IB Economics - Micro Review PDF

MS.
COLO
IB ECONOMICS II
IB ECONOMICS
TEXT
RESOURCES
▸ The IB Economist
▸ http://ibeconomist.com/
▸ IA Articles, AI Guides, Revision Notes

IB ECONOMICS
SCOPE & SEQUENCE

▸ Foundations of Economics
▸ Microeconomics
▸ Elasticities, Government Intervention, Market Failures, Costs, Market Structures
▸ Macroeconomics
▸ Economic activity, AD/AS, Unemployment & Inflation, distribution of income,

Demand-side & supply-side policies.
▸ International Economics
▸ International Trade, Exchange rates, balance of payments, Economic integration.
▸ Development Economics
▸ Economic Growth and Development. Balance between markets and intervention

IB ECONOMICS
EXTERNAL ASSESSMENT (4 HOURS) - 80%

PAPER 1 - 30%
▸ Paper 1 (1 hour and 30 minutes)
▸ An extended response paper (50 marks) 

Assessment objectives 1, 2, 3, 4 
Section A 
Syllabus content: section 1—microeconomics 
Students answer one question from a choice of two. (25 marks)
Section B
Syllabus content: section 2—macroeconomics 
IB ECONOMICS
PAPER 2 - 30%
▸ Paper 2 (1 hour and 30 minutes)
▸ A data response paper (40 marks) 

Assessment objectives 1, 2, 3, 4 
Section A 
Syllabus content: section 3— international economics
Section B
Syllabus content: section 4— development economics
IB ECONOMICS
PAPER 3 - 20%
▸ HL extension paper (50 marks)

Assessment objectives 1, 2 and 4
▸ Syllabus content, including HL extension material: sections

1 to 4—microeconomics, macroeconomics, international
economics, development economics
▸ Students answer two questions from a choice of three. (25

marks per question)
▸ Can use a calculator

IB ECONOMICS
WRITTEN PAPERS
▸ Students are given five minutes of reading time before they begin answering the papers.
▸ Command terms
▸ explain (AO2) , suggest (AO2), evaluate (AO3), describe (AO1)
▸ Use of diagrams
▸ expected, where appropriate, to include correctly labelled and clearly drawn

diagrams.
▸ Use of examples
▸ Examples should be used to highlight economic concepts, theories and relationships

in the real world.
▸ Use of economic terms
▸ ability to define the economic terms

IB ECONOMICS
INTERNAL ASSESSMENT - 20%
▸ Students produce a portfolio of three commentaries,

based on different sections of the syllabus and on
published extracts from the news media.
▸ Maximum 750 words x 3 (45 marks)
▸ First draft - teacher feedback
▸ Second/Final draft - cannot be retracted ability to define

the economic terms
IB ECONOMICS
INTERNAL ASSESSMENT - 20%
▸ Each article must be based on a different section of the

syllabus (microeconomics, macroeconomics, international
economics and development economics).
▸ The articles may be from a newspaper, a journal or the

internet, but must not be from television or radio
broadcasts. Lengthy articles are discouraged.
▸ A commentary must not be prepared collaboratively.
▸ Each commentary must not exceed 750 words.

INTRODUCTION
CHAPTER 1: THE FOUNDATIONS OF
ECONOMICS
. 1.1 Economics is a social science  
. 1.2 Scarcity
. 1.3 Choice and opportunity cost
1.4 The use of models in economics
1.5 Central themes in economics
1.6 Theory of knowledge and economics

CHAPTER 1: THE FOUNDATIONS OF ECONOMICS
HOW BIG OF AN ISSUE IS CLEAN DRINKING WATER ACCESS AROUND THE WORLD?
http://www.pbs.org/newshour/extra/daily_videos/%E2%80%8B%E2%80%8Bwater-atms-offer-relief-to-indias-poorest/
1.1 SCARCITY, CHOICE AND OPPORTUNITY COST
THE TERM ‘ECONOMICS’ IS DERIVED FROM THE ANCIENT

GREEK EXPRESSION OÍKOV VE′ΜΕIV (OIKON NEMEIN),
WHICH ORIGINALLY MEANT ‘ONE WHO MANAGES AND
ADMINISTERS ALL MATTERS RELATING TO A HOUSEHOLD’.
OVER TIME, THIS EXPRESSION EVOLVED TO MEAN ‘ONE
WHO IS PRUDENT IN THE USE OF RESOURCES’.
THE FUNDAMENTAL PROBLEM OF ECONOMICS: SCARCITY AND CHOICE
▸ Scarcity is the situation in which available resources, or factors of

production, are finite, whereas wants are infinite. There are not
enough resources to produce everything that human beings
need and want.
▸ Economics is the study of choices leading to the best possible

use of scarce resources in order to best satisfy unlimited human
needs and wants.
▸ Opportunity Cost is defined as the next best alternative forgone

when a decision is made (what you give up to get something
else). Opportunity cost is never expressed in monetary terms.
THE FUNDAMENTAL PROBLEM OF ECONOMICS: SCARCITY AND CHOICE
▸ Opportunity cost:
▸ Economic Good - If a good or service has an opportunity

cost then it must be relatively scarce, so it will have a
price.
▸ Free Goods - There are a few things, such as air and salt
water, that are not limited in supply and so do not have
an opportunity cost when they are consumed. they are
not relatively scarce and so will not have a price.
THREE BASIC ECONOMIC QUESTIONS: RESOURCE ALLOCATION AND OUTPUT/INCOME DISTRIBUTION
▸ What to produce. All economies must choose what particular goods

and services and what quantities of these they wish to produce. (RA)
▸ How to produce. All economies must make choices on how to use

their resources in order to produce goods and services. Goods and
services can be produced by use of different combinations 
of factors of production by using different skill levels of labour, and
by using different technologies. (RA)
▸ For whom to produce. All economies must make choices about

how the goods and services produced are to be distributed among
the population. (O/I)
POSITIVE AND NORMATIVE ECONOMICS

