodities take more time to produce, hard to store and resources
cannot be quickly diverted from obtaining one primary commodity to obtaining
another
...
...
oc ange m pnce
0 < PED < 1
Inelast ic Demand
1 < PED < oo
Elastic Demand
PED= 1
Unit Elast ic
Demand
PED = O
Perfectly Inelastic
Demand
PED = oo
Perfectly Elast ic
Demand
%change in quant it y demanded
YED
=
...
och ange m
mcome
0 ,,
YED > O
The product is a
norm al good
XED
=
YED < O
The product is an
inferior good
%change in quantity of good A demanded
, ch ange m
...
ce of good B
o,
...
m pn
...
3 Government intervention
Indirect taxes
Explain why
governments impose
indirect (excise
taxes)
Indirect taxes are taxes on spending to buy goods and services
...
They are paid to the
government by the firms indirectly
...
Reasons for
imposing taxes include:
Restrict/discourage consumption of demerit goods
Increase tax revenue
Redistribute income if taxes focus on luxury goods, only affects high
income earners
Improve allocation of resources (improve allocative efficiency) by
correcting negative externalities
Two types of indirect tax include:
6
...
g
...
Ad Valorem tax
o % of the selling price
o As price of product increases tax increases
Evaluation of indirect taxes:
Reduce consumption of demerit goods
Increase in government revenue
Market outcomes of indirect taxes
Draw diagrams to
show specific and ad
valorem taxes and
analyse their
impacts on market
outcomes
Market outcomes of specific and ad valorem taxes include
Equilibrium quantity produced and consumed falls from Qx to Qt
Equilibrium price increases to Pc
Consumer expenditure changes (P x Q)
Price received from firms falls from Px to Pp
Government revenue is shaded
Underallocation of resources to the production of the good as Qt is less
than Qx
CAUSES UPWARD SHIFT IN SUPPLY
Consequences of imposing indirect taxes
Discuss the
consequences of
imposing an indirect
tax on the
stakeholders in a
market including
consumers,
producers and the
government
Consequences of imposing an indirect tax include:
Consumers
o Increase in price and decrease in quantity supplied
o Worse off as they receive less of the good and pay more for it
Producers
o Fall in price they receive and fall in quantity of output sold,
translating into fall in revenues
o Worse off
Government
o Gains in the form of revenues, positive for the budget
Workers
o Less to produce, fewer workers are needed, therefore may lead
to unemployment
Society
o Worse off as there is an underallocation of resources
Subsidies
Explain why
governments
provide subsidies,
and describe
A subsidy is assistance by the government to individuals, they can be cash or low
interest or tax relief
Reasons governments provide subsidies include:
Increase revenues
Make certain goods (necessitates) affordable to low income earners
examples of
subsidies
Encourage production and consumption of particular goods and services
as the government thinks its desirable (education)
Used to support growth of particular industries
Encourage exports of particular goods
Method to improve allocation of resources by correcting positive
externalities
Equilibrium price falls
Amount of subsidy is (Pp – Pc) x Qsb
The shading shows government spending
Diagram of subsidy
Draw a diagram to
show a subsidy and
analyse the impacts
of a subsidy on
market outcomes
Market outcomes off subsidy include
Equilibrium price falls – price paid by consumers
Price received by producers increase
Over allocation of resources to the production of the good
Consequences of subsidy
Discuss the
consequences of
providing a subsidy
on various
stakeholders in a
market including
consumers,
producers and the
government
Consequences of imposing a subsidy include:
Consumers
o Lower price and increase in quantity purchased
Producers
o Produce larger quantity and increased revenues
Government
o Has to pay the subsidy which is a burden, therefore may have to
reduce expenditures elsewhere or increase taxes
Workers
o Increased production and increased employment
Society
o Worse off as there is overallocation of resources to the
production of the good
Foreign producers
o Due to lower prices other countries may not be able to compete
Price controls
Define price controls
Price controls are the setting of maximum or minimum prices by the government
so that prices are unable to adjust to their equilibrium
...
Price ceilings
Explain why
governments impost
price ceilings, and
describe examples of
price ceilings,
including food price
controls and rent
controls
Government sets legal maximum price for particular goods known as price ceiling
Price that can be legally charge by sellers of the good must not be higher
than maximum legal price
Price set is below equilibrium price
Price ceilings are imposed to protect consumers, they are usually placed on a
merit good and/or a necessity such as food or rent
...
