Ib 1 Economics January Exams

Front 1

What is PPF?

Back 1

It's a production possibility curve (PPC) which shows the maximum combinations of goods and services that can be produced at that time if all the resources are being used fully. This is the "Potential output" or the production possibility frontier (PPF)

Front 2

What shape is PPF and why?

Back 2

It's concave because of the law of diminishing returns. Which means not all resources can be transferred between different uses without some cost or time.

Front 3

How is the opportunity cost on a PPC measured

Back 3

By the number of units of the 2nd goof forgone if an additional unit of the first good is made

Front 4

What are the two types of economic growth?
What are their definitions?

Back 4

Actual Growth: when there is a movement from a point inside the PPF towards the curve. Achieved by using the resources better
Potential growth: When there is an outwards shift of the PPF achieved by the quantity or quality of resources

Front 5

What is demand?

Back 5

The quantity of goods and services that consumers are able and willing to buy at a certain price

Front 6

What is the law of demand?

Back 6

Under ceteris paribus, a change in price will lead to a change in quantity demanded.

Front 7

What is the income effect?

Back 7

If the price of a good falls and your income remains the same, you can now buy more goods

Front 8

What is the substitution effect?

Back 8

If the price of a good falls, what has really happened to the price of alternative goods (substitutes)

Front 9

What does the demand curve assume?

Back 9

There is a competitive market and perfect knowledge.

Front 10

What factors determines demand?

Back 10

Price, income, substitute goods, complement goods, taste and preferences, expectations, population and season (umbrella for example)

Front 11

What is the law of supply?

Back 11

As the price of a product rises, the quantity supplied will usually increase with ceteris paribus.

Front 12

What causes a movement along the supply curve?

Back 12

A change in the price

Front 13

What determines supply?

Back 13

Cost of factors of production
Changes in technology
Government intervention (indirect taxes or subsidies)

Front 14

Diagram for a free good

Back 14

Front 15

Diagram of an economic good

Back 15

Front 16

Diagram of an economic good with a fixed supply

Back 16

Front 17

What is allocative efficiency?

Back 17

What to produce

Front 18

What is productive efficiency?

Back 18

How to produce

Front 19

What are price controls?

Back 19

maximum prices (price ceilings), minimum prices (price floors), and commodity agreements

Front 20

Maximum price:
Situation?
Purpose?
Problem?
Solutions?
+graphs

Back 20

Situation: government will set a maximum price below the equilibrium
Purpose: usually to protect the consumer
Problem: create excess demand (shortages), black markets and queues may result
Solutions: shift demand to the left (but this will mean less consumption), or shift supply to the right (via subsidies)

Front 21

Minimum price:
Situation?
Purpose?
Problem?
Solutions?
+ Graph

Back 21

Situation: government will set a minimum price above the equilibrium
Purpose: raise income for producers or protect workers (minimum wage)
Problem: excess supply
Solutions: government could buy the surplus (can be then destroyed or sold to another country), impose quotas, or attempt shift the demand curve to the right through advertising, and restricting imported products

Front 22

Commodity agreements:
Situation?
Purpose?
+ Graph

Back 22

Situations: when countries operate buffer stock schemes together for a particular commodity
Purpose: alleviate difficulties in some countries (especially developing) which are reliant on commodity exports but which suffer from these products having low products

Front 23

What are the 4 types of elasticity?

Back 23

Price elasticity of demand (PED)
Cross elasticity elasticity of demand (XED)
Income elasticity of demand (YED)
Price elasticity of supply (PES)

Front 24

What is PED and what is the formula?

Back 24

PED (price elasticity of demand) It's the measure of how much the quantity demanded of a product changes when there is a change in the price of a product
%change in quantity demanded of the product/ %change in price of the product

Front 25

In PED when is it inelastic and elastic?

Back 25

Inelastic: PED = 1, 1>PED>0
Elastic: ∞>PED>1

Front 26

Theoretical PED's (perfectly inelastic and elastic)

Back 26

Perfectly inelastic when PED = 0
Perfectly elastic when PED = ∞

Front 27

Determinants of price elasticity

Back 27

1. Availability of substitute goods (product with many substitute goods are usually more elastic)
2. Necessity of the product (the bigger the need the more inelastic)
3. Time period (takes time for consumers o react to a change in price)
4. How widely it's defined (meat>chicken>chicken nuggets>McDonals nuggets)
5. Price of product (the cheaper the product, the more inelastic)

Front 28

PED graph

Back 28

Front 29

What is XED and what is the formula?

Back 29

XED (cross elasticity of demand) determines the relation between two goods (Compliment, unrelated or substitutes)
XED = %change in QD of product X / % Change in Price of product Y

Front 30

What does it mean when XED is positive, negative or 0?
+ graph

Back 30

positive: two goods are substitutes (coke and pepsi)
negative: two goods are compliments (bread and butter)
0: unrelated (phones and candles)

Front 31

What is PES and what is the formula?

