The article title is IBDP Economics: Take Your Revision to the Next Level We know IBDP exams are approaching ridiculously soon. We've provided exam revision strategies for the IB exam for international students, and subject-specific revision strategies before too. But we know that the key to good grades is good resources. That's why our team of Economics Subject Experts have gathered and broken down a topical Economics IB/IGCSE guide for your needs as you rev up your learning. IB Economics, while it relies on you understanding the foundational micro-economic concepts and macro-economic concepts, also requires an understanding to integrate between the topics.  We're going to provide microeconomics topical revision in this article just below. Click on the Economics topics you are the weakest within, and you'll see a concise breakdown for your revision needs. Micro-Economics Topical Revision: Demand Shifts in the Demand Curve Calculating the Demand Curve (HL) Supply Shifts in the Supply Curve Calculating the Supply Curve (HL) Market Equilibrium Basic Definitions Economics: The study of how groups allocate scare resources to satisfy unlimited wants and needs Opportunity Cost: The value of the next-best alternative forgone Factors of Production: All inputs used to produce goods and services C- Capital (equipment) E- Entrepreneurship (management) L- Land (natural resources) L- Labor (workforce) Normative Statement: A statement that is a matter of opinion Positive Statement: A statement that can be proven or disproven PPF (Production Possibilities Frontier): Represents all combinations of the maximum amounts that two goods can be produced in an economy when there is a full employment of resources and efficiency. The PPF model demonstrates concepts such as scarcity and opportunity cost. Point A = the economy is operating less than full efficiency Point B = the economy is operating at full efficiency however the opportunity cost to produce more guns is a lot of bread Point C = the economy is operating at full efficiency however the opportunity cost to product more bread is a lot of guns Point X = the economy can not operate at this efficiency as they do not have the factors of production to do so Economic Growth: The measure of a change in countries GDP, or real national income such that an increase in national income is classified as economic growth Economic Development: The measure of welfare and well-being, instead of being measured in monetary indicators, it is measured in terms of indicators such as education, health and social indicators Demand Demand and the Law of Demand Demand is the quantity of a good that consumers are willing and able to purchase at a given price in a given time period. The law of demand states that as the price of a product falls, the quantity demanded increases. Ceteris paribus Shifts in the Demand Curve Income Normal Goods: as a consumer’s income rises, the demand for the product will also rise, shifting the demand curve to the right Inferior Goods: as a consumer’s income rises, the demand for the product will fall, shifting the demand curve to the left Substitutes If products are substitutes, then a change in the price of one of the products will lead to a change in the demand for the other product. For example, if there is a fall in the price for Good A (movement along the demand curve), then the demand for Good B will decrease (demand shifts left). Complements If products are complements to each other, then a change in the price of one good will lead to a change in the demand for the other product. For example, if there is a fall in the price for Good A (movement along the demand curve), then the demand for Good B will increase (demand shifts right). Calculating the Demand Curve (HL)                                       Equation: Qs = c +dP  A = where the graph meets the x-axis and where demand would be if the price was zero. If A changes, there will be a parallel shift in the demand curve. B = sets the slope for the demand curve (rise/run). If B changes, there will be a change in the steepness of the curve therefore a change in the elasticity. Supply Supply and the Law of Supply Supply is the willingness and ability of products to produce a quantity of a good or serve at a given price in a given time period. The law of supply states that as the price of a product rises, the quantity supplied of the product will increase. Ceteris Paribus. Shifts in the Supply Curve Cost of Factors of Production If there is an increase in the costs of the factors of production, such as a wage increase, ths will increase the firm’s costs meaning that they can supply less (shift to the left) Price of Other Products Producer’s often have a choice of what they would like to produce such that if there is a raise in the price of Good A, they may produce less of Good B (shift to the left) to maximize revenue Technology Improves in the state of teachnology in a firm should lead to an increase in supply thus a shift of the supply curve to the right Calculating the Supply Curve (HL)   C = the quanitity that would be supplied if the price was zero. If C changes, there will be a parallel shift in the supply curve D = sets the slope of the curve. If D changes, there will be a change in the slope therefore the elasticity. Market Equilibrium Equilibrium