M21 EXAMS
IBDP ECONOMICS
STUDY GUIDE
EMMA VAN DOREMALEN
,IBDP Economics study quide
Table of Contents
Introduction .................................................................................................................... 3
The foundations of economics .................................................................................................. 3
Microeconomics .............................................................................................................. 4
Demand and supply ................................................................................................................. 4
Market equilibrium .................................................................................................................. 6
Elasticities ............................................................................................................................... 7
Price elasticity of demand (PED) ....................................................................................................................7
Cross elasticity of demand (XED) ....................................................................................................................7
Income elasticity of demand (YED).................................................................................................................8
Price elasticity of supply (PES) ........................................................................................................................8
Taxes, subsidies and price controls ......................................................................................... 10
Indirect taxes ............................................................................................................................................... 10
Subsidies ...................................................................................................................................................... 11
Price controls ............................................................................................................................................... 12
Costs, revenues and profits .................................................................................................... 13
Cost theory .................................................................................................................................................. 13
Revenue theory ........................................................................................................................................... 17
Profit theory ................................................................................................................................................ 18
Perfect competition ............................................................................................................... 19
Monopoly .............................................................................................................................. 22
Monopolistic competition ...................................................................................................... 24
Oligopoly ............................................................................................................................... 25
Price Discrimination ............................................................................................................... 26
Market Failure ....................................................................................................................... 28
Macroeconomics ............................................................................................................34
The level of overall economic activity ..................................................................................... 34
Aggregate Demand ................................................................................................................ 37
Aggregate supply ................................................................................................................... 39
The short-run AS curve ................................................................................................................................ 39
The long-run AS curve ................................................................................................................................. 39
Macroeconomic equilibrium................................................................................................... 42
The Multiplier Effect .................................................................................................................................... 44
Low unemployment ............................................................................................................... 45
A low and stable rate of inflation............................................................................................ 49
The Phillips curve ......................................................................................................................................... 52
Economic growth ................................................................................................................... 53
Equity in the distribution of income........................................................................................ 54
Taxation ....................................................................................................................................................... 55
International Economics .................................................................................................57
Why do countries trade? ........................................................................................................ 57
1
,IBDP Economics study quide
Free Trade and Protectionism................................................................................................. 58
Exchange rates ....................................................................................................................... 61
Balance of payments .............................................................................................................. 65
Economic Integration ............................................................................................................. 69
Terms of trade ....................................................................................................................... 71
Formula sheet.................................................................................................................75
Paper 1 Tips ....................................................................................................................79
Command terms .............................................................................................................80
Quizlet link
2
,IBDP Economics study quide
Introduction
The foundations of economics
Goods: physical objects (tangible things).
Services: intangible things.
Scarcity: available resources or factors of production are finite, while human wants and
needs are infinite. There are not enough resources to produce everything that is
necessary to satisfy human beings' needs and wants.
The Factors of Production
- Land
- Labor
- Capital – physical and human
- Entrepreneurship
As people cannot have everything they need and want, they must make choices. Resource
scarcity forces society to make a choice between available alternatives. An opportunity cost
therefore arises.
Opportunity cost: the next best alternative foregone when an economic decision is made.
A production possibility curve shows
the maximum combinations of goods and
services that can be produced by an
economy in a given time period, if all
resources in the economy are being used
fully and efficiently and the state of
technology is fixed.
An outward shift of the PPC can be
achieved when there is an improvement
in the quantity and/or quality of the FOP.
A fall in the quantity of the FOP would
Figure 1. Production possibility curve cause in inward shift, caused by for
example a war.
3
,IBDP Economics study quide
Microeconomics
Demand and supply
Market: where buyers and sellers come together to carry out an economic transaction.
Demand
Demand: the quantity of a good or service that consumers are willing and able to purchase
at a given price in a given time period.
The law of demand states that as the price of a product falls, the quantity demanded will
increase, ceteris paribus and vice versa.