▸ A positive statement is one that may be proven to be
right or wrong by looking at the facts.
▸ Ex:“The unemployment rate for China for 2009 was

4.2%”.
▸ A normative statement is a matter of opinion and cannot

be conclusively proven to be right or wrong.
▸ Ex: “The Chinese government put too little emphasis on

curing rural unemployment in 2009”
RATIONING SYSTEMS: PLANNED VS FREE MARKET

▸ In theory there are two main systems.
▸ Free Market System/private/capitalism
▸ All production is in private hands and demand and supply

are left free to set wages and prices in the economy.
▸ Planned Economy/Command/ Centrally Planned
▸ decisions are made by the government
▸ In reality, all economies are mixed economies, which are a

combination of the free market and planning.
There are four resources that allow an economy to produce its output.
GUESS WHO?
KARL MARX: THE REVOLUTIONARY COMMUNIST

REVIEW
▸ Key Economic Concepts For This Module:
• Economic resources are limited/scarce which implies that the

goods/services they produce are limited.
• Scarcity requires that choices be made.
• Choices imply that things are given up.
• There is an opportunity cost for all choices.
• Many decisions are based upon a comparison of the marginal

benefits received and the marginal costs incurred. Economists
refer to this approach as marginal analysis.
THE PRODUCTION POSSIBILITY CURVE

▸ PPC shows maximum combination of goods and services that can
be produced by an economy in any given time.
▸ PPC helps explain three important aspects of the real economy:
• efficiency;
• opportunity costs;
• and economic growth
▸ It also helps us show “tradeoffs” graphically
▸ All models have simplifying assumptions:
▸ Economy produces only two types of products.
▸ Available supply of resources is fixed in quantity and quality
at this point in time.
▸ Technology is constant during analysis.
ECONOMIC GROWTH- SHIFTS IN PPC

▸ Economic growth
▸Expansion of the economy’s

production possibilities: the
economy can produce more of
everything.
Sources of Economic Growth:
▸ Availability of resources (land, ‣ V: actual output

labor, capital, entrepreneurship) ‣ movement from V to W = growth
‣ Z1: unattainable
▸ Technology ‣ Z to Z1 - potential growth
‣ If this shift is achieved, there is an
increase in potential output but this
does not necessarily mean that there
is an increase in actual output.
ECONOMIC GROWTH – SHIFTS IN PPC

▸ Specific Technological change:
▸ Guns and Butter
▸ "We can do without butter, but, despite all our love of
peace, not without arms. One cannot shoot with
butter, but with guns."
ECONOMIC GROWTH
If there is an increase in the level of real national income
between one year and another, then we could say that the
economy has grown. Δ in GDP aka GNI
‣ National income is the value of all the goods and services

produced in an economy in a given time period, normally one
year.
‣ Because it is purely a money measurement and an average,

economic growth does not tell us very much about the
actual welfare of the people in a country.
ECONOMICS DEVELOPMENT
▸ Unlike economic growth, economic development is a measure of
welfare, a measure of well-being.
▸ Looks at:
▸ Human Development Index (HDI), one of the most commonly used

development measures, weighs up real national income per head
▸ the adult literacy rate
▸ the average years of schooling
▸ life expectancy in ranking the countries of the world in terms of

development
THEORY OF KNOWLEDGE
NOW, YOU SHOULD BE ABLE TO:

- define, and give examples of, a social science
- define, give examples of, and distinguish between, goods and services; needs and
wants; economic goods and free goods  
- define opportunity cost and understand its link to relative scarcity and choice  
- explain the basic economic questions: “What to produce?”, “How to produce?”, and
“How much to produce?”  
- describe the factors of production  
- explain, illustrate, and analyse production possibility curves  
- distinguish between microeconomics and macroeconomics; positive economics
and normative economics; private sector and public sector  
- explain that economists are model builders and that they employ the assumption of
“ceteris paribus” 
- explain and illustrate a basic model of an economy  
- distinguish between different rationing systems  
- compare and contrast the advantages and disadvantages of planned and free
market economies  
- distinguish between economic growth and economic development  
- define sustainable development.
GUESS WHO?
ADAM SMITH: THE FATHER OF MODERN ECONOMICS

COMPETITIVE
MARKETS
CHAPTER 2: THE NATURE OF MARKETS
. 2.1 The nature of market
2.2 Demand
2.3 Determinants of Demand
2.4 Linear Demand Functions (HL)
2.5 Supply
2.6 Determinants of Supply
2.7 Linear supply functions (HL)
ARTICLE
NEXT WEEK'S SOLAR ECLIPSE WILL COST US ECONOMY $700 MILLION

▸ $700 million...
▸ That’s the total projected cost to the American economy in lost

productivity as workers head outside to watch next week’s
solar eclipse, according to Chicago executive-outplacement
firm Challenger, Gray and Christmas
▸ “American employers will see at least $694 million in missing

output for the roughly 20 minutes that outplacement firm
Challenger, Gray & Christmas estimates workers will take out of
their workday on Monday to stretch their legs, head outside the
office and gaze at the nearly two-and-a-half minute eclipse.”
https://www.youtube.com/watch?v=Yt7MI8c9DoE
2: COMPETITIVE MARKETS: DEMAND AND SUPPLY
2.1: THE NATURE OF MARKETS

