1. IB HL Economy Year 1 Hannah Phillips Diagram and Definition

2. Economy Economics is the study of how scarce resources are or should be used.

3. Section 1 Introduction

5. Scarcity Scarcity exists because of the limited availability of economic resources relative to society’s unlimited demand for goods and services.

7. Capital is the factor of production that is made by humans and is used to produce goods and services. It occurs as a result of investment.

8. Labor is the human factor of production. It is the physical and mental contribution of the existing workforce to production.

10. Free Goods Free goods are goods which are unlimited in supply and have no opportunity cost. A free good has an unlimited supply at market price zero. Aneconomic good is a good or service that is relatively scarce and so has a price. An opportunity cost is involved when it is consumed. EconomicGood

11. Utility Utility is the satisfaction or pleasure that an individual derives from the consumption of a good or service.

12. Production Possibilities Curve (PPC) A production possibilities curve (PPC) shows the maximum combination of goods or services that can be produced by an economy in a give time period, if all the resources in the economy are being used fully and effectively. All resources being used efficiently. Good A Good B

13. Actual Output Actual output is the production of goods and services in an economy achieved in a given time period. Potential output is the possible production that would be achieved in an economy if all available factors were employed. Potential Output

16. Market A market is where buyers (consumers) and sellers (producers) come together to establish an equilibrium price and quantity for a good or service. It does not need to be an actual place.

17. Ceteris Paribus Ceteris paribus is an assumption that all other variables are being held equal, when a single variable is being altered in an economic model.

20. Determinants of Demand Tastes and preferences Other related goods Expectation of future income Income Size of market Special circumstances TOEISS

21. Movement (Change in Quantity Demanded) As price decreases, Quantity Demanded increases. Price P1 P2 Q1 Q2 Quantity

22. Price D2 D1 D3 Quantity Shift (Change in Demand) A rightward shift shown by Curve D2 shows an increase in Demand. A leftward shift shown by Curve D3 shows an decrease in demand. P Q1 Q2 Q3

23. Price Quantity

26. Determinants of Supply Subsidies and taxes Technology Other related goods Resources Expectations Special events or circumstances STORES

27. Movement (Change in Quantity Supplied) As price increases quantity supplied increases. P2 Price P1 Q1 Q2 Quantity

28. Shift (Change in Supply) A rightward shift shown by Curve D2 shows an increase in supply. A leftward shift shown by Curve D3 shows an decrease in supply. D3 D1 D2 Price P Q1 Q2 Q3 Quantity

29. Equilibrium Price Equilibrium price is the market clearing price. It occurs where demand is equal to supply. Price P Q Quantity

30. Price Ceiling (Maximum Price) The maximum price is also known as price ceiling. It is a price set by the government, above which the market price is not allowed to rise. It may be set to protect consumers from high prices, and it may be used in markets for essential goods, such as rice, or house rentals. Price P Quantity

31. Price Floor( Minimum Price) The minimum price is also known as the floor price. It is a price set by the government, below which the market price is not allowed to fall. It may be set to protect producers producing essential products from facing prices that are felt to be too low, such as many agricultural products in the European union. P Price Quantity

32. Buffer Stock Scheme A buffer stock scheme sets a maximum and a minimum price in a market to stabilize prices.

33. Section 2.2 Elasticities

34. Price Elasticity of Demand (PED) Price elasticity of demand (PED) is a measure of the responsiveness of the quantity demanded of a good or service to a change in its price. How sensitive is a buyer to a change in price?

35. Elastic Demand Elastic demand means that a change in the price of a good or service will cause a proportionately larger change in quantity demanded. PED>1 P2 Price P1 Q1 Q2 Quantity

36. Inelastic Demand Inelastic demand means that a change in the price of a good or service will cause a proportionately smaller change in quantity demanded. PED<1 P2 Price P1 Q1 Q2 Quantity

37. Cross Elasticity of Demand (XED) Cross elasticity of demand (XED) is a measure of the responsiveness of the demand for a good or service to a change in the price of a related good. How sensitive is a buyer when another product changes price? XED = Percentage Change in Quantity Demanded for X Percentage Change in Price of Y

38. Substitute Goods Substitute goods are goods that can be used instead of each other. For example, Pepsi and Coca-Cola. XED is a positive value. Price for Pepsi P2 P1 Q2 Q1 Demand for Coca-Cola

39. Complement Goods Complement goods are goods which are used together, such as Oreos biscuits and milk. XED is a negative value. Price of Milk P1 P2 Q1 Q2 Demanded for Oreos

40. Income Elasticity of Demand (YED) Income elasticity of demand (YED) is a measure of the responsiveness of demand for a good to a change in income. How sensitive is a buyer to changes in their own income? YED = Percentage Change in Quantity Demanded Percentage Change in Income

41. Normal Good A normal good has a positive income elasticity of demand. As income rises, demand increases. Income P2 P1 Q2 Q1 Quantity

42. Inferior Good Inferior goods have a negative income elasticity of demand. As income rises, demand decreases. Income P2 P1 Q2 Q1 Quantity

43. Price Elasticity of Supply (PES) Price elasticity of supply (PES) is a measure of he responsiveness of the quantity supplied of a good or service to a change in its price. How sensitive is a supplier to a change in price? PES = Percentage Change in Quantity Supplied Percentage Change in Price

44. Indirect Tax An indirect tax is an expenditure tax on a good or service. An indirect tax is shown on a supply and demand diagram as an upward shift in the supply curve, where the vertical distance between the two supply curves represents the amount of the tax. A specific tax is shown as a parallel shift. An ad valorem tax is shown as a divergent shift. Ad Valorem Tax Specific Tax Supply + Tax Supply + Tax Price Price Fixed percentage of tax Quantity Quantity

45. Incidence (Burden) of Tax The incidence (or burden) of tax refers to the amount of tax paid by the producer or the consumer. If the demand for a good is inelastic the greater incidence of the tax falls on the consumer. If the demand for a good is elastic, the greater incidence of the tax falls on the producer.

46. Section 2.3 Theory of the Firm

48. The Law of Diminishing Returns This law states that as extra units of a variable factor are applied to a fixed factor, the output per unit of the variable factor will eventually diminish.

50. Price = AR

52. Normal Profits Normal profits are the amount of revenue needed to cover the total costs of production, including the opportunity cost. MC AC Normal Profit AR=D MR

53. Abnormal Profits Abnormal profits are any level of profit that is greater than that required to ensure that a firm will continue to supply its existing good or service. (Amount or revenue greater than the total costs of production, including opportunity costs) MC AC Abnormal Profits AR=D MR

54. Profit-maximizing Level of Output Theprofit-maximizing level of output is the level of output where marginal revenue is equal to marginal cost.

55. Shut-down Price The shut-down price is the price where average revenue is equal to average variable cost. Below this price, the firm will shut down in the short run. The break-even price is the price where average revenue is equal to average total cost. Below this price, the firm will shut down in the long run. Break-even Price