Microeconomics

This set of pages covers the microeconomics section of the IB Economics course.

Unit 2.1: Demand theory

This page covers the nature of demand theory, the law of demand, utility theory and the non-price factors that affect demand. The market is a central feature of the study of microeconomics. A market for a good or service exists where buyers...

Unit 2.2: Supply theory

This page covers the nature of supply theory and the determinants of supply. Supply is the willingness and ability of producers to offer a given quantity of a good for sale at a point in time and at a given price. Supply refers to the resource...

Unit 2.3: Competitive market equilibrium

This page looks at the concept of market equilibrium. Equilibrium in markets occurs where demand equals supply and the market-clearing price and output are established. Equilibrium in markets occurs where demand equals supply and the market-clearing...

Unit 2.4(1): Behavioural economics (HL)

This page covers the behavioural economic section of the course. This an HL only topic. Behavioural economics considers how psychology affects economic decision-making and offers an alternative approach to classical economics. Behavioural economics...

Unit 2.4(2): Business objectives (HL)

This page focuses on different business objectives. It includes coverage of profit maximisation, corporate and social responsibility, market share, satisficing, growth. Market supply decisions are based on the objectives businesses set when...

Unit 2.5(1) Price elasticity of demand (PED)

This page focuses on price elasticity of demand. It covers its definition and measurement, the interpretation of the PED value, the determinants of PED, the effect of PED on revenue, types of goods and PED and an evaluation of PED. Price elasticity...

Unit 2.5(2): Income elasticity of demand (YED)

This page focuses on income elasticity of demand. It covers its definition and measurement, the interpretation of the YED value, the Engels Curve and the application of YED to industrial change and business strategy. Income elasticity of demand...

Unit 2.6: Price elasticity of supply (PES)

This revision page covers the definition and measurement of PES, the interpretation of the PES value, determinants of PES and the application of PES. Price elasticity of supply is the responsiveness of the quantity supplied of a good to a change...

Unit 2.7(1): Governments in markets - indirect taxation

This page on indirect taxation covers the reasons for indirect tax, a graphical analysis of indirect tax, the effect of PED and PES on indirect tax and the impact of indirect tax on different stakeholders. An Indirect or expenditure tax is the...

Unit 2.7(2): Governments in markets - subsidies

This page covers the subsidy section of the syllabus. It includes the nature of subsidies, reasons for subsidies, how subsidies affect markets, the impact of PED and PES on subsidies and the way subsidies affect different stakeholders. A subsidy...

Unit 2.7(3): Governments in markets - maximum prices

This page covers the nature of maximum prices and the reasons why governments use them. It also covers the impact of maximum prices on different stakeholders. A maximum price or price ceiling is a price set by a government or controlling authority...

Unit 2.7(4): Governments in markets - minimum prices

This page covers the nature of minimum prices and the reasons why governments use them. It also covers the impact of minimum prices on different stakeholders. A minimum price or price floor is a lower limit set by the government or controlling...

Unit 2.8(1): Market Failure – Externalities

This page covers market failure, negative externalities of consumption and production along positive externalities of consumption and production. Markets fail when the free market forces of demand and supply lead to an allocation of resources...

Unit 2.8(2) Merit and demerit goods

This page covers merit and demerit goods. It explains the theory behind these goods and why they are a market failure. Merit goods are goods that society says people should consume because they are associated with significant social benefits.

Unit 2.8(3) External cost policies

This page covers the different policies to reduce the external costs of consumption and production. This includes taxation, tradeable permits, regulations, advertising and education. Where an industry is associated with negative externalities...

Unit 2.8(4) External benefit policies

This page covers the policies to increase the consumption and production of goods associated with positive externalities and merit goods. These policies include subsidies, state provision, regulation, advertising and education. When positive...

Unit 2.8(5) Common pool resources

This page covers the theory of common pool resources, the importance of sustainability, external costs and policy approaches to common pool resources. Common pool resources are the natural resources that firms and individuals can access in...

Unit 2.9 Public goods

This page covers the nature of public goods and why they are a market failure. It also covers the policy options for the provision of public goods. Public goods have the characteristics of being non-rivalrous and non-excludable goods that cannot...

Unit 2.10: Asymmetric information (HL)

This page covers the nature of asymmetric information as a market failure from a buyer and seller perspective, adverse selection, moral hazard and policies. Asymmetric information is an imbalance of information that exists between buyers and...

Unit 2.11(2) Market power - Perfect competition(HL)

This page covers the nature of perfect competition, price and output in the market, profits and losses and efficiency in perfect competition. Agricultural markets provide the best examples of perfect competition. The example used in this chapter...

Unit 2.11(3) Market power - Monopoly(HL)

This page covers monopoly in terms of the nature of the market, barriers to entry, price and output, profits and losses and efficiency. A monopoly exists when one firm's output accounts for the total market supply of an industry. Domestic water...

Unit 2.11(4) Market power - Monopolistic competition(HL)

This page covers monopolistic competition in terms of the nature of the market, price and output, profits and losses and efficiency. A large number of buyers and sellers means each firm has very limited market power. There are no barriers to...

Unit 2.11(5) Market power - Oligopoly(HL)

This page covers oligopoly in terms of the nature of the market, collusive and non-collusive oligopoly, game theory, price rigidity, non-price competition and efficiency. An oligopoly is a model of a market where a small number of large firms...