▸ What is a “Market”
▸ A market is any place, physical or virtual, where the buyer and

sellers of goods and services meet.
▸ Direct, Indirect (online)
▸ Local
▸ National - limited by laws and custom policies of national

government.
▸ International - can have local producers with international

buyers. eg. steel, oil, gas, corn, wheat or cotton.
▸ Product Market & Resource Market

THE GREAT VIRTUE OF A FREE MARKET SYSTEM IS THAT IT

DOES NOT CARE WHAT COLOR PEOPLE ARE; IT DOES NOT
CARE WHAT THEIR RELIGION IS; IT ONLY CARES WHETHER
THEY CAN PRODUCE SOMETHING YOU WANT TO BUY. IT IS
THE MOST EFFECTIVE SYSTEM WE HAVE DISCOVERED TO
ENABLE PEOPLE WHO HATE ONE ANOTHER TO DEAL WITH
ONE ANOTHER AND HELP ONE ANOTHER.
Milton Friedman
MILTON FRIEDMAN QUOTE
▸ Asses the validity of freedman’s statement.
▸ Cite examples where Friedman’s assertion could be true,

and other where it is not.
MARKET STRUCTURES
▸ A firm: is an individual or organization that combines the
factors of production to create and sell goods and services on
the market.
▸ An industry: is made up of all the firms engaged in the same

market activity. eg. Toshiba, Hewlett-Packard, Dell.
▸ Perfect competition
▸ Monopolistic Competition
▸ Oligopoly
▸ Monopoly
MARKET STRUCTURES
▸ There are four criteria by which an industry is categorized

as a particular market structure.
▸ The number of firms in the industry
▸ A firms level of market power
▸ The degree of product differentiation between goods

offered by different firms.
▸ The ease of exit and entry

MARKET STRUCTURES AND MARKET POWER

▸ Competition is inversely related to market power.
YOU CAN ALWAYS GET SYMPATHY BY USING THE WORD

“SMALL”. WITH LITTLE INDUSTRIES, YOU FEEL AS YOU DO
ABOUT A LITTLE PUPPY.
Frances Perkins , US
Secretary of Labor
1933-45
2.2: DEMAND
▸ Demand is defined as the quantity of a good or service
that a consumer or group of consumers are ___________
and _________ to purchase at a given price/time.
THE LAW OF DEMAND

▸ As the price of a good increases, the quantity of the good
decreases.
▸ ceteris paribus
▸ Three factors that underline the law of Demand
▸ The income effect
▸ The substitution effect
▸ The law of diminishing marginal utility
▸ NOT a decline in total satisfaction. Additional units will

bring less satisfaction.
INDIVIDUAL DEMAND AND MARKET DEMAND

NON-PRICE DETERMINANTS OF DEMAND
▸ The most important determinants of demand include:
▸ MERIT
▸ Lesser but still noteworthy determinants include:
▸ demographical change
▸ government policy
▸ seasonal change
PHYSICS AND
PHYSICAL
MEASUREMENT
CHAPTER 3
. 3.1 Equilibrium
3.2 Market equilibrium and linear equations (HL)
3.3 Role of price in resource allocation
3.4 Market efficiency
3: PHYSICS AND PHYSICAL MEASUREMENT
FAKE NEWS
https://www.youtube.com/watch?time_continue=2&v=OeGxFUNPD_k
1. Essential question: What are the effects of extreme weather
events like Hurricane Harvey on the affected area and the rest of
the country?
2. What are government officials doing to help people in Texas
and Louisiana? Why do you think multiple government agencies
like FEMA and the National Guard are called in to help?
3. What has your reaction been to the news coverage of
Hurricane Harvey? From where have you gotten most of your
information?
4. What is media literacy? Why is media literacy an important
tool to have when viewing media coverage of events like
Hurricane Harvey? What questions should you ask about the
reporting, including images? Is there information you’d like
media outlets to share more? Any media you’d like to see
less?
5. What should you do if you come across a post that is ‘fake news,’
in this case, purposely false information about the storm?
3.1 EQUILIBRIUM
▸ Market equilibrium occurs at the price where the quantity
demanded and quantity supplied are equal. Also called
M_ _ _ _ _- c _ _ _ _ _ _ _ p_ _ _ _
MARKET DISEQUILIBRIUM
CHANGES IN SUPPLY AND DEMAND
▸ Market shocks: sudden increase ins supply or demand.

CHANGES IN SUPPLY AND DEMAND
▸ Market shocks: sudden increase ins supply or demand.

Price gouging: referring to when a seller spikes the prices of goods, services or
commodities to a level much higher than is considered reasonable or fair, and is considered
exploitative, potentially to an unethical extent
DEMAND CURVE
▸ A typical demand function looks like this:
▸ Qd = a - bP
▸ Qd represents the quantity demanded
▸ a represents the quantity demanded if the price were 0
▸ b represents the change in quantity demanded

resulting from change in price - it is negative.
▸ P represents the price of a single item

DEMAND CURVE - CHANGE IN A

DEMAND CURVE - CHANGE IN B

SUPPLY CURVE
▸ A typical supply function looks like this:
▸ Qs = c + dP
▸ Qs represents the quantity supplied
▸ c represents the quantity that would be produced if the

price were 0
▸ d represents the rate at which a change in price will cause

the quantity supplied to increase - d is always positive
▸ P represents the price of a single item

SUPPLY CURVE - CHANGE IN A

DEMAND CURVE - CHANGE IN D

3.2 MARKET EQUILIBRIUM AND LINEAR EQUATIONS (HL)

3.3: ROLE OF PRICE IN RESOURCE ALLOCATION

Resources allocation is the manner by which society manages and rations its
resources.
The signaling function of the price system allows this decentralized system of actors
to make decisions for themselves and at the same time tell the world whats most
important to them.
The rise in prices has told consumers to ration their consumption and produce to make more.
3.3: ROLE OF PRICE IN RESOURCE ALLOCATION

Here, an increase in the supply of this resources sends critical information to the
producer, who buys the capital equipment as an input for the producers
A rational reaction to this information would be for producer to look fro ways to hire more capital
equipment (which now costs less) and less labor.
Adam Smith argued
that market forces
guide us to produce
and consume to get
the best outcomes.
Buyers and sellers are

rationing resources,
based on prices, to get
the most from what
they have. In the
process, consumer
wants are satisfied
with the least possible
cost to society.
3: PHYSICS AND PHYSICAL MEASUREMENT TEXT
3.4 MARKET EFFICIENCY

▸ Consumer surplus is the
benefit consumers receive
when they pay a price below
what they are willing to pay.
▸ Producer surplus the benefit

producers receive when they
receive a price above the one
at which they were willing to
supply the good.
ALLOCATIVE EFFICIENCY AND COMPETITIVE MARKETS
▸ Allocative efficiency is
achieved is society
produces enough of a
good so that the marginal
benefit is equal to the
marginal cost.
ELASTICITIES
CHAPTER 4
. 4.1 Defining elasticity
4.2 Price elasticity of demand (PED)
4.3 Applications of price elasticity of demand
4.4 Cross-price elasticity of demand (XED)
4.5 Income elasticity of demand (YED)
4.6 Price elasticity of supply (PES)
4.ELASTICITIES
4.1 DEFINING ELASTICITIES

▸ Measure of the responsiveness of consumers/producers to a
change in price.
▸ Implications for business
▸ Losing/Gaining customers
▸ Implication for government
▸ Increasing/Decreasing revenue
▸ Elasticities must be considered when placing taxes.

Revenue will depend of how sensitive they are.
4.ELASTICITIES
ELASTICITY OF DEMAND (3)
▸ price elasticity of demand [PED]
▸ PEd = %ΔQd / %ΔP
▸ cross elasticity of demand [XED]  
▸ income elasticity of demand [YED]  

III.CALCULATING ELASTICITY
A. Elasticity is the % change in the dependent variable
divided by the % change in the independent variable
elasticity is %∆dep / %∆ind
B. Price elasticity of demand is the percentage change

in quantity demanded divided by the percentage
change in the price.
Ed = %ΔQd / %ΔP
note: we drop the negative sign for Ed only.
Practice Elasticity of Demand #1

75
IV. N-OOO & THE MIDPOINT FORMULA:
N-OOO X100
%Δ =
“New - Old Over Old” x100
A. There are problems with calculating percentage
changes (if the starting and ending prices are
reversed, elasticity is different)
B. The solution: Use the Midpoint formula!
1. %ΔQd = 100*(New Quantity – Old Quantity)/Average Quantity
2. %ΔP = 100*(New Price – Old Price)/Average Price
3. Ed = %ΔQd/ΔP
76
C. Midpoint Formula
Q2-Q1
(Q2+Q1)/2
=E
P2-P1
(P2+P1)/2
If E is > than 1 = Elastic

If E is Equal to 1 = Unit Elastic
If E is < than 1 = Inelastic
77
Elasticity Visualized
D
D
D D
D D
Perfectly Relatively Unit Relatively Perfectly

Inelastic Inelastic Elastic Elastic Elastic
Elasticity Elasticity Elasticity Elasticity Elasticity

Coefficient Coefficient Coefficient Coefficient Coefficient
0 <1 1 >1 ∞
78
REMEMBER
➤ horizontal = Elastic (middle line in a capital E)
➤ Vertical = Inelastic (I in Inelastic)
79
OTHER ELASTICITIES
➤ Cross- Price Elasticity: measures the responsiveness of
demand for one good to changes in the price of another good.
➤ Income Elasticity of Demand: a measure of the

responsiveness of demand to changes in income.
➤ Income Elasticity of supply: measures the responsiveness of

the quantity supplied to changes in price.
CROSS PRICE ELASTICITY OF DEMAND
➤ Shows:
➤ How sensitive a good is to a change in price of another good
➤ if the goods are Substitutes or Complements.
% change in quantity of product “a”

% change in price of product “b”
P increases 20% Q increases 40% Q decreases 40%
• if the coefficient is positive (shows direct relationship) = SUBSTITUTES

• if the coefficient is negative ( who's inverse relationship) = COMPLEMENTS
INCOME ELASTICITY OF DEMAND
➤ Shows:
➤ how sensitive a product is to a change in INCOME
➤ If the goods are NORMAL or INFERIOR
% change in quantity
% change in income
• If coeﬃcient is positive (shows direct relationship) then the good is

NORMAL
• If coeﬃcient is negative (shows inverse relationship) then the good
is INFERIOR
Ex: If income falls 10% and quantity falls 20%…

