IB Economics Micro, Macro and Internation Trade Flashcards

Terms Definitions
what is economics?
The study of how scare resources are or should be used to meet unlimited human wants and needs
What is microeconomics?
Microeconomics is concerned with the individual component parts of the economy. It is the study of the behaviour of firms and consumers and the determination of market prices and quantities.
What is macroeconomics?
Macroeconomics is the study of aggregates (totals) of economic activity. It looks at how economies work and behave as a whole, and is concerned with such factors as the overall price level and the rate of inflation, the level of employment and unemployment, the rate of growth of the total output of the economy, aggregate demand and supply and the balance of payments.
What is economic growth?
It occurs when there is an increase in the productive potential of the economy and is best measured by the increase in a country's real level of output over a period of time
What is economic development?
Economic development is a process where there is improvement in the lives of all people in the country.
What are some measures of economic development?
GNP/GDP per capita, population growth and structure, health, education, technology, employment, rural/urban migration, rights of women and distribution of poverty and income. Also composite indicators such as HDI are great measures
What is the definition of economic sustainability?
The ability of the environment to survive its use for economic activity
What is the difference between a positive and a normative statement?
Positive statements are statements of fact, or provable nature where as normative statements are value judgments or opinions that often have the words would or should in them
What is ceteris paribus?
all other things being equal (remaining constant)
What are the four factors of production? and what are examples of each?
1) Land-natural resources, raw materials
2) Labour- the workforce,
3) Capital-buildings, physical investments,
4) Entrepreneurship- work of the entrepreneur who is the owner of the business
What are the different methods of payment or INCOMES of the different factors of production?
Land-Rent
Labour-Wages
Capital-Interest
Enterprise-Profits
What do people aim to maximise when they consume?
Consumers aim to maximise utility (the satisfaction they receive from consuming the product) while paying the least possible
What is opportunity cost?
The opportunity cost of an activity is the sacrifice made to do it. It is the real cost of the next best alternative foregone.
What are free goods?
Goods that can be consumed in infinite quantities without any cost (not goods that are priced as free)
Air is an example
What are economic goods?
An economic good is one which is produced using the factors of production (resources) and which cannot be obtained without foregoing something else which could otherwise have been produced with the resources. In other words, an economic good involves an opportunity cost.
What is a production possibility curve?
It is a curve which indicates the maximum combination of any two goods which an economy could produce if all its resources were fully employed and allocated efficiently
What does the downward slope of the PPF curve signify?
That there is an opportunity cost
What are some reasons as to why an economy might produce at a point within the PPF?
1) Unemployment of Resources
2) Inefficient use of resources
What is actual growth?
Actual growth occurs when an economy is operating inside its PPC and produces more as a result of using previously unemployed resources, or using resources more efficiently
What is potential growth?
Potential growth occurs when The productive potential of an economy may be increased by an increase in the quality and/or quantity of resources
What are the three types of economies? and give an example of each
Free Market-USA and Canada
Mixed-all economies
Centrally Planned-USSR and China
What is the price mechanism?
Price changes give signals to suppliers who are able to respond to the demands of consumers.
Define market
A market is any effective arrangement for bringing buyers and sellers together, not necessarily face to face.
What is the objective of a rational consumer?
to get the most from their money-buy a good/service with the highest quality for the lowest possible price
What is the objective of producers?
A market is any effective arrangement for bringing buyers and sellers together, not necessarily face to face.
Discuss a perfect competition market structure
-Many Competitors
-Same product
-Market sets the price (firms are price takers)
-No barriers to entry
-This is a benchmark to be aimed for
Discuss Monopoly market structure
-One major producer (must own 25+% of the market
-Producer sets the price
-Producer can build as many barriers to entry as they want
Discuss the monopolistic competition market structure
-A cross between perfect competition and monopoly
-Many competitors
-Differentiated products
-Firms have some influence on prices
-Firms can use marketing tools to promote their own product
Discuss the oligopoly market structure
-A few interdependent competitors
-Market relies on non-price competition (promotions and advertising)
-Firms can earn large profits
-Often they promote brand loyalty with selling points
Define demand
that quantity of a good or service that would be bought at each and every price over a period of time
Define the law of demand
This assumes that consumers act in a rational manner, so that, other things being equal, the lower the price of a good, the greater the quantity demanded and the higher the price, the less the quantity demanded
What are some determinants of demand?
