Economics Summary IB Section 1: Microeconomics Chapter 1 Want: things that make our lives more comfortable, things that we would like to have, but
which are not necessary for our immediate physical survival (computer, car, and phone).
Wants are infinite. Good: Are physical objects, (physical things) that can be touched, smelled, eaten. (Food,
gasoline, movie) Service: Intangible things that cannot be touched. A service is an activity or result from one,
provision of a good (restaurant, gas station, and cinema) Scarce Resource: when there is limited availability of a product. There aren’t abundant and
therefore are valued more since there isn’t a lot of supply. All goods and services that have a
price are relatively scarce. Even though a great number of them exist, not everyone that
would like a good can have one, usually because they cannot afford it. Economic Good: every good or service that has a price, and therefore are being rationed,
because they are limited (petrol, food, jewelry) - thus they are said to have an opportunity
cost. Free Good: goods that don’t have a price because they are unlimited (air, salt water) - thus,
do not have opportunity cost. Allocation: the distribution of resources among competing
uses. Choice: As people do not have infinite incomes, they have to make choices on which product
or service to purchase (choose between alternatives). To make a choice is to use/allocate a
resource in the most efficient way possible to take the best outcome out of it Opportunity Cost: the next best alternative foregone when an economic decision is made
(what you give up doing because you choose another option). Key concept linked with
scarcity. It is what you give up in order to have something else.
Chapter 2: Demand and Supply Market: A market is a virtual or physical place where potential buyers and sellers interact
exchanging goods or services for money, carrying out economic transactions. Scarcity: Unlimited needs and wants with limited resources (not infinite)
Resources limited → choose Factors of production
● Land (natural resources) → Rent
● Labour → Wage
● Capital → Assets, goods/services → Interest
● Entrepreneurship → Profit
● Rent: Payment to owners of land resources who supply their land to the production
● Wage: Payment to whose who provide labour, including all wages, salaries and
● Interest: Payment to owners of capital resources.
● Profit: Payment to owners of entrepreneurship.
Production possibilities frontier curve: It represents all combination of the maximum
amounts of two goods that can be produced by an economy, given its resources and
technology, when there is a full employment of resources and productive efficiency. All
points of the curve are known as production possibilities.
Efficient → it has to be in
Marginal Utility: The greater the quantity of a good consumed, the greater the benefit
derived. However, the extra benefit provided by each smaller amounts.
Market: Any kind of arrangement where buyers and sellers of goods, services or resources
are linked together to carry out an exchange.
Law of diminishing returns: Adding an additional factor of production results in smaller
increases in output. As more and more units of a variable input (such as labour) are added
to one or more fixed inputs (such as land), the marginal product of the variable input at first
increases, but there comes a point when it begins to decrease. Demand: The amount of goods and services consumers are willing and able to buy at a
certain price in a given period, ceteris paribus. Quantity Demanded: Represents the amount of an economic good or service desired by
consumers at a fixed price.
● Qd = a - bP
Qd = Quantity Demanded
P = Price, independent variable
a = The Q intercept (horizontal intercept)
b = Gradient
Law of demand: As the price goes up, the quantity goes down. Inversely proportional.
Negative relationship. Market demand: The sum of the individual demand. The curve is the same as the law of
demand. Change in demand: Any change in a non-price determinant. Represented by a shift of the
entire demand curve. When it goes to the left, demand decreases. When it goes right,
The non price determinants of demand:
● Income in normal goods: A good is a normal good when demand for it increases in
response to an increase in consumer income. Most goods are normal goods. When
income increases, there is a shift to the right in a curve and opposite when it
● Income in inferior goods: An inferior good is when consumer income increases,
demand falls. Example: used clothes and cars.
● Preferences and tastes: If preferences and tastes changes in favour of the product,
demand for the product increases and demand curve shifts to the right.