PRICE ELASTICITY OF SUPPLY
HOW RESPONSIVE(sensitive) QUANTITY SUPPLIED is to a Δ IN PRICE
• INelastic = Insensitive to a change in price (Steep curve)

• Most goods have INelastic supply in the short-run
• Elastic = Sensitive to a change in price (Flat curve)

• Most goods have elastic supply in the long-run
• Perfectly Inelastic Supply= Q doesn’t change Set quantity supplied (Vertical

line)
GOVERNMENT
INTERVENTIONS
CHAPTER 5
. 5.1 Indirect Taxes
5.2 Tax Incidence (HL)
5.3 Subsidies
5.4 Price Controls: Maximum price controls

5: GOVERNMENT INTERVENTIONS
INTERVENTIONS INTO FREE MARKETS

▸ Taxes
▸ Indirect tax - tac collected from the consumer indirectly
▸ specific tax: the amount of the tax is an absolute value, such as $2 per
pack of cigarettes.
▸ ad valorem tax: the amount tax is a percentage of the sale, a value added
tax (VAT) of 19% on the sales of most goods is an ad valorem tax.
“According to value”
▸ Exice tax - taxing one type of good, can be specific or ad valorem.
▸ Subsidies
▸ Price controls
5.1 INDIRECT TAXES
▸ Specific Tax
▸ Specific amount to be paid

for every unit.
▸ Typically flat rate tax
▸ Parallel shift
▸ Shifts left by exactly the

amount of the tax.
5.1 INDIRECT TAXES
▸ Ad valorem tax
▸ base the tax on a percentage

of purchase price.
▸ The higher the price, the

higher the tax.
▸ Shifts left by the amount of

the tax, BUT the distance b/t s
and s1 grows as the price
increases.
TAX INCIDENCE: PED SIMILAR TO PES

TAX INCIDENCE: PED < PES
▸ Supply is more
elastic than
demand.
TAX INCIDENCE: PED > PES
▸ Supply is more
elastic than
demand.
TAX INCIDENCE AND LINEAR FUNCTIONS


NEW SUPPLY FOR $1
TAX:
QS=600 +300(P-1)
= 600 + 300P-300
= 300+300P
▸ Since demand for

cigarettes are relative
inelastic, larger burden
on the tax can be passed
on to buyers rather than
being paid by producers.
▸ consumer pay a+b >

producers pay e + f
MARKET FAILURE
CHAPTER 6
. 5.1 Indirect Taxes
5.2 Tax Incidence (HL)
5.3 Subsidies

6.1 THE MEANING OF MARKET FAILURES AND EXTERNALITIES

▸ Market Failure is any situation where the allocation of resources by
a free market is not efficient.
▸ Negative externalities
▸ Positive externalities
▸ lack of public goods
▸ common access to resources and threat to sustainability
▸ asymmetric information
▸ abuse of monopoly power

6.1 THE MEANING OF MARKET FAILURES AND EXTERNALITIES
“Pareto optimal” - market

situation where no one can be
made better off without making
someone else worse off.
EXTERNALITIES
aka spill overs
NEGATIVE EXTERNALITIES
NEGATIVE EXTERNALITIES - POTENTIAL SOLUTIONS
▸ Legislation and
regulation
▸ Tradable permits
▸ Taxes:
▸ Supply shift to the left
▸ Price raises to Ptax
▸ Amount consumed
decreases to Tax
NEGATIVE CONSUMPTION EXTERNALITIES
▸ smoking
▸ alcohol
consumption
▸ gambling
▸ automobile
use
NEGATIVE CONSUMPTION EXTERNALITIES
▸ Potential solutions:
▸ Legislation and regulation - eg: prostitution, gambling,

alcohol use, minors smoking, phones while driving.
▸ Taxation - attempt to ‘internalize the externality’
▸ depends on accurate assessment of external cost

sand equally accurate application of the tax.
Taxing Negative Consumption Externality
MPC shifts back to Q*,

decreasing the amount
sold and raising market
price to Ptax
*Desirable but highly unlikely

ADVERTISING AND PERSUASION

Publics Trans vs Driving on own
▸ advertising to discourage
future use by changing the
value that consumers place
on a good (find substitutes
or reduce consumptions).
▸ officials must weight the

opportunity cost of such
expensive campaigns
against the social good
that can be achieved.
EXTERNALITY CHALLENGE: FOOD OR FUEL
▸ The American Lung Association says that in

1998, 30,000 people in the US died from
car emissions.
6.7 ASYMMETRIC INFORMATION AND ABUSE OF MONOPOLY POWER (HL)

ASYMMETRIC INFORMATION
▸ More likely for consumers to make ‘mistakes’ regarding

purchases.
▸ Moral Hazard: individuals neglect to take full

responsibility of their actions. Unethical and criminal
behaviors.
▸ Firms dumping waste into rivers
▸ 2008-2009: negligent actions of banks, regulators,

investment bankers and borrowing public.
ASYMMETRIC INFORMATION - SOLUTIONS?
▸ Legislation to punish ‘insider’ information use
▸ difficult to enforce, proof of insider knowledge
▸ Active dissemination of information
▸ In July 2010, finland made broadband access a human

right.
MONOPOLY POWER
▸ Firm is able to influence or increase the price they receive

to a price above the competitive - market equilibrium
POTENTIAL SOLUTIONS
▸ Legislations
▸ ‘anti-trust’ legislations prevents the market power from becoming

concentrated in relatively few firms. Prevents percentage of markets
controlled, mergers and can break up companies and deem them too
dominant.
▸ Regulations
▸ regulatory agencies
▸ Natural Monopolies
▸ granted in some industries because they keep cost lower than a

competitive market would.
COSTS, REVENUES
AND PROFIT (HL)
CHAPTER 7
. 7.1 Cost of production: economics costs
7.2 Production in the short run: law of diminishing marginal

returns
7.3 From short-run productivity to long-run costs of production
7.4 Revenues: total, average and marginal revenue
7.5 The short-run profit-maximization rule

CHAPTER 7: COSTS, REVENUES AND PROFITS (HL)
7.1 COSTS OF PRODUCTION: ECONOMIC COSTS

▸ Cutting costs/corners:
* estimate of monetary damages is in the range of $40 billion

7.1 COSTS OF PRODUCTION: ECONOMIC COSTS

▸ why?
▸ firms have two distinct objectives: reducing costs and

increasing revenues until the profit (difference between
the two) is maximized.
▸ Milton friedman (Nobel Prize-winning Economist)

THE 10 BIGGEST 'SOCIALLY IRRESPONSIBLE' INDUSTRIES
▸ 1. Oil: Energy Select Sector SPDR ETF (XLE)
▸ 2. Power Plants: Utilities Select Sector SPDR (XLU)
▸ 3. Steel: Market Vectors Steel (SLX)
▸ 4. Mining: SPDR S&P Metals & Mining ETF (XME)
▸ 5. Chemicals: Materials Select Sector SPDR ETF (XLB)
▸ 6. Fertilizers: Market Vectors Agribusiness ETF (MOO)
▸ 7. Coal: Market Vectors Coal (KOL)
▸ 9. Clothing and Textiles: SPDR S&P Retail ETF (XRT)
▸ 10. Meat and Poultry: DJ-UBS Livestock Total Return Sub-Index ETN (COW)
▸ Define : Costs, Revenue, Profit, short-run vs long run.
▸ Costs are things that must be given up in order to have

something else. Costs can be explicit or implicit. Explicit costs
are monetary payments that firms make to the owners of
Land, Labour, and Capital in the resource market. Implicit
costs include the opportunity costs of entrepreneurs who
decide to allocate their time and energy to one thing over
another.
▸ Revenue is the income earner from a firm’s sale of its good

and service to consumers in the product market. (P*Q)
▸ Profit is the difference between its total revenue earned in

product market and its total cost in the resource market. (TR -
TC
EXPLICIT COSTS
7.2 PRODUCTION IN THE SHORT RUN: LAW OF DIMINISHING MARGINAL RETURN

▸ Imagine a doughnut shop with one oven and two fryers (c).
▸ How can they increase production in the short run?

-Increasing marginal returns
- decreasing rate
STORY TIME - marginal product of labor decreases
- diminishing marginal return
- productivity
RELATIONSHIP
BETWEEN
MARGINAL &
AVERAGE
PRODUCT
When MP is greater than AP,

AP increases.
When MP is less than AP,

AP falls.
7.3 FROM SHORT-RUN PRODUCTIVITY TO LONG RUN COSTS OF PRODUCTION

TOTAL COSTS: FIXED AND VARIABLE
- When output is zero, TC=TFC
- when output is zero, TVC = 0 (no labor)
- fixed costs must be covered
- As employment begins, TVC will increase
- TFC remains at $100 in the short run
- TC increases at the same rate as TVC
- At each level of output, the firm’s TC equals

the sum of its TFC and its TVC.
PER UNIT COSTS: AVERAGE AND MARGINAL COSTS

ECONOMIES OF SCALE AND DISECONOMIES OF SCALE

COMMUNICATION
MINIMUM EFFICIENT
SCALE (MES): INEFFICIENCIES
THE SIZE AT WHICH THE
OFFICE POLITICS
FIRM ACHIEVES ITS PERSONAL VS FIRM
LOWEST POSSIBLE PER
UNIT COST OF
INCREASE REGULATIONS
PRODUCTION
REVENUES: TOTAL, AVERAGE AND MARGINAL REVENUE

Perfectly competitive Market
PERFECTLY
COMPETITIVE
FIRM
IMPERFECTLY
COMPETITIVE
FIRM
A single-price monopolistically competitive firm must lower the price of all
its output in order to sell additional units.
- MR declines faster than AR and price
- only for the 1st unit will price AR and MR be the same
- TR is Maximized when MR = 0
QUANTITY
EFFECT : P↑,
TR ↓
TOTAL REVENUE TEST REVISITED
PRICE
EFFECT : P↑,
TR↑
▸ An imperfect competition will
never wish to produce at a point
beyond the unit elastic point
(PED=1).
▸ increased output means

increased TC, but TR decreases.
▸ Never produce in the enelastic

range.
▸ Increase in TR = fall in TR =
decline in profit
CHAPTER 7: COSTS, REVENUES AND PROFITS (HL)TEXT
7.5 THE SHORT RUN PROFIT MAXIMIZATION RULE.

