IB Economics: Microeconomics Terms

a situation in which unlimited wants exceed the limited resources available to fulfill those wants

the decisions people make whenever they purchase goods or services

The next best alternative forgone when an economic decision is made

Natural resources and raw materials

Physical and mental contribution of the existing workforce to production or the work done by humans used in production.

Previously manufactured goods used to make other goods and services

The factor of production that involves the process of managing, organizing, and assuming responsibility for business.

Any place where goods and services are exchanged for money

an organization that produces goods and services for sale

An economy in which the government makes decisions on what to product, how to produce, and who to produce for.

A market in which all production is in private hands. Government has no involvement in market.

An increase in the level of real national income of a country between one year and another. (National income per capita)

The measure of welfare of a country.

Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.

Shows the maximum combinations of goods and services that can be produced by an economy in a given time period.

A measure of usefulness and pleasure.

Total satisfaction gained from consuming a certain quantity of a product.

The extra utility gained from consuming one more unit of a product. Marginal utility gained from extra units of a product falls as consumption increases.

Economics that deal with smaller, discrete economic agents and their reactions to changing events., branch of economic theory that deals with behavior and decision making by small units such as individuals and firms

Economics that deal with, the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth

The quantity of a good or service that consumers are willing and able to purchase at a given time period.

As the price of a product falls, the quantity demanded of the product will usually increase, ceteris paribus.

The change in the quantity demanded of a good that results from a change in real income.
Example: If there is an increase in real income, then people are more likely to buy more of the product.

The change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods that are substitutes.

1. Income
2. The price of other products
3. Tastes/Preferences
4. Size of the population
5. Changes in age structure of population
6. Change in income distribution
7. Government policy changes
8. Seasonal Changes

Goods for which demand increases when income is higher and for which demand goes down when income is lower.

Goods for which demand decreases when income rises.

Two goods for which an increase in the price of one leads to an increase in the demand for the other.

Two products that are often purchased together. An increase in price of one product will lead to a decrease in demand for the other product purchased.

Two products in which a change in price of one of them will not effect the demand for the other product

A change in the price of the good itself leads to a movement.
A changes in any of the other determinants besides price lead to a shift.

The willingness and ability of producers to produce a quantity of a good or service at a given price in a given time period.

As the price of a product rises, the quantity supplied of the product will usually increase, ceteris paribus.

1. Resource costs
2. other good's price
3. Tax&subsidies
4. Technology changes
5. Expectations of producers
6. Number of suppliers

A situation in which quantity demanded equals quantity supplied in a given time period.

prices of commodities affect the demand and supply of goods and services. Price mechanism affects both buyers and sellers who negotiate prices of goods or services.

A situation in which the there is more quantity demanded than supplied at a price. In order to eliminate this, the producers need to increase price.

A situation in which there is more quantity being supplied than demanded at a price. In order to eliminate this, the producers need to lower price.

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

The excess of 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.

The sum of consumer and producer surplus. Total Benefit to society.

When a market is in equilibrium. Resources are allocated in the most efficient way. Community surplus is maximized.

The measure of responsiveness of one variable to a change in another.

The measure of how much the demand for a product changes when there is a change in one of the factors that determines demand (usually price)
PED = %∆ in QD / %∆ in Price of Product

Demand with an elasticity of infinity; the quantity demanded becomes zero if the price rises of falls by the slightest amount.

Demand with an elasticity of zero; the quantity demanded does not change as the price changes

When the value of PED is LESS than one and greater than zero. Slope is VERY steep

When the value of PED is GREATER than one and less than infinity. Slope is not steep.

PED falls as price falls. This is because as products get cheaper, they begin to become more inelastic.

1. Number and closeness of substitutes
2. Necessity of the product and how widely the product is defined (food, water, etc)
3. Time period considered (think of Apple Products)

The measure of how much the demand for a product changes when there is a change in the price of another product.
XED = %∆ QD of Product A/ %∆ Price of product B

Two goods are COMPLIMENTS for each other.

Two goods are SUBSTITUTES of each other.

Two goods are unrelated

The measure of how much demand for a product changes when there is a change in the consumer's income.
YED= %∆ in QD of Product/ %∆ Income of consumer

Inferior goods; if income increases, QD decreases

Normal goods; if income increases, QD increases

0<YED<1 = Income Inelastic
YED >1 = Income Elastic
(Similar to PED)

A measure of how much the supply of a product changes when there is a price change in the price of the product.
PES = %∆ QS of Product/ %∆ Price of product

Elasticity of supply is zero; the quantity supplied does not change as the price changes

Elasticity of supply is infinite; the quantity supplied becomes zero if the price rises of falls by the slightest amount

When the value of PES is LESS than ONE and greater than zero.

When the value of PES is GREATER than ONE and less than infinity.

1. How much costs rise as output is increased
- Existence of unused capacities
- Mobility of factors of production
2. Time period considered
3. Ability to store stock

Commodities tend to have an inelastic supply because raw materials are not hand-made.

Manufactured goods tend to have an elastic supply because it is easier to control their production.

A tax imposed upon expenditure, usually place upon the selling price of a product.

A tax on a good or service which is set as a fixed amount per unit of the good or service sold.

This is where the tax is a percentage of the selling price; As the quantity purchased increases, percentage tax also increases

When the value of PED is greater than the value of PES for a product, tax burden imposed will be greater on ___.

When the value of PED is less than the value of PES for a product, tax burden imposed will be greater on ___.

Inelastic; because people are buying that product anyway, regardless of price change.

Government regulation of free market prices such that a legal maximum or minimum price is specified.

Also known as price CEILING. Government sets a price below the equilibrium price, which prevents producers from raising the price above it. It is usually done to protect consumers and usually imposed on necessity products.

Also known as price FLOOR. Government sets a price above the equilibrium, which prevents producers from reducing the price below it. Usually done to attempt to raise income for producers for goods services that the government thinks are important or to protect workers by setting a minimum wage.

A good that is considered socially desirable (usually under-provided).

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

1. To lower price of essential goods
2. To guarantee the supply of products that the government thinks is necessary for the economy
3. To enable producers to compete with overseas trade (protect home industry)

The extra unit of output that is produced by using extra unit of the variable factor. MP= ∆TP/∆V

As extra units of a variable factor are added to a given quantity of a fixed factor, the output form each additional unit of the variable factor will eventually diminish.

The opportunity cost of the firm's production. In this case it is the opportunity cost of the factors of production (resources) that have been used in producing the good or service.

the cost added by producing one extra item of a product.

The income that a firm receives from selling its products, goods, and services, over a certain time period.
Total revenue : p x q

The revenue that a firm receives per unit of sales. TR/q

The extra revenue that a firm gains when it sells one more unit of a product in a given time period.
∆TR/∆q

The difference between total revenues and the opportunity cost of all factors of production.

A firm makes this profit when total revenue is less than total cost. Explicit costs maybe covered by implicit costs are not covered.

Occurs when firm produces its product at the lowest possible unit cost (average cost).
MC=MC

Occurs where suppliers are producing the optimal mix of goods and services required to consumers.
MR = AR

when a market (using P mechanism) doesn't allocate resources efficiently --> creating shortage or surplus

the use of something by 1 person prevents the use of it by others (i.e. pen)

you can't use it unless you pay for it (i.e. your education)

have positive externalities, non rivalrous and non-exclusive (i.e. defense, police, navigation systems,
flood control, broadcasting, pavements, street lighting)

Shifts D/MPB, decrease

Shifts S, decrease

Increases Q - instead of a higher P, G provide it a P of 0 or ration it at a price ceiling

shifts D out, increase

increases S