The point in which the demand and supply curve intersect and the economy is in a state of rest such that there is no “outside disturbance” Changes in Equilibrium If there is a change in one of the determinants of demand or supply there will be a shift in one of the curves resulting in a new equilibrium. Surpluses and Shortages If the price is raised above the equilibrium, suppliers will have more incentive to produce however demand will decrease resulting in a surplus (excess supply) If the price is lowered, demand will increase while supply will decrease resulting in a shortage (excess demand) Consumer and Producer Surplus Consumer surplus: the highest price consumers are willing to pay minus the price they actually pay. Consumers who are willing to pay for a product at a higher price, but only have to pay at equilibrium price are experiencing a gain. Producer surplus: the price received by firms for selling their goods minus the lowest price they are willing to accept. Producers who are willing to supply a product at a lower price, but instead can supply at equilibrium are experiencing a gain. Economic Efficiency When allocative and productive efficiency are achieved and marginal cost = marginal benefit (MC=MB) in every market Allocative Efficiency When an economy produces the combination of goods most desired by society where the consumer surplus is equal to producer surplus thus community surplus is achieved and where marginal cost is equal to marginal benefit Calculating Market Equilibrium Set Qs and Qd equal to one another and solve for P to get the equilibrium price Substitute P into either of the equations to get the equilibrium quantity Elasticity’s Elastic vs. Inelastic Elastic: responds substantially to price (e.g. luxuries, goods with close substitutes), such that if the price goes down the change in Qd/Qs is greater Inelastic: does not respond to price (e.g. necessities, addictiveness), such that if the price goes down the change in Qd/Qs is smaller/   Price Elasticity of Demand (PED)   Price Elasticity of Demand The measure of how much the demand for a good changes when there is a change in the price of the product *Percentage change is calculated by taking (New – Old)/Old   Values of PED PED<1 -->  inelastic PED>1 --> elastic PED=1 ---> unit elastic PED=0 --> perfectly inelastic PED=P ---> perfectly elastic Inelastic Demand If a product has inelastic demand, then a change in the price of a product leads to a proportionally smaller change in the quantity demanded of it. Therefore raising the price of an inelastic product leads to a larger total revenue. Elastic Demand If a product has elastic demand, then a change in the price leads to a greater than proportionate change in the quantity demanded of it. Determinants of PED The number of substitutes: If a product has more substitutes then likely the demand will be elastic The necessity of the product: If a product is a necessity, then likely it will have inelastic demand Cross Elasticity of Demand (XED) Cross Elasticity of Demand The measure of how much the demand for a product changes when there is a change in the price of another product. Values of XED XED>0 substitutes XED<0 complements Large number > close substitutes/complements Small number > remote substitutes/complements Income Elasticity of Demand (YED) Income Elasticity of Demand The measure of how much the demand for a product changes when there is a change in the consumer’s income Values of YED YED>0 = normal good YED<0 = inferior good 0<YED<1  = income inelastic (necessity) YED>1 = income elastic (superior good) Price Elasticity of Supply (PES) Price Elasticity of Supply The measure of how much the supply of a product changes when there is a change in the price Values of PES PES=0 à perfectly inelastic PES=P à perfectly elastic 0<PES<1 à inelastic supply PES >1 à elastic supply PES=1 à unit elastic supply Determinants of PES Mobility of factors of production: the ability for the factors of production to be switched, if it is easily switched then PES is elastic but if they cannot be easily switched then PES is inelastic Time Period: the time in which elapses for suppliers to change their supply, in the short run PES is inelastic while in the long run PES is elastic Spare Capacity Available: the higher the spare capacity the more elastic PES is Taxation Indirect Tax A tax imposed upon expenditure. It is placed upon the selling price of a product so it raises the firm’s costs and shifts the supply curve for the product vertically upwards by the amount of the tax. Specific Tax This is a fixed amount of tax that is imposed upon a product like $1, thus shifting the supply curve vertically upwards by the amount of the tax. Ad Valorem Tax This is a percentage tax on the selling price so the supply curve will shift such that as prices increase, the tax curve will become increasingly larger. Effect of Taxation Revenue Before Tax: Q x $5.00 Revenue After Tax: Q1 x $4.50 Government Revenue: Consumer burden + producer burden Deadweight Loss: The triangle formed by the loss in producer and consumer surplus Incidence of Taxation Refers to the group that shares the greatest burden of the tax, since the elastic group is more affected by the tax, the more inelastic party has the greatest burden When the government taxes an inelastic product, they