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IB Economics: Microeconomics
HL/SL * This term can also be shown on a diagram, please see the diagram set
Terms in this set (115)
the condition that results from limited resources combined with unlimited wants
Cost of the next best alternative use of money, time, or resources when one choice is made rather than another
Factors of Production
resources of land, labor, capital, and entrepreneurship used to produce goods and services
the physical location where production occurs. Includes bodies of water as well as resources extracted from the earth.
the work done by humans that is used in the production of goods and services.
previously manufactured goods used to make other goods and services
the process of starting, organizing, managing, and assuming the responsibility for a business
Any product that is produced in the primary sector, which includes agriculture, forestry, fishing, and the extractive industries.
A product that has been produced by machines and/or human labor.
a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade
Law of Demand
the claim that, ceteris paribus, the quantity demanded of a good falls when the price of the good rises
The quantity of a good or service that consumers are willing and able to purchase at a given price in a given period of time.
Consumer Demand v. Market Demand
Consumer demand is the demand of an individual. Market demand is the combination of all consumer demand in the market.
Demand Curve *
a graph of the relationship between the price of a good and the quantity demanded.The Law of Demand implies that this curve is negatively sloped.
Determinants of Demand
Anything other than price of the current item that influences consumer buying decisions, including income, tastes and preferences, price of related items (substitutes and complements), number of consumers in the market, and expected future price.
The quantity of a product that producers are willing and able to produce at a given price in a given period of time.
the total of all individual suppliers; products in a market at a particular time
Law of Supply
the rule that, ceteris paribus, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied
Determinants of Supply
Anything other than price of the current item that influences production decisions, including cost of raw materials, cost of labor, level of technology used to produce, number of producers in the market, price of related products, and expected future price.
Supply Curve *
a graph of the relationship between the price of a good and the quantity supplied. It has a positive slope.
a situation in which the market price has reached the level at which quantity supplied equals quantity demanded
when a price is below equilibrium causing quantity demanded to be greater than quantity supplied
when a price is above equilibrium causing quantity demanded to be less than quantity supplied
The Invisible Hand
Adam Smith's term for the natural self-regulation of a market economy driven by self-interest and efficiency.
forces, such as supply and demand, that drive the terms of transaction in capitalism
Price Mechanism *
price signals which determines allocation of resources through interaction of supply and demand, This describes the means in which the decisions taken by consumers and businesses interact to determine the allocation of scarce resources between competing uses. Through the forces of demand and supply markets move to equilibrium.
Indication of over- or underproduction of a good or service in a market. Rising prices signal a shortage; lowered prices signal overproduction
Incentive Function of Price Increases
a rising price gives producers the incentive to increase the quantity supplied, as the higher price may result in higher revenues.
Disincentive Function of Price Decreases
a falling price causes producers to decrease quantity supplied, as the opportunity cost of producing that good is increasing. They will likely begin to produce more of other goods.
Price Elasticity of Demand
The responsiveness of the quantity demanded to a change in price, measured by dividing the percentage change in the quantity demanded of a product by the percentage change in the product's price.
Price elastic *
The demand for a product is highly responsive to price changes. The range of a demand curve where elasticities of demand are greater than 1.0.
Price inelastic *
The demand for a product is not very responsive to price changes. The range of a demand curve where elasticities of demand are less than 1.0.
Unit elastic *
a given change in price causes a proportional change in quantity demanded. The point of any demand curve where revenue is maximised.
Perfectly elastic demand *
Any increase in price results in all demand being eliminated.
Perfectly inelastic demand *
the case where the quantity demanded is completely unresponsive to price, and the price elasticity of demand equals zero.
Cross (Price) Elasticity of Demand
a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good.
two goods for which an increase in the price of one leads to an increase in the demand for the other. Occurs when XED is a positive value.
two goods for which an increase in the price of one leads to a decrease in the demand for the other. Occurs when XED is a negative value.
Income Elasticity of Demand
a measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income
Normal good *
a good for which demand goes up when income is higher and for which demand goes down when income is lower.
Inferior good *
a good that consumers demand less of when their incomes increase. Occurs when yED is a negative value.
Price Elasticity of Supply
a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price
Unit Elastic Supply *
when the percentage change in the quantity supplied equals the percentage change in price
Inelastic Supply *
the kind of supply that exists when the percentage change in quantity supplied is less than the percentage change in price.
Elastic Supply *
the kind of supply that exists when the percentage change in quantity supplied is greater than the percentage change in price
A tax levied on one party but passed on to another for payment.
Specific Tax *
a fixed amount that is imposed upon a product by the government; it has the effect of shifting the supply curve vertically upwards by the amount of the tax.
ad valorem tax *
an indirect tax where a percentage is added to the selling price of each unit.
A tax on a good that is often meant to limit consumption of that good.
Tax incidence *
the actual division of the burden of a tax between buyers and sellers in a market
Government payments given to certain industries to help offset some of their costs of production. It has the effect of shifting the curve vertically downwards.
Government-mandated prices that are generally imposed in the form of maximum (price ceiling) or minimum (price floor) legal prices.
Price Ceiling *
a maximum price that can be legally charged for a good or service: set below equilibrium
Price Floor *
a legal minimum on the price at which a good can be sold: set above equilibrium
Consumer Surplus *
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it: excess utility for consumers.