Back 31

PES (price elasticity of supply) It's a measure of the responsiveness of quantity supplied for a good or service to change in its price
PES = %Change in Quantity supplied of the product / %Change in price of the product

Front 32

PES when is it inelastic, elastic or unit elastic?
+ Graph

Back 32

Inelastic: 1>PES>0
Elastic: ∞>PES>1
Unit elastic: PES = 1

Front 33

In PES what are the costs of inputs?

Back 33

If the cost of production increase significantly as supply increases then the producers may decide not to raise the supply, therefore PES will be inelastic. Even if price increase, it will take larger rises to make increasing the supply worthwhile

Front 34

In PES why do you have to consider the time period?

Back 34

Immediately, PES may be very inelastic as supply may be hard to increase straight away.
Short run, producers have the ability to increase some of the factors of production but not all, so PES is more elastic than the immediate
Long run: PES is likely to be much more elastic as firms can increase the quantity f all factors of production.

Front 35

What is YED and what it the formula?

Back 35

It calculates how much the demand for a product changes when there is a change in the consumer's income.
%change in quantity demanded of the product/ %change in income of the consumer

Front 36

What does it mean when YED is positive, negative?

Back 36

Positive: normal good
1>YED>0: income elastic
1<YED: income inelastic
Negative: inferior good

Front 37

What is a normal good?

Back 37

Demand increases as income increases

Front 38

What is an inferior good?

Back 38

Demand decreases as income increases

Front 39

What is a superior good?

Back 39

Have a high elasticity demand. As income rises, the buyers can buy the products that they want

Front 40

YED graph?

Back 40

Front 41

What is a subsidy?

Back 41

This is a payment made by the government to producers of consumers

Front 42

What are 4 purposes of taxation?

Back 42

1. Reduce consumption of demerit goods (e.g. cigarettes, alcohol)
2. Reduce consumption of imported goods (tariffs)
3. Raise or lower levels of aggregate deand in an economy (Keynes)
4. Redistribute income in an economy

Front 43

What are direct taxations?

Back 43

A tax on income or wealth

Front 44

What are the three types of taxation?

Back 44

1. Progressive taxes
2. Regressive taxes
3. Proportional taxes

Front 45

What are progressive taxes and what does it do to the distribution of income?

Back 45

As income rises, people pay a higher proportion of their income in taxes.
This system makes income more evenly distributed

Front 46

What are regressive taxes and what does it do to the distribution of income?

Back 46

Taxes decrease as income rises, for example indirect taxes
This system makes income less evenly distributed

Front 47

What are proportional taxes and what does it do to the distribution of income?

Back 47

These taxes are set at a rate which is constant no matter the income level
This system does not alter the distribution of income

Front 48

What are transfer payments and what is the aim?

Back 48

Money transferred from one group to another not in return for providing a good or service (e.g. child support assistance, unemployment benefits)
The aim is to redistribute income to those in society who need assistance. The government will use tax revenue to fund transfer payments

Front 49

What are 3 other methods to redistribute income? (not counting progressive taxation)

Back 49

1. income distribution from businesses to employees (minimum wage)
2. Price support for farmers
3. Subsidies provision of merit goods

Front 50

Graph of the three types of taxation (progressive, regressive and proportional)

Back 50

Front 51

What could be a problem with high taxes?

Back 51

It reduces the incentive to work and save. This has negative impacts on investment and growth

Front 52

Draw and explain what the Lorenz curve is

Back 52

The Lorenz curve is used to show the degree of income inequality in an economy

Front 53

What is the equation for the GIni coefficient

Back 53

Gini Index = area between diagonal and Lorenz Curve / Entire area under diagonal

Front 54

What does the Gini index tell us?

Back 54

The higher the Gini index, the more unequal the distribution of income

Front 55

Draw and explain the Laffer curve

Back 55

The Laffer curve shows the relationship between income tax rates and government revenues

Front 56

What are 5 different reasons for Market failure?

Back 56

1. The existence of Public goods
2. The under-provision of merit goods
3. Imperfect competition (such as monopoly power)
4. The existence of positive and negative externalities
5. The existence of asymmetric information

Front 57

Why would the existence of Public good cause market failure?

Back 57

Public goods are non-excludable and non-rivalrous, as the private sector is unlikely to provide these. Therefore the government provides by financing these through general taxation. (E.g. street lights, police, roads)

Front 58

Why would the under-provision of merit goods cause market failure?

Back 58

Merit goods are goods and services that the government thinks are good for society, but if left to the free market will not be provided in sufficient quantity. Social benefits are likely to outweigh the Private Benefits. (E.g. Health, education, libraries, vaccination)

Front 59

Why would imperfect competition cause market failure?