All other things remain equal
An increase in demand can occur due to the income effect and substitution effect…
- Income effect: when the price of a product falls, people’s “real income” increases so
they are able to purchase more of the product.
- Substitution effect: When the price of a product falls, the product will be more
attractive relative to other products who’s prices have stayed unchanged. Therefore
consumers will likely purchase more of the product, substituting it for products that
were previously purchased.
Non- price determinants of demand:
1. Income
o Normal goods: as income rises, demand for the product will also increase.
o Inferior goods: as income rises, demand for the product will fall as the
consumers will start to pay for higher priced subsititutes of the good.
2. The price of other products
o Substitutes: a change in the price for one product will lead to a change in
demand for the other product, in the way that an increase in price for good A
will cause an increase in demand for good B.
o Complements: a change in the price for one product will lead to a change in
demand for the other product, in the way that if there is a decrease in price
for good A, there will be an increase in demand for good B as well.
o Unrelated goods: a change in the price of one product will have no effect
upon the demand for the other product.
3. Tastes and preferences
- A change in tastes in favour of a product will lead to
more being demanded at every price.
4. Other factors
- The size of the population
- Changes in the age structure of the population
- Changes in income distribution
- Government policy changes
- Seasonal changes
Figure 2. increase in demand for a product
4
,IBDP Economics study quide
*a change in price causes movement along the demand curve, a change in any other
determinant of demand causes a shift of the curve*
A simple demand function takes to form:
𝑄𝑑 = 𝑎 − 𝑏𝑃
Qd = quantity demanded
P = price
a = Qd if price is zero
b = slope
Supply
Supply: the willingness and ability of producers to produce a quantity of a good or service at
a given price in a given time period.
The law of supply states that as the price of a product increases, the quantity supplied of
the product will increase, ceteris paribus and vice versa.
Non-price determinants of supply:
1. The cost of factors of production
2. The price of other products that a producer could produce
- If a producer of skateboards can produce roller skates and there is an increase in
demand for roller skates the producer may choose to produce them instead.
3. The state of technology
- Improved technology will allow supply to increase.
4. Future expectations
- If a producer expects demand for their product to increase they might increase
prices.
5. Government intervention (e.g. subsidies and taxes)
*a change in price causes movement along the supply curve, a change in any other
determinant of supply causes a shift of the curve*
A simple supply function takes to form:
𝑄𝑠 = 𝑐 + 𝑑𝑃
Qs = quantity supplied
P = price
c = Qs if price is zero
d = slope
Figure 3. decrease in supply for a product
5
, IBDP Economics study quide
Market equilibrium
Equilibrium
Equilibrium: a point where the demand in a market is equal to the supply. There are no
external disturbances.
𝑄𝑑 = 𝑄𝑠
The price mechanism:
The market equilibrium is
self-correcting. If you
move away from it, e.g.
the producer increases
the price to P1, the Qd
will fall to Q1 so there is
an excess supply. In order
to eliminate surplus,
producers need to lower
their prices. Same thing if
there is excess demand.
Consumer and producer surplus
Consumer surplus: the extra satisfaction gained by consumers from paying a price that is
lower than what they are prepared to pay.
There are people willing to pay $20 for a thingy but they
have to pay market equilibrium price which is $10, so the
consumer pays a price that is lower than what they were
prepared to pay.
Producer surplus: the difference between the lowest price
producers were willing and able to offer the good at, and
the actual price that they end up receiving for it.
The producer is willing to supply 5 thingies at a price of $5
but sells at $10 so the producer is gaining. Figure 4. consumer/producer surplus in the market of
thingies
Allocative efficiency
When a market is in equilibrium, it is said to be in a state of allocative efficiency.
Allocative efficiency: when society’s resources are being allocated in the most efficient way
possible from society’s point of view.