Price
Price of other goods (substitutes and complements)
Real Disposable Income
Taste
Advertising
Season and Weather
What are the two type of goods that are exceptions to the law of demand?
Giffen (extreme inferior) and Veblen (extravagent) Goods
Give examples of Giffen and Veblen Goods
Giffen Goods-Rice or potatoes in LEDCs where if prices rise, they resort to eating just the basics
Veblen Goods-perfumes, expensive cars, and some clothing where the rich want to buy a Superior Good
Define Supply
That quantity of goods and services that will be supplied to the market at various prices over a given period of time.
Define the law of supply
Other things being equal, the higher the price, the greater will be the quantity supplied and the lower the price, the less will be the quantity supplied.
What is the difference between a specific tax and an Ad-valorem tax?
a specific tax is a fixed amount charged on each unit where as an ad-valorem tax is a percentage of the selling price (HST)
How do the two different types of taxes affect the supply curve?
A specific tax will shift the entire supply curve left where as the ad valorem tax will shift the curve at an angle as the higher the price the larger the taxation value (therefore the curves are no longer parallel)
What is the aim of a subsidy?
to encourage production of the good and it has the effect of shifting the supply curve to the right
How do you determine the total affect of the subsidy?
Go straight up from the new quantity demanded at the new supply curve, to the old supply curve, and then over to price. The level above the original price is the benefit for the producer while between the original and new price is the benefit for the consumer
What are price controls?
controls that governments (or other authorities) put in place to try to influence the outcome of a market
What is the effect of a maximum price control?
The maximum price means that demand now exceeds supply (excess demand) and this means a shortage.
What is the effect of a minimum price control?
The impact of this policy is the opposite to a maximum price. This time the minimum price will create a surplus in the market
What is the effect of a minimum wage?
Assuming that the minimum wage is above the equilibrium level, wages will rise to the minimum wage level, but the number of employees will fall, at least in the short run.
What are buffer stocks?
Buffer stock schemes are operated by a central authority and aim to stabilise prices and protect producers from sudden shifts in demand and supply (often supply in the case of agriculture)
What is the Price Elasticity of Demand and its formula?
A measure of the resposniveness of the demand for a product to changes in its own price.
Price elasticity of demand = % change in Qd / % change in P
What is the difference between perfectly elastic, unitary elastic, and perfectly elastic?
Perfectly Inelastic: Price has no effect on demand
Unitary: % change in price and % change in demand are the same
Perfectly Elastic: A change in demand doesn't change the price of the good
What is the cross elasticity of demand and what is its formula?
The cross elasticity is a measure of the responsiveness of the demand for one product to changes in the price of another product. Cross elasticity of demand = % change in Qdx / % change in Py
What are the two types of crossing goods?
Substitutes- goods that can be purchased in substitute for each other (beef and lamb)
Complements-goods that are often bought together (cars and gas)
Define and give the formula for Income Elasticity of Demand
The income elasticity of demand is a measure of the responsiveness of the quantity demanded to changes in real income. Income elasticity of demand = % change in Qd / % change in Y
Define Price Elasticity of Supply and write it's formula
The responsiveness of the quantity of a good supplied to changes in its price. Price elasticity of supply = % change in quantity supplied / % change in price
What is the affect of taxation on the PED?
It depends on the elasticity of demand; the more elastic the lesser the affect of the taxation, the more inelastic the more the affect of the taxation
What are fixed and variable costs?
Fixed costs (FC)-costs that do not change as production is increased or decreased and exist even if output is zero (Rent)
Variable Costs (VC)-costs that vary with output (wages)
What is the total cost (TC)?
the sum of fixed costs and variable costs at a particular level of output
TC=TFC+TVC
What is the Marginal Cost (MC)?
the cost of one more unit of output. In other words the increase in total cost from producing one more unit of output.
What is average cost (AC)?
total costs divided by the level of output.
TC/Level of Output
What is the shape of the short run and long run AC curve?
the SRAC curve has a semi-circle shape and the LRAC has a U shape that is stretched along it's width
What is the difference between the short run and long run?
The short run is the period of time in which at least one factor of production is fixed. Over this time period the firm can only expand production by using more of the variable factor. The long run is the period of time when all factor inputs, including capital, can be changed.
What is the Law of Diminishing Returns?
as more and more of a variable factor is added to a fixed factor, output will rise initially but will eventually fall. (remember activity in class)
What are economies of scale?