The ceiling leads to excess demand – shortage of the product
Consequences of imposing a price ceiling on stakeholders
Explain why
governments impost
price ceilings, and
describe examples of
price ceilings,
including food price
controls and rent
controls
Consequences of imposing a price ceiling include:
Consumers
o Gain from lower prices but have less output to buy so not all
demanders are satisfied
Producers
o Worse off as smaller output and lower price
o Revenues drop
Government
o No gains or losses
o However, may gain in popularity among consumers who are
better off
Workers
o Some likely fired due to fall in output
Consequences of imposing a price ceiling
Examine the possible
consequences of a
price ceiling,
including shortages,
inefficient resource
allocation, welfare
impacts,
underground
markets and nonprice rationing
mechanisms
Consequences of imposing a price ceiling include:
Shortages
o At maximum price consumers are willing and able to purchase
more of the product
Non-price rationing
o Free market – price system, if you can pay for it you can buy it
o Shortage – only some demanders will be able to get the product
and others will go unsatisfied
o Non-price rationing methods include:
First in first serve
Distributing the good through coupons
Favouritism
Underground (parallel) markets
o Unrecorded transactions and usually illegal
o Good is bought at maximum legal price and then result at a price
above the legal maximum
o Happens when there are dissatisfied people not able to get the
good
Allocative inefficiency
o Under allocation of resources to the good
Negative welfare impacts
o Creates welfare loss, meaning price ceiling introduces allocative
efficiency due to an under allocation of resources to the
production of the good
Examples of price ceiling
Rent and food price
controls
The examples of rent controls and food price controls
...
Examples of price ceilings include
Rent controls
o Maximum legal price on housing under the market determined
level
o Makes housing more affordable to low income earners
o Consequences include:
Shortage of housing
Smaller quantity of housing available
Long waiting list
Underground markets – tenants sell their apartments
above the price on an underground market
The housing may be poorly maintained due to the low
price
Food controls
o Makes food more affordable to low income earners
o Consequences include:
Food shortages
Non-price rationing methods (queues)
Underground markets
Falling farmer incomes
More unemployment in agricultural sector
Misallocation of resources
Possible greater popularity for government
Price floors
Explain why
governments impost
price floors and
describe examples of
price floors,
including support for
agricultural products
and minimum wages
A price floor is a legally set minimum price charged by sellers of the good, it is set
above the equilibrium price
...
Provide income support to farmers
2
...
4 Market failure
The meaning of market failure
Analyse the concept
of market failure as
a failure of the
market to achieve
allocative efficiency,
resulting in an
overallocation of
resources (over
provision of a good)
or an
underallocation of
resources (under
provision of a good)
relative to social
optimum
Allocative efficiency is achieved when MB=MC, or when social surplus is
maximised
Market failure refers to the failure of the market to allocate resources efficiently
...
g
...
An externality
creates divergence between MPC and MSC or MPB and MSB
...
Shown by Qm > Qopt and MSC>MSB at the point of production,
Qm
Welfare loss is a reduction in social benefits due to misallocation of resources
and equals Qm – Qopt
Correcting negative externalities of production
Government regulations, are used to prevent or reduce the effects of production
externalities
...
g
...
g
...
g
...
g
...
g
...
g
...
The free rider problem arises from nonexcludability: people cannot be excluded from using the good
...
Common access resources
Describe, using
examples common
access resources
Common access resources are resources not owned by anyone that do not have
a price and can be accessed to anyone without payment
E
...
clean air, lakes, rivers
There is a fear that the nature of these resources and inability to charge for them
may encourage overuse or over consumption → depletion of the resource
Threats to sustainability
Describe
sustainability
Sustainability refers to maintaining the ability of the environment and economy
to continue to produce and satisfy needs and wants into the future, it relies
heavily on preservation of the environment
Sustainable resource use means that resources are used at a rate that allows
them to reproduce themselves, so they do not become degraded or depleted
The threat of sustainability lies in the increased scale of economic activities
around the world, which may be due to economic growth based on the use of
fossil fuels or due to the increasing numbers of very poor people who engage in
environmentally destructive activities in an effort to survive
Government responses to threats to sustainability
Evaluate possible
government
responses to threats
to sustainability,
including legislation,
carbon taxes, cap
and trade schemes
and funding for
clean technologies
Government responses to sustainability include:
Legislation
o Intended to limit threat to sustainability can involve emission
standards, quotas, licenses, permits or outright restrictions
E
...
restrictions on emissions from cars
Cap and trade systems
o Done where governments set national targets for emission
reduction and encourage firms to meet targets by creating an
economic incentive to reduce emissions
Clean technologies
o Renewable sources of energy use it as a solution to remove
negative externalities from use and extraction of fossil fuels
o
Governments can subsidise development of clean technologies
by offering tax credits to firms that invest in clean technologies
Government subsidies
o Lower firms production costs → increasing supply
o Gives firms incentive to use higher amount of clean technologies
o There is opportunity cost involved as money spent will not be
able to spend on achieving other objectives
E
...
restrictions on emissions from cars
Title: full IB micro economics notes
Description: These notes are of the highest quality, they got me a band 7, to be exact a score of 96. I was the dux of my cohort with the next highest being 84. Follow these notes precisely and I guarantee you will get a good mark.
Description: These notes are of the highest quality, they got me a band 7, to be exact a score of 96. I was the dux of my cohort with the next highest being 84. Follow these notes precisely and I guarantee you will get a good mark.