● Price of related goods
Types of goods:
● Complementary Goods: Two goods are complements if they tend to be
used together. For example DVD and DVD players. A fall in the price
of one, say DVD’s, leads to an increase in demand for the DVD
players. The goods are not related to each other → independent
● Substitutes Goods: Two goods are substitutes if they satisfy a similar need. A fall in
the price of one, say Coca Cola, results in a fall in the demand for the other Pepsi. For
example: Coca Cola and Pepsi.
When there is a change in price there is a movement along the demand curve.
Supply: The amount of goods or services, a firm is willing and able to produce and supply at
different prices during a particular time period, ceteris paribus. The buyer wants a lower price whilst the producer wants a higher price. Law of supply: Positive causal relationship between the quantity of a good supplied over a
particular time period and it’s price, ceteris paribus.
As the price of the good increases, the quantity of the good supplied
also increases, as the price falls, the quantity supplied also falls →
Non Price Determinants of supply: → shift
Cost of factors of production → If oil increases
price, then the supply for plastic will decrease
due to an increase in cost.
● Taxes / Subsidies
● Technology → Lower costs
● Shocks or sudden unpredictable events.
● Related goods
● Producer expectations
Movements along the supply curve → Price, change in quantity supplied.
Market Supply: Indicates the total quantities of a good that firms are willing and able to
supply in the market at different possible prices and is given by the sum of all individual
supplies of that good. Ceteris Paribus → If the cost goes higher, the price will go higher as
the profit always remains the same.
Change in supply is a change in the non price determinants and a change in quantity
supplied is a change in the price.
Linear Function of Supply: Qs = c + dP
Qs = Quantity Supplied
P = Price → independent variable pero va en el lugar de la Y
c = The Q intercept (horizontal intercept)
d = Gradient
Chapter 3: Elasticities Price elasticity of demand (PED): Is a measure of the responsiveness of the quantity
demanded of a good to a change in its price. PED is calculated along a given demand curve. In general, if there is a large responsiveness
of quantity demanded, demand is referred to as being price elastic, if there is a small
responsiveness, demand is price inelastic. Elasticity: The change in quantity demanded is proportionally more to the change in price.
Inelasticity: The change in quantity demanded is proportionally less to the change in price.
When price is less than 1 but greater than 0 → inelastic.
Price more than 1 → elastic.
𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑝𝑝𝑝𝑝𝑝𝑝 𝑝𝑝 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝
𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑝𝑝𝑝𝑝𝑝𝑝 𝑝𝑝𝑝 𝑝𝑝𝑝𝑝𝑝
% △ 𝑝𝑝 𝑝.𝑝
PED (Simplified) =
% △ 𝑝𝑝 𝑝𝑝𝑝𝑝𝑝
Absolute value: Always negative but we don't put the minus sign. Perfectly elastic and perfectly inelastic: Theoretical, not possible. No response in QD when
changing price.The steeper the more inelastic.
Unitary elasticity: When QD increases the same percentage as price.
Value of PED
0 < PED < 1
Quantity demanded is relatively unresponsive
1 < PED
Quantity demanded is relatively responsive
PED = 1
Unit elastic demand
Percentage change is quantity demanded
equals the percentage change in price.
PED = 0
Quantity demanded is completely
unresponsive to price.
PED = ∞
Perfectly elastic demand
Quantity demanded is infinitely responsive to
PED varies: Along any downward-sloping,straight line demand curve, the PED varies as we
move along the curve. It excludes unit elastic, perfectly inelastic and perfectly elastic
● At high prices and low quantities, the percentage change in Q is relatively large
(since the denominator of ΔQ/Q is small), while the percentage change in P is
relatively small (because the denominator of ΔP/P is large). Therefore results in a
large PED (elastic demand).
● At low prices and high quantities the opposite holds.
The relationship between PED and the slope (HL):
PED varies along the curve, where's the slope is constant thought the slope.
The slope is defined as
PED= % △ 𝑝= 𝛥 =𝛥𝛥 𝛥
X =slope X
% △ 𝑝
𝛥𝛥 𝛥𝛥 𝛥
Determinants of price elasticity of demand:
● Number and closeness of substitutes: The more substitutes a good or a service has,
the more elastic is its demand.
