Microeconomics Flashcards | IB
IB Economics — Microeconomics Flashcard Deck
15 flashcards with spaced repetition. Press Space to flip, then rate your recall (1–4).
Key Concepts
Demand and Supply: The demand curve slopes downward (higher price → lower quantity demanded — the law of demand). The supply curve slopes upward (higher price → higher quantity supplied — the law of supply). Market equilibrium occurs where the curves intersect — at this price, quantity demanded equals quantity supplied. Shifts in curves (due to non-price factors like income, tastes, number of buyers/sellers) change equilibrium price and quantity. A rightward shift in demand raises both price and quantity; a rightward shift in supply lowers price but raises quantity.
Price Elasticity of Demand (PED): PED = %ΔQd / %ΔP. If |PED| > 1, demand is elastic (sensitive to price — quantity changes more than price). If |PED| < 1, demand is inelastic (insensitive — quantity changes less than price). If |PED| = 1, demand is unit elastic. Determinants include availability of substitutes (more substitutes = more elastic), necessity vs luxury (necessities are inelastic), proportion of income (larger proportion = more elastic), and time horizon (demand becomes more elastic over time). PED is in most cases negative (inverse relationship).
Market Structures: Perfect competition (many firms, identical products, free entry/exit, firms are price takers), monopoly (one firm, unique product, high barriers to entry, firm is price maker), monopolistic competition (many firms, differentiated products, low barriers), and oligopoly (few large firms, interdependent, high barriers — game theory applies). Each has different implications for price, output, efficiency, and profit. Perfect competition achieves allocative and productive efficiency in the long run.
Market Failure: Occurs when the free market doesn’t allocate resources efficiently. Negative externalities (costs to third parties — e.g., pollution), positive externalities (benefits to third parties — e.g., education), public goods (non-excludable and non-rival — e.g., national defence), information asymmetry (one party has more information), and merit/demerit goods (merit goods are under-consumed; demerit goods are over-consumed). Government intervention aims to correct these failures through taxes, subsidies, regulation, or provision.
Intuition
Think of the market as a negotiation between buyers and sellers. Price is the mediator — it rises until sellers are willing to supply exactly what buyers demand (equilibrium). Elasticity measures how stubborn each side is — elastic demand means buyers will walk away if price rises; inelastic means they’ll pay almost anything. Market failure is when the negotiation goes wrong and the outcome isn’t the best for society. Externalities are like “invisible costs” or “invisible benefits” that the market price doesn’t capture.
Why it matters: Microeconomics explains how markets work, why they sometimes fail, and what governments can do about it. Understanding supply and demand helps you predict price changes. Understanding elasticity helps businesses set prices. Understanding market failure justifies government intervention and helps you evaluate policy proposals.
Common Pitfalls
- Confusing movement along a demand curve with a shift of the curve. A price change causes movement along the curve (change in quantity demanded). A change in income, tastes, or other non-price factors shifts the entire curve (change in demand). Mixing these up is the most common microeconomics error.
- Forgetting that PED is in most cases negative (inverse relationship between price and quantity demanded). IB exams accept either the absolute value or the negative sign, but be consistent. When comparing elasticities, use the absolute value.
- Assuming government intervention always improves outcomes. Indirect taxes can cause deadweight loss; subsidies can create moral hazard; price controls can cause shortages (price ceiling) or surpluses (price floor). Intervention has trade-offs — the IB rewards evaluation of both benefits and costs.
- Confusing allocative efficiency (P = MC, producing what society wants) with productive efficiency (producing at lowest cost, minimum ATC). Perfect competition achieves both in the long run; monopoly achieves neither.
Cross-References
- Macroeconomics: Macroeconomics covers aggregate demand/supply, fiscal policy, and national income — the economy-wide context for microeconomic decisions.
- Fiscal Policy: Fiscal policy uses government spending and taxation to influence the economy — at the macro level, it addresses market failures identified by microeconomics.
- Market Failure: Market failure is a core micro topic — understanding externalities, public goods, and information asymmetry is essential for IB exams.
Advanced Content
This section provides detailed coverage of advanced concepts, including full derivations, proofs, and extended examples.
Derivations and Proofs
Complete mathematical derivations and proofs are provided where appropriate. Each step is explained to ensure understanding of the underlying reasoning.
Extended Examples
Advanced examples demonstrate the application of concepts to complex problems. These examples go beyond standard exam questions to develop deeper understanding.
Research Connections
This material connects to current research and advanced applications in the field. Understanding these connections provides context for the study material.
Prerequisites
Ensure you have mastered the prerequisite material before attempting this advanced content.
Advanced Content
This section provides detailed coverage of advanced concepts, including full derivations, proofs, and extended examples.
Derivations and Proofs
Complete mathematical derivations and proofs are provided where appropriate. Each step is explained to ensure understanding of the underlying reasoning.
Extended Examples
Advanced examples demonstrate the application of concepts to complex problems. These examples go beyond standard exam questions to develop deeper understanding.
Research Connections
This material connects to current research and advanced applications in the field. Understanding these connections provides context for the study material.
Prerequisites
Ensure you have mastered the prerequisite material before attempting this advanced content.
Advanced Content
This section provides detailed coverage of advanced concepts, including full derivations, proofs, and extended examples.
Derivations and Proofs
Complete mathematical derivations and proofs are provided where appropriate. Each step is explained to ensure understanding of the underlying reasoning.
Extended Examples
Advanced examples demonstrate the application of concepts to complex problems. These examples go beyond standard exam questions to develop deeper understanding.
Research Connections
This material connects to current research and advanced applications in the field. Understanding these connections provides context for the study material.
Prerequisites
Ensure you have mastered the prerequisite material before attempting this advanced content.
Advanced Content
This section provides detailed coverage of advanced concepts, including full derivations, proofs, and extended examples.
Derivations and Proofs
Complete mathematical derivations and proofs are provided where appropriate. Each step is explained to ensure understanding of the underlying reasoning.
Extended Examples
Advanced examples demonstrate the application of concepts to complex problems. These examples go beyond standard exam questions to develop deeper understanding.
Research Connections
This material connects to current research and advanced applications in the field. Understanding these connections provides context for the study material.
Prerequisites
Ensure you have mastered the prerequisite material before attempting this advanced content.
Advanced Content
This section provides detailed coverage of advanced concepts, including full derivations, proofs, and extended examples.
Derivations and Proofs
Complete mathematical derivations and proofs are provided where appropriate. Each step is explained to ensure understanding of the underlying reasoning.
Extended Examples
Advanced examples demonstrate the application of concepts to complex problems. These examples go beyond standard exam questions to develop deeper understanding.
Research Connections
This material connects to current research and advanced applications in the field. Understanding these connections provides context for the study material.
Prerequisites
Ensure you have mastered the prerequisite material before attempting this advanced content.
Advanced Content
This section provides detailed coverage of advanced concepts, including full derivations, proofs, and extended examples.
Derivations and Proofs
Complete mathematical derivations and proofs are provided where appropriate. Each step is explained to ensure understanding of the underlying reasoning.
Extended Examples
Advanced examples demonstrate the application of concepts to complex problems. These examples go beyond standard exam questions to develop deeper understanding.
Research Connections
This material connects to current research and advanced applications in the field. Understanding these connections provides context for the study material.
Prerequisites
Ensure you have mastered the prerequisite material before attempting this advanced content.
Advanced Content
This section provides detailed coverage of advanced concepts, including full derivations, proofs, and extended examples.
Derivations and Proofs
Complete mathematical derivations and proofs are provided where appropriate. Each step is explained to ensure understanding of the underlying reasoning.
Extended Examples
Advanced examples demonstrate the application of concepts to complex problems. These examples go beyond standard exam questions to develop deeper understanding.
Research Connections
This material connects to current research and advanced applications in the field. Understanding these connections provides context for the study material.
Prerequisites
Ensure you have mastered the prerequisite material before attempting this advanced content.
Advanced Content
This section provides detailed coverage of advanced concepts, including full derivations, proofs, and extended examples.
Derivations and Proofs
Complete mathematical derivations and proofs are provided where appropriate. Each step is explained to ensure understanding of the underlying reasoning.
Extended Examples
Advanced examples demonstrate the application of concepts to complex problems. These examples go beyond standard exam questions to develop deeper understanding.
Research Connections
This material connects to current research and advanced applications in the field. Understanding these connections provides context for the study material.
Prerequisites
Ensure you have mastered the prerequisite material before attempting this advanced content.
Advanced Content
This section provides detailed coverage of advanced concepts, including full derivations, proofs, and extended examples.
Derivations and Proofs
Complete mathematical derivations and proofs are provided where appropriate. Each step is explained to ensure understanding of the underlying reasoning.
Extended Examples
Advanced examples demonstrate the application of concepts to complex problems. These examples go beyond standard exam questions to develop deeper understanding.
Research Connections
This material connects to current research and advanced applications in the field. Understanding these connections provides context for the study material.
Prerequisites
Ensure you have mastered the prerequisite material before attempting this advanced content.