Economies of scale are the advantages that an organization gains due to an increase in size. These will lead to a decrease in the average costs of production.
What are diseconomies of scale?
Diseconomies of scale are the disadvantages that an organization experiences due to an increase in size. They will increase the average costs per unit.
What is Total Revenue (TR), Average Revenue (AR) and MArginal Revenue (MR)?
TR-all the revenue earned by the business
AR-total revenue divided by total number of products sold
MR-the increase in total revenue due to one more sale
What is the difference between normal profit and super normal profit?
Normal profit is that level of profit which is just sufficient to keep the firm in its present use. Supernormal profits is any profit made in excess of normal profit
Where does profit maximization occur?
Occurs when Marginal Cost=Marginal Revenue
What is price discrimination?
Price discrimination is the practice of charging different prices for the same or similar product/service to different consumers where the price differences do not reflect the differences in cost of supply.
What are some possible reasons for price discrimination?
Geographical- Dumping overseas where the good is more expensive in the domestic market and cheaper in the foreign market
Temporal-easier to travel from 9:30am to 10am therefore higher rate
Consumer Type-Movie pass for adult vs children
What are the advantages of price discrimination?
Producers benefit from higher profits most often due to inelastic demands from certain markets. Select consumers are able to pay a lower price than others (such as kids at the movies)
What is market failure?
Market failure is a situation in which the free market leads to a misallocation of society's scarce resources in the sense that either overproduction or underproduction of a particular good occurs, leading to a less than optimal outcome.
What are some main reasons of Market Failure?
* Positive and negative externalities
* Lack of public goods
* Under-provision of merit goods
* Over-provision of demerit goods
* Abuse of monopoly power
* Inequality
What are externalities?
costs or benefits of an economic transaction that affect third parties that were not involved in the decision making process of the transaction. (Often called by-products or spillover effects)
What is a production externality and an example of a positive and negative?
An externality that is initiated and received in production
Positive: New training helps the next firm when workers switch jobs
Negative: Waste affects the local food chain and makes meat unsaleable
What is a mixed externality (1) and an example of a positive and negative?
Initiated in production but received in consumption
Positive: A store landscapes a waste area which enhances the attraction for walkers
Negative: Firm sells candy to children causing cavities and discomfort
What is a consumption externality and an example of a positive and negative?
Initiated and received in consumption
Positive: person get vaccinated and prevents from spreading disease to others
Negative: minority of rude students distract the majority from learning
What is a mixed externality (2) and an example of a positive and negative?
Initiated in consumption and received in production
Positive: employees work out a fitness club at lunch, more efficient at work
Negative: People drink alcohol and eat McDonalds at lunch, less efficient at work
How do negative externalities affect the price of the product?
They don't, and this is how private and social cost are formed. Social cost is the private cost and the cost to society of the production of the product. Like waste that is produced and pushed into the local river
What is the private cost?
The private cost is the internal money cost of production incurred by the firm i.e. costs such as wages, raw materials, heating and lighting which must be paid to carry out production, and which would appear in the firm's accounts.
What is the social cost?
The social cost is the real cost to society as a whole; it is the private, internal costs plus the value of the negative externalities (external costs ).
How do positive externalities affect the price of a product?
They don't, this is how private and social benefit came about as private benefit measures only the benefits of the product to the firm (i.e. revenue). While social benefit also adds the benefit of the product to society.
Define private benefit
The private benefit is the money value of the benefits accruing internally to the firm from production activity e.g. in the form of sales revenues.
Define social benefit
Social benefit is the private, internal benefits plus the value of positive externalities.
What is a circular flow?
A model showing the major interrelationships and flows of an economy
What is the most basic circular flow?
Households and Firms
Households make consumer expenditure and receive goods and services in return
Firms pay income to households in return for the factors of production
What is a leakage?
A leakage is any income not passed on in the circular flow. (imports and savings)
What is a public good?
goods that are non-excludable and non-rivalrous,
Examples: Traffic Lights, the sidewalk, lighthouses
What are merit goods?
goods whose consumption creates significant positive externalities. Governments often want even the poor and ignorant to consume these goods/services. Examples-basic education, health care, museums
What are demerit goods?
Goods that when consumed create significant negative externalities so governments often prohibit their consumption
Examples-Alcohol, Drugs
What is an example of an injection into the circular flow?
Exports, Investment, Government Expenditure
In summary, what are leakages and injections in terms of general codes into the circular flow
Leakages:
*Savings (S)
*Taxation (T)
*Imports (M)
Injections
*Investment (I)
*Exports (X)
*Government Expenditure (G)
What is the equation for total level of expenditure?
C+I+G+(X-M)
Consumer expenditure, investments, and government expenditure added to (exports-imports)
What is the Human Development Index (HDI)?
It is a composite indicator that measures quality of life within a country using three specific indicators; life expectancy, literacy rate, and gross educational enrollment rate
What are four goals of macroeconomics?
Maintain high levels of employment
Maintain price stability (along with consistent levels of inflation)
Maintain a satisfactory balance of payments
Maintain high levels of economic growth
What is the difference between the D/S and AD/AS graphs?
The demand and supply graph focuses on one specific market, and equates price and quantity where as the Aggregate Demand Aggregate Supply graph looks at the whole economy and price level vs output
What is aggregate demand?
the total expenditure on the national output at different values of the price level over a given period of time. It is therefore the sum of:
* C = consumption or spending by households
* I = investment, which is the spending by firms on capital goods
* G = government spending and
* Exports (X) - Imports (M), which is the net amount spent on the economy's output by the rest of the world.
What is aggregate supply?
the total output of goods and services, which all firms in the economy are willing and able to supply at different price levels over a period of time.
Why would aggregate demand shift?
Changes to Income Tax
Changes to interest rate levels
Changes in government spending
Changes to the competitiveness of domestic producers (boosting or lowering export sales)
What shape is the long run aggregate supply curve (neo-LRAS) and why is it shaped as it is?
It is vertical because many economists believe that no matter what kind of expansion there may be, the supply will plateau and can not extend past the point where employment is 100%
What is the shape of the keynesian long run aggregate supply curve (LRAS) and why?
at low levels of output and employment, there is spare capacity in the economy which would enable firms to increase their output without increasing the cost per unit produced. Here LRAS curve will be horizontal. However Keynesians believe that once full employment is reached the LRAS curve will become vertical
What would cause a shift in the LRAS?
A change in the quantity or quality of factors of production.
What is the trade cycle
A cycle that involves periods of growth and periods of negative economic growth,
General Sequence:
Boom, Recession, Slump and then Recovery
What are the three types of policies a government can use to try to achieve economic objectives?
Fiscal policy-taxation and government expenditure
Monetary Policy-interest rates and money supply
Supply-Side Policy-focus on making the economy more flexible and producing to meet demand
If there is a shortage of demand, what kind of policy will a government use and how does it affect the demand?
A reflationary (fiscal) policy would be in order and it could be in the form of lowering taxes which would encourage consumer spending
If there is an excess of demand, what kind of policy will a government use and how does it affect the demand?
A deflationary policy would be needed which may come in the form of increased taxation which would discourage spending
How would increasing government expenditure affect the level of consumption?
Increased government expenditure=increased consumption
Who does the responsibility for monetary policies land on?
The government or central bank
What is the aim of monetary policy?
to manage the economy without causing sudden increases in either inflation or unemployment. as price stability is central to macroeconomic policy.
What are supply-side policies meant to do?
Supply-side policies are designed to make aggregate supply (AS) more responsive to changes in national income. When combined with other macro policies they are supposed to deliver a competitive economy.
How do supply-side policies do what they are meant to do?
They remove market imperfections, restrictive practices, and make work more attractive and workers more efficient through incentives, reform of unions, education and training improvements, and privatisation
If interest rates were to rise then consumption would...?
fall,
This is due to the fact that if interest rates rise then incomes would likely fall therefore less money would be available to consume
Define Unemployment
Unemployment is where people are able and willing to work but do not have a job.
Define the Employment Rate
The employment rate is the percentage of the labour force in work.
Define the unemployment rate
The unemployment rate is the percentage of the labour force who are out of work.
Define what underemployment is
Underemployment refers to those people who only manage to get a few hours paid work per week - they want full-time employment, but can only find part-time employment.
What affect do the unemployed have on the government?
The unemployed don't pay tax and also have social security money spent on them
What are the types of unemployment?
Frictional-time between someone losing and gaining or changing jobs
Structural-an industry is no longer competitive in the market and therefore a loss of jobs
Cyclical-seasonal work
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