Producer Surplus *
the amount a seller is paid for a good minus the seller's cost of providing it
Community Surplus *
the sum of consumer and producer surplus; the total benefit to society, this is maximised at the equilibrium.
Allocative Efficiency *
A state of a market in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it
a situation in which the free market, operating on its own, does not allocate resources in a way that is optimal for society
Welfare loss (to society)
refers to decreases in producer and/or consumer surplus as a result of either more or less than Q* (the socially optimal level of output) produced and consumed
similar (same?) as welfare loss - implies that society is carrying a burden (like a tax) for which their benefit is less
economic side effects or by-products that affect an uninvolved third party; can be negative or positive
Positive externality of consumption*
When there is a spillover benefit of consuming a good or service onto a third party.
Positive externality of production*
when the production of a good or service creates a benefit to third parties.
Negative externality of consumption*
when a good or service consumed by individuals adversely affects third parties
Negative externality of production*
when the production of a good or service adversely affects third parties
Marginal Private Benefit*
The benefit from an additional unit of a good or service that the consumer of that good or service receives.
Marginal Social Benefit*
The true benefit to society of a one unit increase in the production of a good or service
Marginal Private Cost*
the cost of producing an additional unit of a good or service that is borne by the producer of that good or service
Marginal Social Cost*
the true cost borne by society when the production of a good or service is increased by one unit
a good or service considered as beneficial for people and that would be under provided by the market and so under consumed
a good or service considered to be harmful for people who consume them and society as a whole. If left to the market forces or private enterprise, they would be over-produced and thus over consumed
licenses to emit limited quantities of pollutants that can be bought and sold by polluters (AKA Cap and Trade)
the reduction in economic surplus resulting from a market not being in competitive equilibrium
A good that is neither excludable nor rivalrous in consumption
Free Rider Problem
tendency for people to refrain from contributing to the common good when a resource is available without requiring any personal cost or contribution
Common Access Resource
a resource that is owned by no one, but is available to all users at little or no charge
providing the best outcomes for human and natural environments both in the present and for the future
situations in which buyers and sellers are not equally well informed about the characteristics of goods and services for sale in the marketplace
a period of time sufficiently short that at least one of the firm's factors of production cannot be varied
A period of sufficient time to alter all factors of production used in the productive process - all inputs can be changed.
all the goods and services produced by a business during a given period of time with a given amount of input
Law of Diminishing Marginal Returns*
As more of a variable resource is added to a given amount of a fixed resource, marginal product eventually declines and could become negative
The total opportunity costs of production to a firm, including the opportunity cost of entrepreneurship and the other FOP's.
Costs that do not vary with the quantity of output produced
Costs that vary directly with the level of production
Total Costs divided by quantity. ATC = TC/Q
the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold
Revenue per unit produced. It is calculated by dividing TR by the output. NOTE: This is always equals Price if there is no price discrimination.
the additional income from selling one more unit of a good; sometimes equal to price
Abnormal (Economic) Profit*
Total revenue minus total cost, including both explicit and implicit costs - accounting profit minus the opportunity costs.
the payment made by a firm to obtain and retain entrepreneurial ability; the minimum income entrepreneurial ability must receive to induce it to perform entrepreneurial functions for a firm. When TC=TR or ATC=AR
a short-run decision not to produce anything during a specific period of time because of current market conditions. This would minimize losses for the firm if AVC > AR at Qpm. The firm would only be losing it's fixed costs.
Operate at a loss *
a short-run decision to continue operating in spite of losses. Losses would be minimized with this decision if AR>AVC at Qpm. In other words, the revenue would be paying for all of the variable costs and some portion of the fixed costs.
Refers to a firm earning as much sales revenue as possible while, at the same time, keeping costs to a minimum. Profit maximisation is the most common goal for a firm. Occurs at the quantity of output where MR=MC
An alternative goal of some firms: to produce the output level yielding the highest value of sales (MR=0)
An alternative goal of some firms: to expand output as quickly as possible
Choosing an option that is acceptable, although not necessarily the best or perfect.
a market structure in which a large number of firms all produce the same product and no single seller controls supply or price and barriers to entry are low
products that have income elasticity between 0 and 1. When consumer income grows, quantity demanded rises by less than the rise in income.
goods that have income elasticities greater than 1. when consumer income grows, quantity demanded of luxury goods rises more than the rise in income
the average amount produced by each unit of a variable factor of production
The increase in output that arises from an additional unit of input
the extra cost of producing one more unit of output
the sum of the fixed and variable costs for any given level of production
the production of a good in the least costly way: occurs at ATC minimum.
Economies of Scale
factors that cause a producer's average cost per unit to fall as output rises in the long run
Diseconomies of Scale
factors that cause a producer's average cost per unit to rise as output rises in the long run
Increasing returns to scale*
When long-run average total cost declines as output increases. Economies of scale outweigh diseconomies of scale
Decreasing returns to scale*
when long-run average total cost increases as output increases: diseconomies of scale outweigh economies of scale
Constant returns to scale*
the property whereby long-run average total cost stays the same as the quantity of output changes
a strategy that firms use to achieve market power. Accomplished by producing products that have distinct positive identities in consumer's minds.
(economics) a market in which there are many buyers but only one seller
(economics) a market in which control over the supply of a commodity is in the hands of a small number of producers and each one can influence prices and affect competitors
A market structure with many fully informed buyers and sellers of an identical product and no barriers to trade
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