IB Economy – Microeconomics

The study of how groups of people use scarce resources that are used to produced and services in order to compensate the unlimited needs of the population, and to distribute it among different groups.

Studies behaviors of more individualized aspects in an economy. Examples: automobile companies, planes to Zurich.

The study of economics as a whole, focused more on large scale or general economic factors.

1.) Total output of a nation
2.) The average price level of a nation
3.) The employment level (unemployed as well)
4.) Distribution of income in the nation

1.) Scarcity
2.) Resources
3.) Trade-offs
4.) Opportunity Cost

When something is both limited in quantity and is desired. Examples: Oil, money, houses

Individuals and society are constantly making choices between alternatives. Which goods to consume? Which to produce?

Idea that "nothing is free" A process when one thing is chosen, another is given up. Example: Choosing the 3 year old results in letting go the 78 year old.

1.) Land
2.) Labor
3.) Capital
4.) Entrepreneurship

"gifts of nature" Examples: forest, mountains, animals

human resources in the production of goods. Example: Factory Workers

tools and technologies used to produce goods. Examples: Factories, tools

innovation and creativity applied to the production of goods. Example: New hormone created to make chickens bigger

- Economic value is derived from scarcity
- The extent of government intervention in the allocation of resources
- Economic growth v.s Economic development
- Goal of economic efficiency v.s equity

a ration system where the prices of goods and services are based on the consumer. No government intervention.

where means of production are owned by the state. No private property, all economic decisions are made by the government.

statements based on facts or evidence, free from subjectivity. Can be tested and scientifically proven.

economics statements based on norms, thus evaluated subjectively. Can't be proved or disprove scientifically scientifically.

Production Possibility Curve

This means that the outcome is attainable given the resources.

This means that the outcome is inefficient and the resources are not being used to their potential.

This means that the outcome is impossible to achieve with the given resources.

Scarcity: a society can have a certain amount of output

Actual output: shown by how much the country is currently producing

Potential output: can show the potential output of a nation. Something the nation can work up to

Economic Growth: If there is economic growth, then the PPC will shift

increase in total output of goods and services over time. Can be defined as an increase in household income.

the improvement in people's standard of living over time. Can be measured in health, education, equality, life expectancy

Households buy the goods and service
- private schools
- dental services
- airline travel

Businesses buy the production resources they need to make products
- the market for teachers
- the market for dentists
- market for pilots

Labor - wages, sallary
Land - rent
Capital - interest
Entereupship - Profit

- consumers buy goods and services from firms
- expenditures by households become revenues for firms

- Households depends on businesses and businesses depend on households

- Households seek to maximize quality, businesses seek to maximize utility

allocated between competing interests in an economy. What should be produced, how and when?

defined as a quantity of a particular good that consumers are willing and able to buy at a range of prices at a particular period of time

There is an inverse relationship between price and the quantity demanded by consumer

consumers will buy more of a good at low prices, less at a high price

1.) The law of diminishing marginal utility
2.) Income effect
3.) Substitution effect

As we consume, the satisfaction we derive for additional unit grows smaller

Real income refers to income that is adjusted for price changes, implies the buying power of a consumer. As the price decreases, the quantity demand increases b/c consumers have a more real income to spend. With more buying power, they sometimes chose to buy more of the product.

As prices of a good increases, consumers switch from the other substitute goods because the price is lower

Quantity Demanded - changes as a result of changes in a price, movement along the curve

Demand changes - when the whole curve shifts. As a result of non-prices determinants.

A change in consumers taste

A change in the price of substitute and complementary goods

the expectation among consumers of the future prices of a good or their future home

A change in consumers income

A change in the number of consumers

Changes in factors such as weather, natural disaster, scientific studies, etc.

Demand increases when incomes fall, demand falls when income grows (inverse relationship). Examples include: bikes, used goods

Demand increases when incomes grow, demands fall when income falls (direct relationship) ex. automobiles, movie tickets

if the good is normal and consumers income increase, there will be an upwards shift of the demand curve.

if good is inferior, the curve will shift downwards as consumers move on to normal goods

If population of consumers increases demand shifts up, if the population decreases, demand shifts down.

how much of a product producers will supply at each range of prices

As price increases, firms increase output. As price decreases, firms decrease output.

New technologies make production more efficient and increase in supply

Subsidies: government payment for producers, will increase supply
Taxes: Payments for firms to the government will decrease supply

cost of input falls, supply will increase. If input cost rise, supply decreases.

When quantity demanded is equal to quantity demanded

When supply/demand shifts, there is disequilibrium. Can result in surplus or shortage.

How responsive consumers are to a change in price

% change in demand / % change in price

demand is inelastic

demand is elastic

perfectly inelastic (i.e insulin)

unit elastic

perfect elastic

the number of substitutes available

how much of the income the good uses up

if good is a luxury good, consumers can live without it, therefore more elastic. If good is a necessity, the good tends to be more ineleastic

addictive goods tend to be more inelastic (i.e drugs)

How much time the consumer has to respond to the price change

% change in demand of good A / % change in price of good b

% change in demand / % change in income

% change in quantity supplied / % change in price

After price changes, supply is inelastic as producers cannot produce as much in a short period of time

firms can use capital more intensively, so supply is elastic

firms have time to vary the amount of capital they use

mobility of resources
ability to share stocks

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