IB Economics - Microeconomics Diagrams
Terms in this set (100)
Change in Demand
E.G. due to a new marketing campaign.
Change in Quantity Demanded
Due to a change in supply.
Change in Supply
E.G. due to an improvement of technology
Change in Quantity Supplied
Due to a change in Demand.
At P*, Qs=Qd
At P1, Qs < Qd
The condition in which available resources (land, labour, capital, entrepreneurship) are limited; they are not enough to produce everything that human beings need and want.
At P1, Qs > Qd
Disequilibrium in Qs & Qd cause price to move toward Pe, until the disequilibrium is eliminated
Instead of paying the higher price (P1), the consumer can pay the market price (P*). This is measured as additional utility for the good (the blue arrow).
Instead of earning the lower price (P1), the producer can earn the market price (P*). This is measured as additional benefit derived from producing the good (the blue arrow).
A concept which implies that at all quantities until Q
, both producers and consumers are more than satisfied with the market price (P
Community Surplus is maximized at P*
Welfare loss (to society)
At quantities less than Q*, benefits are greater than costs and should be produced.
Price Elastic Demand
An increase in price reduces total revenue, and vice versa
Price Inelastic Demand
An increase in price reduces total revenue, and vice versa
Unit Elastic Demand
A change in price does not change total revenue
Perfectly Elastic Demand
Quantity Demanded is infinite at P1. A measure of the responsiveness of the quantity of a good demanded to a change in its price, given by the percentage change in quantity demanded divided by the percentage change in price. In general, if there is a large responsiveness of quantity demanded (PED > 1), demand is referred to as being elastic; if there is a small responsiveness (PED < 1), demand is inelastic.
Perfectly Inelastic Demand
Any change in price would have no effect on D.
Can be classified as necessity or luxury
Unit Elastic Supply
Qs = 0 + dP
Qs = -C + dP
Qs = +C + dP
eg a toll charge or a fee
ad valorem tax
eg a VAT or sales tax
Tax incidence: Elastic Demand
Producers bear more of the weight than the consumers. Tax revenue is lower.
Tax Incidence: Inelastic Demand
Consumers bear more of the weight than the producers. Tax revenue is higher.
Subsidy: Elastic Demand
The consumers benefit less than producers. The subsidy produces a relatively high amount of additional units (Q2 - Q*).
Subsidy: Inelastic Demand
The consumers benefit more than producers. The subsidy is expensive when compared to the additional units produced (Q2 - Q*).
Since price cannot be raised beyond Pc, the government might subsidize the product to eliminate the scarcity (shown by an increase in supply from S1 to Ssub.)
Since price cannot be lowered beyond Pf, the government might buy up the surplus (shown by an increase in demand from D1 to D2.)
Positive Externality of Consumption
At Q*, social benefits exceed private benefits
Positive Externality of Production
At Q* social costs are less than private costs
Negative Externality of Consumption
At Q*, social benefits are less than private benefits
Negative Externality of Production
At Q* social costs are greater than private costs
The green line intersects the highest point of the blue line, then intersects the X axis at the red line's highest point.
The blue line shows productive efficiency at its highest point (where the green line intersects it)
The red line increases at an increasing rate, then at a decreasing rate, then decreases
Total Fixed Costs
The red line stays the same. It is also represented by the space between the other two lines.
Total Variable Costs
The green line becomes less steep, then more steep, due to the law of eventually diminishing marginal returns.
The blue line is produced by adding together the other two; it is a vertical translation of the green line.
Average Fixed Costs
The red line diminishes, but never becomes zero.
"a" (blue to green) is equal to "c" (red to axis)
b = d
Average Variable Costs
The green line decreases, then increases due to the law of eventually diminishing marginal returns.
It gets closer to the blue line, but will never touch it.
Average Total Costs
The blue line is the sum of the green and red lines.
The purple line fall, then rises. It intersects the blue and green lines at their lowest points.
Total Revenue: Perfect Competition
The blue line increases in a linear manner because the red line is horizontal.
AR, MR: Perfect Competition
The red line is actually 2 lines that are equal to each other.
Total Revenue: Imperfect Competition
The blue curve is maximised when the red curve = 0
Average Revenue: Imperfect Competition
The light blue curve is the same as the demand curve and is negatively sloped.
Marginal Revenue: Imperfect Competition
The dark blue curve is derived from the light blue curve and is twice as steep.
Average Revenue: Non-Collusive Oligopoly
The green curve is relatively elastic at prices above Ppm and relatively inelastic at prices below Ppm.
Marginal Revenue: Non-Collusive Oligopoly
MC will always be found on the vertical section of the red curve.
Beyond Q1, MC > MR so TR declines
At Qpm, Ppm > Pcost
All costs are covered and then some!
Break- Even Profit
At Qpm, Ppm=Pcost
All costs are covered, with no extra
At Qpm, Pavc > Ppm
Losses are minimized by not producing
Operate at a Loss
At Qpm, Pavc < Ppm < Patc
Losses are minimized by producing
The firm produces until MR = 0
Where MC intersects AC, AC is minimized
Increasing Returns To Scale (LR)
Movements along LRAC to Q3 result in lower costs
Decreasing Returns to Scale (LR)
Movements along LRAC beyond Q3 result in higher costs
Constant Returns to Scale (LR)
At Q3 further expansion does not lower costs.
A Latin expression that means 'other things being equal'. Another way of saying this is that all other things are assumed to be constant or unchanging. It is used in economics theories and models to isolate changes in only those variables that are being studied.