generate large revenue whereas when they tax elastic products, they generate much smaller revenue Subsidization   Subsidies An amount of money paid by the government to a firm per unit of output thus shifting the supply curve vertically downwards. The government may do this for two reasons: The lower the price of essential goods to consumers To guarantee the supply of products that the government thinks are necessary for the economy   Effect of a Subsidy     Consumers: P decreases (P1) Quantity increases (Q1)   Producers: Price increases (P0) Quantity increases (Q1) TR increases   Tax Payers: Pay more taxes to cover subsidies           Price Control and Government Intervention   Price Controls Price controls are imposed when policymakers believe the market price is unfair to either producers or consumers   Price Ceiling A price ceiling is the legal maximum at which a good can be sold. If it is above the equilibrium, it is not binding because the equilibrium can be obtained. However if it is below the equilibrium, then it is binding because the equilibrium cannot be obtained         Consequences of a price ceiling Smaller quantity supplies and sold Quality decreases Failure to meet allocative efficiency (shortage)       Price Floor A price floor is the legal minimum at which a good can be sold. If it is below the equilibrium is it not binding because equilibrium can be reached however if is it above equilibrium, then it is binding because equilibrium cannot be obtained.   Consequences of a price floor Failure to reach allocative efficiency (surplus) Smaller quantity demanded and purchased Illegal sales below the price floor       Market Failure   Market Failure A situation in which the free market leads to a misallocation of societies resources leading to either an overproduction or underproduction of a good       Private (MPC) vs. Social (MSC) Cost Private Cost: internal monetary costs such as wages, raw materials and heating/lighting Social Cost: real cost to society such that it reflects the private costs plus the negative externality   Private (MPB) vs. Social (MSB) Benefit Private Benefit: the monetary value of the benefit such as sales revenue Social Benefit: the benefit to society such that is reflects the private benefit plus the positive externality   Positive Externality A benefit not reflected in the free market price that the generator of the externality imposes benefits on others who are not responsible for initiating it.   Positive Externality of Consumption Occurs when marginal social benefit exceeds marginal private benefit in relation to marginal social cost.       Positive Externality of Production Occurs when marginal private cost is greater than marginal social cost in relation to marginal social benefit. There is potential welfare gain because quantity could be increased to Qs.       Negative Externality A cost not reflected in the free market price such that the generator of the externality imposes the cost not those who are not responsible for it.   Negative Externality of Production Occurs when marginal social cost is larger than marginal private cost in relation to marginal private benefit. There is welfare loss because there is an overproduction.   Negative Externality of Consumption Occurs when marginal private benefit is larger than marginal social benefit in relation to marginal social cost.   Merit vs. Demerit Goods Merit Goods: goods that are deemed socially desirable but are likely to be under produced and under consumed (e.g. education, health care and public parks). Merit goods are often associated with positive externalities. Demerit Goods: goods that are deemed socially undesirable and are likely to be over produced and over consumers (e.g. alcohol, cigarettes and illegal drugs). Demerit goods are often associated with negative externalities.   Remedies for Externalities Taxation: the government could tax a negative externality of production, which would result in MPC shifting upwards towards MSC. If they tax a negative externality of consumption, the MSC will shift upwards therefore decreasing quantity because of an increase in price.   Cap and Trade: the government could issue tradable emission permits to give firms the license to create pollution up to a set level, this would solve negative externalities of production.   Subsidization: the government could subsidize firms who generate positive externalities, which would decrease the marginal social cost curve   Advertising: the government could advertise the consequences of negative externalities of consumption to reduce consumption, or could increase the advertising of the benefits of positive externalities of consumption Tragedy of the Commons Tragedy of the Commons The overconsumption of resources in the interest of self-worth and are able to do so because the goods are common or unknown   Public Goods Public goods have two qualities that make them a part of the tragedy of the commons. Non rivalry: one persons consumption of the public good does not deprive another’s ability to consumer that goods Non-excludability: once the good is provided for one person it is not possible to prevent others from consuming it   Public Goods and Market Failure Public goods are likely to be under produced or not produced at all because their properties make them incapable of providing private profitability. The free rider problem arises because those who enjoy the benefits of a public good do not have to pay.   