Unit 2.1: Demand theory
The market is a central feature of the study of microeconomics. A market for a good or service exists where buyers and sellers interact and the price and quantity of the product traded is established. Markets can be narrowly defined (the market...
Unit 2.2: Supply theory
Supply is the willingness and ability of producers to offer a given quantity of a good for sale at a point in time and at a given price. Supply refers to the resource element of the central economic problem of scarcity. The factors of production...
Unit 2.3: Competitive market equilibrium
This page looks at the concept of market equilibrium. Equilibrium in markets occurs where demand equals supply and the market-clearing price and output are established. Equilibrium in markets occurs where demand equals supply and the market-clearing...
Unit 2.4(1): Behavioural economics (HL)
Behavioural economics offers a different view on consumer decision making by considering an alternative to the classical economic perspective that people try to maximise their utility from their available income Behavioural economics considers...
Unit 2.4(2): Business objectives (HL)
Market supply decisions are based on the objectives businesses set when they are producing in different markets. Classical economic theory assumes that firms aim to maximise profits and this is the business objective that underlys supply decisions...
Unit 2.5(1) Price elasticity of demand (PED)
This page focuses on price elasticity of demand. It covers its definition and measurement, the interpretation of the PED value, the determinants of PED, the effect of PED on revenue, types of goods and PED and an evaluation of PED. Price elasticity...
Unit 2.5(2): Income elasticity of demand (YED)
This page focuses on income elasticity of demand. It covers its definition and measurement, the interpretation of the YED value, the Engels Curve and the application of YED to industrial change and business strategy. Income elasticity of demand...
Unit 2.6: Price elasticity of supply (PES)
This revision page covers the definition and measurement of PES, the interpretation of the PES value, determinants of PES and the application of PES. Price elasticity of supply is the responsiveness of the quantity supplied of a good to a change...
Unit 2.7(1): Governments in markets - indirect taxation
Governments raise revenue to pay for public services like health and education. The main source of government revenue is taxation and revenue is also raised through government owned enterprises and assets. Many businesses and organisations in...
Unit 2.7(2): Governments in markets - subsidies
This page covers the subsidy section of the syllabus. It includes the nature of subsidies, reasons for subsidies, how subsidies affect markets, the impact of PED and PES on subsidies and the way subsidies affect different stakeholders. A subsidy...
Unit 2.7(3): Governments in markets - maximum prices
This page covers the nature of maximum prices and the reasons why governments use them. It also covers the impact of maximum prices on different stakeholders. A maximum price or price ceiling is a price set by a government or controlling authority...
Unit 2.7(4): Governments in markets - minimum prices
This page covers the nature of minimum prices and the reasons why governments use them. It also covers the impact of minimum prices on different stakeholders. A minimum price or price floor is a lower limit set by the government or controlling...
Unit 2.8(1): Market Failure – Externalities
This page covers market failure, negative externalities of consumption and production along positive externalities of consumption and production. Markets fail when the free market forces of demand and supply lead to an allocation of resources...
Unit 2.8(2) Merit and demerit goods
This page covers merit and demerit goods. It explains the theory behind these goods and why they are a market failure. Merit goods are goods that society says people should consume because they are associated with significant social benefits.
Unit 2.8(3) External cost policies
This page covers the different policies to reduce the external costs of consumption and production. This includes taxation, tradeable permits, regulations, advertising and education. Where an industry is associated with negative externalities...
Unit 2.8(4) External benefit policies
This page covers the policies to increase the consumption and production of goods associated with positive externalities and merit goods. These policies include subsidies, state provision, regulation, advertising and education. When positive...
Unit 2.8(5) Common pool resources
This page covers the theory of common pool resources, the importance of sustainability, external costs and policy approaches to common pool resources. Common pool resources are the natural resources that firms and individuals can access in...
Unit 2.9 Public goods
Public goods are goods that bring significant social benefits to society but cannot be provided by the free market. They are a market failure, which means the government needs to intervene in the market to ensure they are provided. Because they...
Unit 2.10: Asymmetric information (HL)
This page covers the nature of asymmetric information as a market failure from a buyer and seller perspective, adverse selection, moral hazard and policies. Asymmetric information is an imbalance of information that exists between buyers and...
Unit 2.11(1) Market power - Theory of production and costs (HL)
The theory of costs underpins the theory of supply covered in Unit 2.2. There are two ways of looking at costs, implicit costs and explicit costs. An implicit cost is the opportunity cost that exists in every business decision-making situation.
Unit 2.11(2) Market power - Perfect competition(HL)
This page covers the nature of perfect competition, price and output in the market, profits and losses and efficiency in perfect competition. Agricultural markets provide the best examples of perfect competition. The example used in this chapter...
Unit 2.11(3) Market power - Monopoly(HL)
A monopoly exists when one firm's output accounts for the total market supply of an industry. Domestic water supply in an area is an example of a monopoly. Many countries consider firms whose total revenue accounts for a high proportion of total...
Unit 2.11(4) Market power - Monopolistic competition(HL)
A large number of buyers and sellers means each firm has very limited market power. There are no barriers to entry into or exit from the market. Each firm in a market sells a differentiated product that is similar but slightly different to the...
Unit 2.11(5) Market power - Oligopoly(HL)
This page covers oligopoly in terms of the nature of the market, collusive and non-collusive oligopoly, game theory, price rigidity, non-price competition and efficiency. An oligopoly is a model of a market where a small number of large firms...