Economics Summary IB
Section 1: Microeconomics
Chapter 1
Want: things that make our lives more comfortable, things that we would like to have, but
which are not necessary for our immediate physical survival (computer, car, and phone).
Wants are infinite.
Good: Are physical objects, (physical things) that can be touched, smelled, eaten. (Food,
gasoline, movie)
Service: Intangible things that cannot be touched. A service is an activity or result from one,
provision of a good (restaurant, gas station, and cinema)
Scarce Resource: when there is limited availability of a product. There aren’t abundant and
therefore are valued more since there isn’t a lot of supply. All goods and services that have
a price are relatively scarce. Even though a great number of them exist, not everyone that
would like a good can have one, usually because they cannot afford it.
Economic Good: every good or service that has a price, and therefore are being rationed,
because they are limited (petrol, food, jewelry) - thus they are said to have an opportunity
cost.
Free Good: goods that don’t have a price because they are unlimited (air, salt water) - thus,
do not have opportunity cost. Allocation: the distribution of resources among competing
uses.
Choice: As people do not have infinite incomes, they have to make choices on which
product or service to purchase (choose between alternatives). To make a choice is to
use/allocate a resource in the most efficient way possible to take the best outcome out of it
Opportunity Cost: the next best alternative foregone when an economic decision is made
(what you give up doing because you choose another option). Key concept linked with
scarcity. It is what you give up in order to have something else.
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,Chapter 2: Demand and Supply
Market: A market is a virtual or physical place where potential buyers and sellers interact
exchanging goods or services for money, carrying out economic transactions.
Scarcity: Unlimited needs and wants with limited resources (not infinite)
Resources limited → choose
Factors of production
● Land (natural resources) → Rent
● Labour → Wage
● Capital → Assets, goods/services → Interest
● Entrepreneurship → Profit
Reward:
● Rent: Payment to owners of land resources who supply their land to the production
process.
● Wage: Payment to whose who provide labour, including all wages, salaries and
supplements.
● Interest: Payment to owners of capital resources.
● Profit: Payment to owners of entrepreneurship.
Production possibilities frontier curve: It represents all combination of the maximum
amounts of two goods that can be produced by an economy, given its resources and
technology, when there is a full employment of resources and productive efficiency. All
points of the curve are known as production possibilities.
Efficient → it has to be in
the line
Marginal Utility: The greater the quantity of a good consumed, the greater the benefit
derived. However, the extra benefit provided by each smaller amounts.
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,Market: Any kind of arrangement where buyers and sellers of goods, services or resources
are linked together to carry out an exchange.
Law of diminishing returns: Adding an additional factor of production results in smaller
increases in output. As more and more units of a variable input (such as labour) are added
to one or more fixed inputs (such as land), the marginal product of the variable input at first
increases, but there comes a point when it begins to decrease.
Demand: The amount of goods and services consumers are willing and able to buy at a
certain price in a given period, ceteris paribus.
Quantity Demanded: Represents the amount of an economic good or service desired by
consumers at a fixed price.
● Qd = a - bP
Qd = Quantity Demanded
P = Price, independent variable
a = The Q intercept (horizontal intercept)
b = Gradient
Law of demand: As the price goes up, the quantity goes down. Inversely proportional.
Negative relationship.
Market demand: The sum of the individual demand. The curve is the same as the law of
demand.
Change in demand: Any change in a non-price determinant. Represented by a shift of the
entire demand curve. When it goes to the left, demand decreases. When it goes right,
demand increases.
The non price determinants of demand:
● Income in normal goods: A good is a normal good when demand for it increases in
response to an increase in consumer income. Most goods are normal goods. When
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, income increases, there is a shift to the right in a curve and opposite when it
decreases.
● Income in inferior goods: An inferior good is when consumer income increases,
demand falls. Example: used clothes and cars.
● Preferences and tastes: If preferences and tastes changes in favour of the product,
demand for the product increases and demand curve shifts to the right.
● Price of related goods
Types of goods:
● Complementary Goods: Two goods are complements if they tend to be
used together. For example DVD and DVD players. A fall in the price
of one, say DVD’s, leads to an increase in demand for the DVD
players. The goods are not related to each other → independent
goods.
● Substitutes Goods: Two goods are substitutes if they satisfy a similar need. A fall in
the price of one, say Coca Cola, results in a fall in the demand for the other Pepsi.
For example: Coca Cola and Pepsi.
When there is a change in price there is a movement along the demand curve.
Supply: The amount of goods or services, a firm is willing and able to produce and supply
at different prices during a particular time period, ceteris paribus.
The buyer wants a lower price whilst the producer wants a higher price.
Law of supply: Positive causal relationship between the quantity of a good supplied over a
particular time period and it’s price, ceteris paribus.
As the price of the good increases, the quantity of the good supplied
also increases, as the price falls, the quantity supplied also falls →
ceteris paribus.
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