Consumer surplus + producer surplus = community surplus (total benefit to society)
6
IBDP ECONOMICS
STUDY GUIDE
EMMA VAN DOREMALEN
,IBDP Economics study quide
Table of Contents
Introduction .................................................................................................................... 3
The foundations of economics .................................................................................................. 3
Microeconomics .............................................................................................................. 4
Demand and supply ................................................................................................................. 4
Market equilibrium .................................................................................................................. 6
Elasticities ............................................................................................................................... 7
Price elasticity of demand (PED) ....................................................................................................................7
Cross elasticity of demand (XED) ....................................................................................................................7
Income elasticity of demand (YED).................................................................................................................8
Price elasticity of supply (PES) ........................................................................................................................8
Taxes, subsidies and price controls ......................................................................................... 10
Indirect taxes ............................................................................................................................................... 10
Subsidies ...................................................................................................................................................... 11
Price controls ............................................................................................................................................... 12
Costs, revenues and profits .................................................................................................... 13
Cost theory .................................................................................................................................................. 13
Revenue theory ........................................................................................................................................... 17
Profit theory ................................................................................................................................................ 18
Perfect competition ............................................................................................................... 19
Monopoly .............................................................................................................................. 22
Monopolistic competition ...................................................................................................... 24
Oligopoly ............................................................................................................................... 25
Price Discrimination ............................................................................................................... 26
Market Failure ....................................................................................................................... 28
Macroeconomics ............................................................................................................34
The level of overall economic activity ..................................................................................... 34
Aggregate Demand ................................................................................................................ 37
Aggregate supply ................................................................................................................... 39
The short-run AS curve ................................................................................................................................ 39
The long-run AS curve ................................................................................................................................. 39
Macroeconomic equilibrium................................................................................................... 42
The Multiplier Effect .................................................................................................................................... 44
Low unemployment ............................................................................................................... 45
A low and stable rate of inflation............................................................................................ 49
The Phillips curve ......................................................................................................................................... 52
Economic growth ................................................................................................................... 53
Equity in the distribution of income........................................................................................ 54
Taxation ....................................................................................................................................................... 55
International Economics .................................................................................................57
Why do countries trade? ........................................................................................................ 57
1
,IBDP Economics study quide
Free Trade and Protectionism................................................................................................. 58
Exchange rates ....................................................................................................................... 61
Balance of payments .............................................................................................................. 65
Economic Integration ............................................................................................................. 69
Terms of trade ....................................................................................................................... 71
Formula sheet.................................................................................................................75
Paper 1 Tips ....................................................................................................................79
Command terms .............................................................................................................80
Quizlet link
2
,IBDP Economics study quide
Introduction
The foundations of economics
Goods: physical objects (tangible things).
Services: intangible things.
Scarcity: available resources or factors of production are finite, while human wants and
needs are infinite. There are not enough resources to produce everything that is
necessary to satisfy human beings' needs and wants.
The Factors of Production
- Land
- Labor
- Capital – physical and human
- Entrepreneurship
As people cannot have everything they need and want, they must make choices. Resource
scarcity forces society to make a choice between available alternatives. An opportunity cost
therefore arises.
Opportunity cost: the next best alternative foregone when an economic decision is made.
A production possibility curve shows
the maximum combinations of goods and
services that can be produced by an
economy in a given time period, if all
resources in the economy are being used
fully and efficiently and the state of
technology is fixed.
An outward shift of the PPC can be
achieved when there is an improvement
in the quantity and/or quality of the FOP.
A fall in the quantity of the FOP would
Figure 1. Production possibility curve cause in inward shift, caused by for
example a war.
3
,IBDP Economics study quide
Microeconomics
Demand and supply
Market: where buyers and sellers come together to carry out an economic transaction.
Demand
Demand: the quantity of a good or service that consumers are willing and able to purchase
at a given price in a given time period.
The law of demand states that as the price of a product falls, the quantity demanded will
increase, ceteris paribus and vice versa.
