1. Semester 2
IB HL Economy Year 1
Hannah Phillips
Diagrams and Definitions

2. Section 2.4
Market Failure
3. Market
A market is any situation or place that enables the buying and selling of goods and services and factors of production. A market may be a physical location (a street market), it may also be a virtual one (internet buying and selling) or a national one (the market for teachers or doctors). Triple A
Markets exist when buyers and sellers interact. This interaction determines market prices and thereby allocates scarce good and services.
4. Perfect Competition
Number of Firms
Small and many
Barriers to Entry
None
Homogeneous or Heterogeneous
Identical
Consumer Sovereignty
Very high
5. Oligopoly
Number of Firms
Large but few
Barriers to Entry
High
Homogeneous or Heterogeneous
Both
Consumer Sovereignty
Low
6. Monopolistic Competition
Number of Firms
Relatively small and many
Barriers to Entry
Relatively low
Homogeneous or Heterogeneous
Similar
Consumer Sovereignty
High
7. Monopoly
Number of Firms
One and large
Barriers to Entry
Very high
Homogeneous or Heterogeneous
Unique
Consumer Sovereignty
Very low
8. Consumer Surplus
Consumer surplus is when people are able to buy a good for less than they would have been willing to pay.
Consumer Surplus
A+B = Maximum willingness to pay Q
Price
B
P
What is Paid
A
Q
Quantity
9. Producer Surplus
Producer surplus is the difference between the minimum price a producer would accept to supply a given quantity of a good and the price actually received.
Producer Surplus
Minimum amount needed to supply Q
Price
What is Paid
Q
Quantity
10. Market Failure
Markets fail to:
allocate resources efficiently
provide goods beneficial to society
stop production and consumption of harmful goods
11. Sources of Market Failure
Externalities
Merit and Demerit Goods
Public Goods
Abuse of Monopoly Power
12. Positive Externalities
Third parties benefit from the production of goods and services
Third parties benefit from the consumption of goods and services
13. Positive Production Externality
S=MPC= Sum of all Private Cost
Welfare Gain
MSC
Positive Externality
Price
P
D = Marginal Private Benefit
Q 1
QOPT
Quantity
14. Correcting Positive Externalities of Production
Subsidy
15. Positive Consumption Externality
S=MPC= Marginal Private Cost
Positive Externality
Price
MSB= Private benefits & Social Benefits
D= MPB
Q1
Q=OPT
Quantity
16. Correcting Positive Externalities of Consumption
Legislation
Subsidies
Advertising
17. Negative Externalities
Third parties bear spillover costs of the production of goods and services
Third parties bear spillover cost of the consumption of goods and services
18. Negative Production Externalities
MSC
Welfare Loss
S=MPC= Sum of all Private Cost
Negative Externality
Price
P
D = Marginal Private Benefit
Q OPT
Q1
Quantity
19. Correcting Negative Externalities (Production)
Legislation & Regulation
Tax
Tradable Permits
20. Negative Consumption Externalities
S=MPC= Sum of all Private Cost
Price
Negative Externality
D = Marginal Private Benefit
Marginal Social Benefit
Q
Q1
Quantity
21. Correcting Negative Externalities (Consumption)
Legislation & Regulation
Tax firm
Advertising
22. Section 3.1
Macroeconomics
23. Macroeconomics
Macroeconomics is the study of a national economy.
24. Macroeconomic Goals
25. Circular Flow of Income
simplified model of the economy that shows the flow of money through economy.
26. Two Sector
27. Four Sector
28. National Income
Employment Income
Rental Income
Profits
Interest
=National Income
29. National Expenditure
Household Consumption (C)
Firms Investment (I)
Government Spending (G)
Exports Imports (X M)
= National Expenditure
30. Gross Domestic Product
National Expenditure
National Income
National Output
= GDP
Gross Domestic Product = Total Value of all Spending in an Economy = The Total Value of all final Goods and Services in an Economy regardless of who owns the productive assets.
GDP = C + I + G + (X M)
31. Gross National Product
GNP
Total Income Earned by a nations factors of production regardless of where the assets are located
32. Real GDP
Nominal GDP adjusted for inflation
33. Economic Development
Economic Development is a multidimensional concept that includes poverty reduction, provision of education, health care and law and order, civil liberties and civic participation.
34. Fiscal Policy
Policy using changes in government spending and/or direct taxation to achieve economic objectives.
35. Monetary Policy
Policy using changes in the money supply or interest rates to achieve economic objectives.
36. Aggregate Supply
Total amount of domestic goods and services supplied by businesses and the government, including both consumer goods and capital goods.
37. Unemployment
Situation that exists when people who are willing and able to work cannot get a job.
38. Inflation
Sustained increase in the general level of prices and a fall in the value of money.
39. Demand-Pull Inflation
Inflation that is caused by an increase in the costs of production in an economy that shifts the SRAS curve to the left.
40. Cost-Push Inflation
Inflation that is caused by an increase in the costs of production in an economy that shifts the SRAS curve to the left.
41. Direct Taxation
Taxation imposed on peoples income or wealth, and on firms profits.
42. Indirect Taxation
Tax on expenditure.It is added to the selling price of a good or service.