A factor of production which includes all natural resources: land and agricultural land, as well as everything that is under or above the land, such as minerals, oil reserves, underground water, forests, rivers and lakes. Natural resources are also called 'gifts of nature' or 'natural capital'.
A factor of production, which includes the physical and mental effort that people contribute to the production of goods and services.
Includes spending by firms of the government on capital goods (i.e. buildings, machinery, equipment, etc.) and all spending on new construction (housing and other buildings).
The skills, abilities and knowledge acquired by people, as well as good levels of health, all of which make them more productive; considered to be a kind of 'capital' because it provides a stream of future benefits by increasing the amount of output that can be produced in the future.
Numerous types of physical capital resulting from investments, making major contributions to economic growth and development by lowering costs of production and increasing productivity; include power, telecommunications, piped water supplies, sanitation, roads, major dam and canal works for irrigation and drainage, urban transport, ports and airports.
The value of the next best alternative that must be given to or sacrificed in order to obtain something else.
Potential output (potential GDP)
The level of output (GDP) that can be produced when there is 'full employment' meaning that unemployment is equal to the natural rate of unemployment; also known as the full employment level of output.
Increases in in total output produced by an economy (real GDP) over time; may also refer to increases in real output (real GDP) per capita (or per person).
Broad-based rises in the standard of living an well-being of a population, particularly in economically less developed countries. It involves increasing and reducing poverty, reducing income inequalities and unemployment, and increasing provision of and access to basic goods and services such as food and shelter, sanitation, education and heath care services.
Free market economy (market economy)
An economy where the means of production are privately held by individuals and firms. Demand and supply determine how much to produce, how/how many to produce, and for whom to produce.
The extra or additional benefit received from consuming one more unit of a good.
Non-price determinants of demand
The variables (other than price) that can influence supply, and that determine the position of a demand curve; a change in any determinant of demand causes a shift if the demand curve, which is referred to as a 'change in demand'.
Two or more goods that satisfy a similar need, so that one good can be used in place of another. If two goods are substitutes, an increase in the price of one leads to an increase in the demand for the other.
In the context of demand an supply, occurs when the quantity of a good demanded is greater than the quantity supplied, leading to a shortage of the good.
In the context of demand and supply, occurs when the quantity of a good demanded is smaller than the quantity supplied, leading to a surplus.
Cross Elasticity of Demand (XED)
A measure of the responsiveness of the demand for one good to a change in the price of another good; measured by the percentage change in the quantity of one good demanded divided by the percentage change in the price of another good. If XED > 0, the two goods are substitutes; if XED < 0, the two goods are complements.
Income elasticity of demand (YED)
A measure of the responsiveness of demand to changes in income; measured by the percentage change in quantity demanded divided by the percentage change in price.
Income elasticity of demand
%change in quantity demanded over %change in income
A good the demand for which varies positively (or directly) with income; this means that as income increases, demand for the good increases.
A good the demand for which varies negatively (or indirectly) with income; this means that as income increases, the demand for the good decreases.
Price elasticity of supply
A measure of the responsiveness of the quantity of a good supplied to changes in its price, given by the percentage change in quantity supplied divided by the percentage change in price. In general, if there is a large responsiveness of quantity supplied (PES > 1), supply is referred to as being elastic; if there is a small responsiveness (PED < 1), supply is inelastic.
Refers to the difference between the highest prices consumers are willing to pay for a good and the price actually paid. In a diagram, it is shown by the area under the demand curve and above the price paid by consumers.
Refers to the difference between the price received by firms for selling their good and the lowest price they are willing to accept to produce the good. In a diagram, it is shown as the area under the price received by producers and above the supply curve.
Taxes paid directly to the government tax authorities by the taxpayer, including personal income taxes, corporate income taxes and wealth taxes.
Taxes levied on spending to buy goods and services, called indirect because, whereas payment of some or all of the tax by the consumer is involved, they are paid to the government authorities by the suppliers (firms), that is, indirectly.
Ad valorem taxes
Taxes calculated as a fixed percentage of the price of the good or service; the amount of tax increases as the price of the good or service increases.
An amount of money paid by the government to firms for a variety of reasons: to prevent an industry from failing, to support producers' incomes, or as a form of protection against imports (due to the lower costs and lower prices that arise from the subsidy). A subsidy given to a firm results in a higher level of output and lower price for consumers. May also be paid to consumers as financial assistance or for income redistribution.
Occurs when the market fails to allocate resources efficiently, or to provide the quantity and combination of goods and services mostly wanted by society. Market failure results in allocative inefficiency, where too much or too little of goods or services are produced and consumed from the point of view of what is socially most desirable.
Marginal private benefits (MPB)
The extra benefit received by consumers when they consume one more unit of a good.
Marginal social benefits (MSB)
The extra benefits to society of consuming one more unit of a good; are equal to marginal private benefits (MPB) when there are no consumption externalities.
Marginal private costs (MPC)
The extra costs to producers of producing one more unit of a good.
Marginal social costs (MSC)
The extra costs to society of producing one more unit of a good; are equal to marginal private benefits (MPB) when there are no production externalities.
Refers to a situation that is the best from the social point of view, determined by the achievement of allocative efficiency (or economic efficiency); occurs when marginal social benefits are equal to marginal social costs (MSB=MSC).
Occurs when the actions of consumers or producers give rise to positive or negative side-effects on other people who are not part of these actions, and whose interests are not taken into consideration. Positive externalities give rise to positive side-effects; negative externalities to negative side-effects.
A type of externality where the side-effects on third parties are positive or beneficial, also known as 'spillover benefits'; to be contrasted with negative externality.
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