All other things remain equal
An increase in demand can occur due to the income effect and substitution effect…
- Income effect: when the price of a product falls, people’s “real income” increases so
they are able to purchase more of the product.
- Substitution effect: When the price of a product falls, the product will be more
attractive relative to other products who’s prices have stayed unchanged. Therefore
consumers will likely purchase more of the product, substituting it for products that
were previously purchased.
Non- price determinants of demand:
1. Income
o Normal goods: as income rises, demand for the product will also increase.
o Inferior goods: as income rises, demand for the product will fall as the
consumers will start to pay for higher priced subsititutes of the good.
2. The price of other products
o Substitutes: a change in the price for one product will lead to a change in
demand for the other product, in the way that an increase in price for good A
will cause an increase in demand for good B.
o Complements: a change in the price for one product will lead to a change in
demand for the other product, in the way that if there is a decrease in price
for good A, there will be an increase in demand for good B as well.
o Unrelated goods: a change in the price of one product will have no effect
upon the demand for the other product.
3. Tastes and preferences
- A change in tastes in favour of a product will lead to
more being demanded at every price.
4. Other factors
- The size of the population
- Changes in the age structure of the population
- Changes in income distribution
- Government policy changes
- Seasonal changes
Figure 2. increase in demand for a product
4
,IBDP Economics study quide
*a change in price causes movement along the demand curve, a change in any other
determinant of demand causes a shift of the curve*
A simple demand function takes to form:
𝑄𝑑 = 𝑎 − 𝑏𝑃
Qd = quantity demanded
P = price
a = Qd if price is zero
b = slope
Supply
Supply: the willingness and ability of producers to produce a quantity of a good or service at
a given price in a given time period.
The law of supply states that as the price of a product increases, the quantity supplied of
the product will increase, ceteris paribus and vice versa.
Non-price determinants of supply:
1. The cost of factors of production
2. The price of other products that a producer could produce
- If a producer of skateboards can produce roller skates and there is an increase in
demand for roller skates the producer may choose to produce them instead.
3. The state of technology
- Improved technology will allow supply to increase.
4. Future expectations
- If a producer expects demand for their product to increase they might increase
prices.
5. Government intervention (e.g. subsidies and taxes)
*a change in price causes movement along the supply curve, a change in any other
determinant of supply causes a shift of the curve*
A simple supply function takes to form:
𝑄𝑠 = 𝑐 + 𝑑𝑃
Qs = quantity supplied
P = price
c = Qs if price is zero
d = slope
Figure 3. decrease in supply for a product
5
, IBDP Economics study quide
Market equilibrium
Equilibrium
Equilibrium: a point where the demand in a market is equal to the supply. There are no
external disturbances.
𝑄𝑑 = 𝑄𝑠
The price mechanism:
The market equilibrium is
self-correcting. If you
move away from it, e.g.
the producer increases
the price to P1, the Qd
will fall to Q1 so there is
an excess supply. In order
to eliminate surplus,
producers need to lower
their prices. Same thing if
there is excess demand.
Consumer and producer surplus
Consumer surplus: the extra satisfaction gained by consumers from paying a price that is
lower than what they are prepared to pay.
There are people willing to pay $20 for a thingy but they
have to pay market equilibrium price which is $10, so the
consumer pays a price that is lower than what they were
prepared to pay.
Producer surplus: the difference between the lowest price
producers were willing and able to offer the good at, and
the actual price that they end up receiving for it.
The producer is willing to supply 5 thingies at a price of $5
but sells at $10 so the producer is gaining. Figure 4. consumer/producer surplus in the market of
thingies
Allocative efficiency
When a market is in equilibrium, it is said to be in a state of allocative efficiency.
Allocative efficiency: when society’s resources are being allocated in the most efficient way
possible from society’s point of view.
Consumer surplus + producer surplus = community surplus (total benefit to society)
6