PERFECT
COMPETITION (HL)
CHAPTER 8
. 8.1 Assumption of the model
8.2 cost and revenue curves in a PC market
8.3 Profit Maximization in the short run
8.4 Profit maximization the long run
8.5 The shut-down rule

MONOPOLY (HL)
CHAPTER 9
. 9.1 Assumption of the model
9.2 Barriers to entry
9.3 Demand and Revenue curves under monopoly
9.4 Profit maximization for the monopolist
9.5 Revenue maximization
9.6 Natural Monopoly
9.7 Disadvantages and advantages of monopoly
9.8 Monopolies and efficiency
9.9 Policies to regulate monopoly power
9.10 Price Discrimination
CHAPTER 9: MONOPOLY
9.1 CHARACTERISTICS
▸ Single seller
▸ No close substitutes
▸ Price-maker
▸ Barriers to entry
CHAPTER 9: MONOPOLY
9.2 BARRIERS TO ENTRY
▸ Characteristics of a market that make if difficult for firms to

join the industry.
▸ Economies of scale: Achieved a size that has lowered

their long-run average cost of production.
▸ Legal barriers: Patents, copyrights , Gov’t licenses,

Tariffs, quotas and other trade barriers.
▸ Ownership of essential resources
▸ Aggressive tactics: ex. buy out firm and price wars.

CHAPTER 9: MONOPOLY
9.3 DEMAND AND REVENUE CURVES UNDER MONOPOLY

MONOPOLIST
PRODUCE IN THE
ELASTIC PORTION
OF THE DEMAND
CURVE, WHERE
MARGINAL
REVENUE IS
POSITIVE.
CHAPTER 9: MONOPOLY
9.4 SR PROFIT /LOSS FOR THE MONOPOLIST

▸ Profit Maximization Rule:
MC=MR (aka loss
minimization) P > ATC : PROFIT
P< ATC : LOSS
P = ATC : NORMAL PROFIT (BE)
▸ In the SR they can experience
profits, losses, normal profits.
- Loss occurs when (A) cost rise to a point at which they are no
longer covered by the amount of demand and revenue (B)
demand shrinks, revenue is below costs.
- If a monopolist were making losses in the short run, then it

would have the option of closing down temporarily (if it was
not covering its variable costs) or continuing production for
the time being.
CHAPTER 9: MONOPOLY
9.5 REVENUE MAXIMIZATION

▸ Profit Maximization
▸ MC = MR
▸ Charges more, Produces

less
▸ Profit: a+ c
▸ Revenue Maximization
▸ MR = 0
▸ Profit: b + c
CHAPTER 9: MONOPOLY
9.6 NATURAL MONOPOLY

▸ When a single large firm can produce more cheaply than
two or more smaller firms, it is called a natural monopoly.
▸ Power, sewage, and water production. Huge infrastructure

costs. (FC)
9.7 DISADVANTAGES AND ADVANTAGES OF MONOPOLY
▸ Disadvantages:
▸ Higher prices and lower quantity
produced.
▸ Producer welfare gains at the
expense of consumers
▸ Incentive Problems
▸ lack of innovation, Incentive to
avoid competition
CHAPTER 9: MONOPOLY
DISADVANTAGES AND ADVANTAGES OF MONOPOLY
▸ Advantages
▸ Economies of scale
▸ Higher profits enable greater research and development

CHAPTER 9: MONOPOLY
9.8 MONOPOLIES AND EFFICIENCY

▸ Profit Maximizing choices of a monopoly lead to allocative
inefficiency (welfare loss) and productive inefficiency.
PRODUCTIVE EFFICIENT:
Q1: P = MIN OF ATC
ALLOCATIVE EFFICIENT :
Q2 : P =MC
CHAPTER 9: MONOPOLY
9.9 POLICIES TO REGULATE MONOPOLY POWER
▸ Natural monopoly
▸ Exclusive production rights to single firm who can yield

lower costs.
▸ Can lead to extra welfare costs so gov’t will sometimes

subsidize them.
▸ Anti-trust legislation
▸ anti- competitive behavior

CHAPTER 9: MONOPOLY
9.10 PRICE DISCRIMINATION
▸ Necessary conditions for price discrimination
▸ Price-setting ability
▸ Market power, Downward sloping demand
▸ Varied consumers elasticities
▸ Ability to separate consumers
▸ Time, Income, taxes, Gender, Location, Consumer

Type
CHAPTER 9: MONOPOLY
TYPES OF PRICE DISCRIMINATION
▸ First Degree: by customer
▸ Second degree: by quantity
▸ Third degree: by consumer groups

CHAPTER 9: MONOPOLY
FIRST DEGREE: BY CONSUMER

▸ PERFECT PRICE DISCRIMINATION
▸ Firms are able to charge exactly
the maximum price.
▸ Precise elasticity of demand.
▸ Separate consumer individually
▸ EX: perfect car salesman
▸ Moves to a more socially optimal
level.
*rare in the real world

CHAPTER 9: MONOPOLY
SECOND DEGREE: BY QUANTITY

▸ Acknowledgment that consumers
may choose to buy additional
amount of a good if the price
decreases.
▸ buy two, get one free (lower

average price but preserves the
high price of the 3 units)
▸ Frequent flyer programs that

award free or reduced rates
▸ season tickets
The shaded areas a,b,c and d
▸ bulk buying represent increases in total
revenue.
▸ reward programmes
THIRD DEGREE: BY CONSUMER GROUPS
▸ Acknowledge and takes advantage of the fact that
different consumer groups have different elasticities.
▸ Bars “ happy hours”
▸ women charged more for dry-cleaning
▸ airlines charging higher prices when the date is closer
▸ restaurants and cinemas charging less to children
elderly, and students.
-Allocative efficient
will not be reacher.
- Profits and total

revenues are likely
to increase.
MONOPOLISTIC COMPETITION
AND OLIGOPOLY (HL)
CHAPTER 10
. 10.1 Monopolistic Competition: assumption of model
10.2 Profit maximization
10.3 Profit Maximization in monopolistic competition
10.4 Price and non-price competition
10.5 Monopolistic competition and efficiency
10.6 Monopolistic competition vs perfect competition and
monopoly
10.7 Oligopoly
10.8 Game theory
10.9 Collusive Oligopoly
10.10 Tacit or informal collusion
CHAPTER 10: MONOPOLISTIC COMPETITION AND OLIGOPOLY ( HL ONLY)
10.1 MONOPOLISTIC COMPETITION: ASSUMPTION OF THE MODEL
▸ Large number of relative small firms.
▸ Relative free entry and exit
▸ Production differentiation
▸ appearance, service, design, quality, expertise/skill,

location, brand reputation/image
10.2 DEMAND AND REVENUE CURVES FOR MONOPOLISTIC COMPETITION

10.3 PROFIT MAXIMIZATION IN MONOPOLISTIC COMPETITION

Short-run profits
Adjustment to long run profits
Short-run losses
CHAPTER 10: MONOPOLISTIC COMPETITION AND OLIGOPOLY ( HL ONLY) TEXT
10.4 PRICE AND NON-PRICE COMPETITION

10.5 MONOPOLISTIC COMPETITION AND EFFICIENCY

▸ Allocative efficient
▸ P (AR) = MC
▸ Productive efficient
▸ P = minimum ATC
▸ In order to be efficient it
would have to produce a
higher quantity - it will not
do so because it produces
amount that maximizes
profits.
10.6 MONOPOLISTIC COMPETITION VS PERFECT COMPETITION
▸ Long run: both industries achieve only normal profits. easy

entry and exit.
▸ Perfect competition is more efficient.
▸ choice and variety are greater among monopolistic

competition due to product differentiation.
10.6 MONOPOLISTIC COMPETITION VS MONOPOLY
▸ Monopolist can earn long- run profits because they have

barriers to entry.
▸ Neither industry is efficient.
▸ Monopolist face no real competition.
▸ Cost-saving of economies of scale are far more likely under

monopoly.
▸ Monopoly will have greater capacity to innovate through

research and development investment.

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▸ IA Articles, AI Guides, Revision Notes

SCOPE & SEQUENCE

▸ Elasticities, Government Intervention, Market Failures, Costs, Market Structures

▸ Economic activity, AD/AS, Unemployment & Inflation, distribution of income,

▸ International Trade, Exchange rates, balance of payments, Economic integration.

▸ Economic Growth and Development. Balance between markets and intervention

EXTERNAL ASSESSMENT (4 HOURS) - 80%

▸ Paper 1 (1 hour and 30 minutes)

▸ An extended response paper (50 marks)

▸ A data response paper (40 marks)

▸ HL extension paper (50 marks)

▸ Syllabus content, including HL extension material: sections

▸ Students answer two questions from a choice of three. (25

▸ Can use a calculator

▸ explain (AO2) , suggest (AO2), evaluate (AO3), describe (AO1)

▸ expected, where appropriate, to include correctly labelled and clearly drawn

▸ Examples should be used to highlight economic concepts, theories and relationships

▸ Use of economic terms

▸ ability to define the economic terms

INTERNAL ASSESSMENT - 20%

▸ Students produce a portfolio of three commentaries,

▸ Maximum 750 words x 3 (45 marks)

▸ First draft - teacher feedback

▸ Second/Final draft - cannot be retracted ability to define

INTERNAL ASSESSMENT - 20%

▸ Each article must be based on a different section of the

▸ The articles may be from a newspaper, a journal or the

▸ A commentary must not be prepared collaboratively.

▸ Each commentary must not exceed 750 words.

. 1.3 Choice and opportunity cost

1.4 The use of models in economics

1.5 Central themes in economics

1.6 Theory of knowledge and economics

THE TERM ‘ECONOMICS’ IS DERIVED FROM THE ANCIENT

THE FUNDAMENTAL PROBLEM OF ECONOMICS: SCARCITY AND CHOICE

▸ Scarcity is the situation in which available resources, or factors of

▸ Economics is the study of choices leading to the best possible

▸ Opportunity Cost is defined as the next best alternative forgone

THE FUNDAMENTAL PROBLEM OF ECONOMICS: SCARCITY AND CHOICE

▸ Economic Good - If a good or service has an opportunity

THREE BASIC ECONOMIC QUESTIONS: RESOURCE ALLOCATION AND OUTPUT/INCOME DISTRIBUTION

▸ What to produce. All economies must choose what particular goods

▸ How to produce. All economies must make choices on how to use

▸ For whom to produce. All economies must make choices about

POSITIVE AND NORMATIVE ECONOMICS

▸ Ex:“The unemployment rate for China for 2009 was

▸ A normative statement is a matter of opinion and cannot

▸ Ex: “The Chinese government put too little emphasis on

RATIONING SYSTEMS: PLANNED VS FREE MARKET

▸ Free Market System/private/capitalism

▸ All production is in private hands and demand and supply

▸ Planned Economy/Command/ Centrally Planned

▸ decisions are made by the government

▸ In reality, all economies are mixed economies, which are a

KARL MARX: THE REVOLUTIONARY COMMUNIST

• Economic resources are limited/scarce which implies that the

• Scarcity requires that choices be made.

• Choices imply that things are given up.

• There is an opportunity cost for all choices.

• Many decisions are based upon a comparison of the marginal

THE PRODUCTION POSSIBILITY CURVE

ECONOMIC GROWTH- SHIFTS IN PPC

▸ An extended response paper (50 marks) 

▸ A data response paper (40 marks) 