Back 59

Due to the lack of competition, firms will seek to maximize profit at output levels that are lower than the optimal level and at higher prices, which leads to a welfare loss.

Front 60

Why would the existence of positive and negative externalities cause market failure?

Back 60

The social costs or benefits of consumption or production are different to the private costs benefits of consumption or production

Front 61

Why would the existence of asymmetric information cause market failure?

Back 61

When buyers make decisions, which are not based on the full information available.

Front 62

Graph of positive externalities of production (MSC<MPC)

Back 62

Front 63

Graph for negative externalities of production (MSC>MPC)

Back 63

Front 64

What is MSB?

Back 64

Stands for Marginal Social Benefit. It is the total benefit gained to society from the consumption of an addition unit

Front 65

What is MSC?

Back 65

Stands for Marginal Social Cost. It is the total cost to society as a whole for producing one addiction unit

Front 66

What is MPB?

Back 66

Stands for Marginal Private Benefits. It is the total benefit gained privately from the consumption of one extra unit

Front 67

What is MPC?

Back 67

Stands for Marginal Private Costs. It is the total private cost for producing one extra unit

Front 68

Which externalities are represented on the demand curve?

Back 68

MPB: Same as the demand curve
MSB: different to MPB when there is a consumption externality. NOT a demand curve

Front 69

Which externalities are represented on the supply curve?

Back 69

MPC: Same as supply curve
MSC: different to MPC when there is a production externality. NOT a supply curve

Front 70

When graphing externalities, what is Q1, Q*, dead weight loss and cause of externality

Back 70

Q1: The quantity that the market will produce - this is where MPB = MPC because individual consumers and producer only consider their own private benefits and costs
Q*: The efficient level of output - this is where MSB = MSC
Dead weight loss: the area between MSB and MSC - Q* and Q1
Cause of externality: Label what causes MSB/ MSC to be different to MPB/ MPC

Front 71

What are 3 different solutions for negative externalities of production? (MSC>MPC)

Back 71

1. Taxation (internalise the externality) - make the producer pay more and shift MPC towards MSC
2. Legislation / regulation - ban activity
3. Tradable emission permits - a licence to pollute

Front 72

What is the problem of taxing negative externalities of production? (MSC>MPC)

Back 72

How to measure exactly how much tax? Which firms are polluting? Do taxes actually stop the pollution?

Front 73

What is the problem regulating negative externalities of production? (MSC>MPC)

Back 73

Job losses, non-consumption of the good, costs of policing and setting standards may costs a lot

Front 74

What is the problem with tradable permits for negative externalities of production? (MSC>MPC)

Back 74

Pollution still occurs at the agreed level. What level to set? How to measure output pollution?

Front 75

What 2 solutions are there for positive externalities of production? (MSC<MPC)

Back 75

1. subsidies so the PC curve shift downwards and socially efficient output would be achieved
2. Government provision of vocational training services

Front 76

What is the problem for subsidising positive externalities of production? (MSC<MPC)

Back 76

Opportunity cost and dificulty in estimating the value of the subsidy

Front 77

What is the problem with government provision of positive externalities of production? (MSC<MPC)

Back 77

High costs: would the training be as good? Lack of expertise: disincentive for to offer training themselves

Front 78

Graph negative externalities of consumption? (MSB<MPB)

Back 78

Front 79

What are 3 solutions for negative externalities of consumption? (MSB<MPB)

Back 79

1. Ban (e.g. smoking)
2. Indirect taxes (to shift MSC upwards)
3. Negative advertising/ education (to shift MPB to the left)

Front 80

What is the problem with banning an negative externality of consumption? (MSB<MPB)

Back 80

Would cause unemployment in tobacco companies and could go out of business. Government tax revenue cost would make them unpopular among voters. Could cause black markets.

Front 81

What is the problem with putting an indirect tax on negative externalities of consumption? (MSB<MPB)

Back 81

If it was elastic people would stop buying it and if it was inelastic it would be ineffective

Front 82

What is the problem with putting negative advertisement on negative externalities of consumption? (MSB<MPB)

Back 82

Costly and not always effective

Front 83

Graph positive externalities of consumption (MSB > MSB)

Back 83

Front 84

3 Solutions for positive externalities of consumption? (MSB > MSB)

Back 84

1. Subsidies (shift MSC curve downwards)
2. Positive advertising/ education (shift MPB curve right)
3. Laws

Front 85

What is the problem with putting a subsidy on positive externalities of consumption? (MSB > MSB)

Back 85

Costly

Front 86

What are the problems with positive advertisement on positive externalities of consumption? (MSB > MSB)

Back 86

Costly and short run effects are minimal (takes time to have an impact

Front 87

What are the problems with putting a law of positive externalities of consumption?

Back 87

Ethical considerations and freedom of choice