Costs, Revenues and Profits   Short Run vs. Long Run Short run: the period of time in which at least one factor of production is fixed. Long run: the period of time in which all factors of production are variable   Fixed vs. Variable Costs Fixed Costs: costs that do not change as production is increased or decreased Variable Costs: costs that vary in direct proportion to output   Total Product (TP) The total output that a firm produces using its fixed and variable factors in a given time period     Average Product (AP) Average product is the output that is produced, on average, by each unit of the variable factor. Marginal Product (MP) The change in output resulting from one additional unit of the variable input   Law of Diminishing Returns As more units of variable input are added to fixed inputs, the marginal product at first increases but then decreases Economics Costs A combination of explicit and implicit costs Explicit costs: firms use resources they do not own and makes payments of money to the resource suppliers Implicit Costs: the cost is the opportunity cost of the sacrifice of income that would have been earned if the resource had been employed in its best alternative use Economics of Scale Advantages that a firm gains due to an increase in size. Constant Returns to Scale: change in input is equal to change in output Increasing Returns to Scale: as input changes, output increasingly changes Decreasing Returns to Scale: as input changes, output decreasingly changes Cost Curves Average Fixed Cost (AFC): The fixed cost per unit of output. Calculated by dividing total fixed cost by quantity. Since total fixed cost is constant, AFC falls as output increases.   Average Variable Costs (AVC): The variable cost pet unit of output. Calculated by dividing total variable cost by quantity. AVC tends to fall as output increases but then increases again.   Average Total Cost (ATC): The total cost per unit of output. Calculated by dividing total cost by quantity. ATC tends to fall as output increases and then rise again as the output continues to increase.   Marginal Cost (MC): The increase in total cost of producing and extra unit of output. Calculated by dividing the change in total cost by the change in quantity. MC tends to fall as output increases and then start to rise because as more variable factors are added to fixed factors, the cost per unit of output eventually begins to rise     Graphical Representation of Cost Curves         Perfect Competition   Perfect Competition Type of Product: identical Market Power: price takers Number of sellers: many Role of advertising: negligible Barriers to entry: low   Cost Curves       The price of the industry determines the price that firms must sell at. The shaded region represents normal profit such that it shows both the cost and the revenue of the firm.         Short Run vs. Long Run Supernormal profits can be earned in the short run if the demand in the industry shifts right, therefore increasing price. However in the long run, the entry of new firms will result in supply in the industry shifting right and therefore price decreasing back to its original.   Allocative and Productive Efficiency Allocative: when P = MC, in this market P = MR Productive: when P = min AC, in this market P = min AC   Monopoly   Monopoly Type of Product: the same Market Power: price market Number of sellers: one or two firms Role of Advertising: possibly high Barriers to entry: very high   Cost Curves       The light grey box represents the firm’s costs, while the dark grey box represents supernormal profits.   Short Run vs. Long Run In the short run and the long run, the monopolist experiences supernormal profits as there are high barriers to entry and exit.   Allocative and Productive Efficiency Allocative: when P= MC, in this market P>MC because there is an under allocation of resources Productive: when P= min ac, in this market P> min AC because the monopolist is producing at higher than minimum average cost       Monopolistic Competition   Monopolistic Competition Type of Product: different but serve the same purpose Market Power: non-price determinants Number of sellers: many Role of Advertising: high Barriers to entry: moderate   Monopolistic Competitive firms aim to achieve the benefits that monopolies enjoy, therefore by using product differentiation and advertising, they can experience similar characteristics   Cost Curves       The light grey box represents the firm’s costs, while the dark grey box represents supernormal profits.   Short Run vs. Long Run In the short run, monopolistic competitive firms can experience supernormal profits however in the long run, more firms are attracted by the supernormal profits and therefore average revenue shifts downwards, erasing supernormal profits. Allocative and Productive Efficiency Allocative: when P=MC, in this market P>MC indicating there is an under allocation of resources Productive: when P= min AC, in this market P>min AC therefore average cost is higher than what is optimal, if excess capacity is lowered than it can become productively efficient Want more? Tutopiya.com provides 24/7 access to online IB Economics subjects and more.