● Necessities versus luxuries: If a good or service is necessary, then it is more
inelastic than if it was a luxury, as luxuries are not essential.
● Length of time: The longer the time period in which a consumer makes a purchasing
decision, the more elastic the demand.
● Proportion of income spent on a good: The larger the proportion of one’s income
needed to buy a good, the more elastic the demand.
PED and the steepness of the demand curve (supplementary material)
We cannot conclude whether demand is more or less elastic in different demand curves
simply by comparing their steepness.
● Demand curves drawn on different scales are not comparable
● Even if two or more demand curves are drawn on the same diagram, the reason is
that PED is not constant along most demand curves.
Revenue and elasticities:TR = P × Q.
Three different cases:
● Demand is elastic (PED>1): When demand is elastic, an increase in price causes a
fall in total revenue, while a decrease in price causes a rise in total revenue. Ex: When
price increases we lose B to gain C.
● Demand is inelastic (PED<1): When demand is inelastic, an increase in price causes
an increase in total revenue, while a decrease in price causes a fall in total revenue.
● Unit elastic demand (PED=1): Remains constant as change in price is equal to
change in quantity.
PED and the firm's pricing decision
A business should take into account the PED when considering price changes in their
products. Total revenue is at a maximum when price is at the point where demand is unit
elastic. Increasing or decreasing the price from that point will make the revenue be less.
Consequences of a low PED for primary commodities
Two results follow from this:
● As primary commodity prices fluctuate widely, so do
producers’ incomes, which depend on the revenues
(price × quantity) producers receive from selling their
● In view of the relationship between PED and total
revenue (see page 55), a fall in the supply of a primary
commodity with inelastic demand (from S1 to S2 in
part (a) of Figure 3.6) leads to an increase in total
revenue of producers because the percentage
increase in price is larger than the percentage
decrease in quantity. An increase in supply leads to
PED and indirect taxes: If governments are interested in increasing their tax revenues, they
must consider the PED of the goods to be taxed. The lower the price elasticity of demand for
the taxed good, the greater the government tax revenues.
Indirect taxes are therefore usually imposed on goods like cigarettes and petrol (gasoline),
which have a low PED. Cross elasticity demand: To measure the responsiveness of demand for one good to the
change in the price of another good.
𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑝𝑝𝑝𝑝𝑝𝑝 𝑝𝑝 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑝𝑝 𝑝𝑝𝑝𝑝 𝑝
𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑝𝑝𝑝𝑝𝑝𝑝 𝑝𝑝 𝑝𝑝𝑝𝑝𝑝 𝑝𝑝 𝑝𝑝𝑝𝑝 𝑝
Money: anything that is acceptable as payment for goods and services; more precisely, money consists of currency (coins and paper money) and cheque (checking) accounts.
An increase in the supply of money leads to a fall in the rate of interest; a decrease in the supply of money leads to an increase in the rate of interest.
Interest rates: rates at which borrowers are charged or lenders paid for their loan. Typically expressed as an annual percentage.
Demand side policies: focus on changing aggregate demand, or shifting the aggregate demand curve in the AD-AS model, to achieve the goals of price stability, full employment and economic growth.
Sources of government revenue:
● Taxes of all types
● From the sale of goods and services
● From the sale of government owned enterprises or property
Types of government expenditure:
● Current expenditures: include the government’s spending on day-to-day items that are recurring.
Government Budget: A type of plan of a country’s tax revenues and expenditures over a period of time. There are 3 types of budgets:
Automatic stabilisers: Most economies have built-in stabilisers like unemployment benefits and progressive taxes. When GDP grows, unemployment falls and wages rise. Lower unemployment means less government spending on unemployment benefits and higher ...
Fiscal policy and its impact on potential output: Fiscal policy can be used to create an environment for long-term economic growth:
Monetary Policy: carried out by the central bank of each country. The use of the interest rates (via manipulating the money supply) to influence aggregate demand.
The role of a central bank:
Interventionist supply-side policies: