Microeconomics Unit Overview (IB Units 1 & 2)This is a featured page

Unit 1 Introduction to Economics

The purpose of this unit is to introduce the basic terminology an concepts in economics. Students are encouraged to consider what markets and governments can and cannot do. This section of the syllabus gives them an early opportunity to begin to explain economic phenomena through the use of diagrams, data analysis and the evaluation of economic material. This section is intended to make students aware of the role of economic sin real-world situations. Even at this initial stage teachers and students should consider the application of economic theories to developing countries, since development economics is integral to the course.

  • Definitions of social science and economics
  • Definitions of microeconomics and macroeconomics
  • Definitions of growth, development and sustainable development
  • Positive and normative concepts
  • Ceteris paribus
  • Scarcity
    • factors of production: land, labor, capital and management/entrepreneurship
    • payments to factors of production: rent, wages, interest, profit
  • Choice
    • utility: basic definition
    • opportunity cost
    • free and economic goods
    • Production possibility curves: definition
      • diagrams showing opportunity cost, actual and potential output
      • diagrams showing economic growth and economic development
  • Rationing systems
    • basic economic questions
      • what to produce?
      • how to produce?
      • for whom to produce?
    • mixed economies
      • public
      • private
      • central planning vs. free market
      • economies in transition

Unit 2 Microeconomics

The purpose of this unit is to identify and explain the importance of markets and the role played by demand and supply. The roles played by consumers, producers and the government in different market structures are highlighted. The failure of a market system are identified and possible solutions are examined.

The concepts learned here have links with other areas of the economics syllabus; for example, elasticity has many applications in different areas of international trade and development.

2.1 Markets
  • Definition of markets with relevant local, national and international examples
  • Brief descriptions of perfect competition, monopoly and oligopoly as different types of market structures, and monopolistic competition, using the characteristics of the number of buyers and sellers, type of product and barriers to entry.
  • Importance of price as a signal and as an incentive in terms of resource allocation

Demand
  • Definition of demand
  • Law of demand with diagrammatic analysis
  • Determinants of demand
  • Fundamental distinction between a movement along a demand curve and a shift of the demand curve
  • Exceptions to the law of demand (the upward-sloping demand curve)
    • ostentatious (Veblen) goods
    • role of expectations
    • Giffen goods

Supply
  • Definition of supply
  • Law of supply with diagrammatic analysis
  • Determinants of supply
  • Effects of taxes and subsidies on supply
  • Fundamental distinction between a movement along a supply curve and a shift of the supply curve

Interaction of demand and supply
  • Equilibrium market clearing price and quantity
  • Diagrammatic analysis of changes in demand and supply to show the adjustment to a new equilibrium

Price controls
  • Maximum price: causes and consequences
  • Minimum price: causes and consequences
  • Price support/buffer stock schemes
  • Commodity agreements

2.2 Elasticities
Price elasticity of demand (PED)
  • Formula
  • Definition
  • Possible range of values
  • Diagrams illustrating the range of values of elasticity
  • Varying elasticity along a straight-line D curve
  • Determinants of price elasticity of demand
Cross-elasticity of demand
  • Definition
  • Formula
  • Significance of sign with respect to complements and substitutes
Income elasticity of demand
  • Definition
  • Formula
  • Normal goods
  • Inferior goods
Price elasticity of supply
  • Definition
  • Formula
  • Possible range of values
  • Diagrams illustrating the range of values of elasticity
  • Determinants of price elasticity of supply
Applications of concepts of elasticity
  • PED and business decisions: the effety of price changes on total revenue
  • PED and taxation
  • Cross-elasticity of demand: relevance for firms
Higher level IB and AP topics:
  • Flat rate and ad valorem taxes
  • Incidence of indirect taxes and subsidies on the producer and consumer
  • Implication of elasticity of supply and demand for the incidence (burden) of taxation

2.2.1 Theory of consumer choice (AP only)
  • Total utility and marginal utility
  • Utility maximization: equalizing marginal utility per dollar
  • Individual and market demand curves
  • Income and substitution effects

2.3 Theory of the firm (Higher level IB and AP only)
Cost theory
  • Types of costs: fixed costs, variable costs (distinction between short-run and long-run)
  • Total, average and marginal costs
  • Accounting costs = opportunity costs = economic costs
Short-run
  • Law of diminishing returns
  • Total product, average product, marginal product
  • Short-run cost curves
Long-run
  • Economies of scale
  • Diseconomies of scale
  • Long-run cost curves
Revenues
  • Total revenue
  • Marginal revenue
  • Average revenue
Profit
  • Distinction between normal (zero) and supernormal (abnormal) profit
  • Profit maximization in terms of total revenue and total costs, and in terms of marginal revenue and marginal cost
  • Profit maximization assumed to be the main goal of firms but other goals exist (sales volume maximization, revenue maximization, environmental concerns)
Perfect competition
  • Assumptions of the model
  • Demand curve facing the industry and the firm in perfect competition
  • Profit-maximizing level of output and price in the short-run and long-run
  • The possibility of abnormal profits/losses in the short-run and normal profits in the long-run
  • Shut-down price, break-even price
  • Definitions of allocative and productive efficiency
  • Efficiency in perfect competition
Monopoly
  • Assumptions of the model
  • Sources of monopoly power/barriers to entry
  • Natural monopoly
  • Demand curve facing the monopolist
  • Profit-maximizing level of output
  • Advantages and disadvantages of monopoly in comparison with perfect competition
  • Efficiency in monopoly
Monopolistic competition
  • Assumptions of the model
  • Short-run and long-run equilibrium
  • Product differentiation
  • Efficiency in monopolistic competition
Oligopoly
  • Assumptions of the model
  • Colusive and non-collusive oligopoly
  • Cartels
  • Kinked demand curve as one model to describe interdependent behavior (IB HL only)
  • Importance of non-price competition
  • Theory of contestable markets (IB HL only)
Price discrimination
  • Definition
  • Reasons for price discrimination
  • Necessary conditions for the practice of price discrimination
  • Possible advantages to either the producer or the consumer

2.4 Market failure (all classes)
Reasons for market failure
  • Positive and negative externalities, with appropriate diagrams
  • Short-term and long-term environmental concerns, with reference to sustainable development (IB only)
  • Lack of public goods
  • Underprovision of merit goods
  • Overprovision of demerit goods
  • Abuse of monopoly power
Possible government responses
  • Legislation
  • Direct provision of merit and public goods
  • Taxation
  • Subsidies
  • Tradable permits
  • Extension of property rights
  • Advertising to encourage or discourage consumption
  • International cooperation among governments

Unit 2.5 Resouce Markets (AP only)
  • Derived factor demand
  • Marginal revenue product
  • Labor market and firms’ hiring of labor
  • Market distribution of income

Performance Objectives and Graphs for Units 1 and 2

Unit 1 Introduction to Economics: Performance Objectives

  1. Introduce opportunity cost, decisions, scarcity and tradeoffs
  2. Understand the “economic problem”: infinite human wants and desires, finite resources
  3. Explain the three basic economic question: a) what to produce, b) how to produce, c) for whom to produce
  4. Identify the four productive resources (factors of production)
  5. Explore the role of scarcity and opportunity costs in the study of economics
  6. Review the three basic economic questions
  7. Introduce Production Possibilities Curve as a graphical representation of tradeoffs and opportunity cost
  8. Apply the concept of opportunity costs to real world examples
  9. Practice using PPCs to model scarcity, trade-offs, and begin discussing comparative advantage.
  10. Introduce the circular flow of resources between the firms and households,
  11. Learn the four productive resources: land, labor, capital and entrepreneurship (refer to them as factors of production and inputs as well),
  12. Examine how economists develop models of behavior of consumer, business and governments engaged in the production, exchange and consumption of goods and services
  13. Introduce the following concepts: Comparative and Absolute Advantage, Specialization in Trade, Connection to Opportunity Cost
  14. Use data to determine absolute and comparative advantage by calculating the opportunity cost.
  15. Using a grid to make these calculations

Unit 1 Graphs:
· Illustrate and label a production possibilities curve.
· Illustrate the concepts of scarcity, choice, cost, and economic growth using the PPC
· Illustrate the effects of trade on a PPC
· Illustrate absolute and comparative advantage using PPCs

Unit 2.1 and 2.2 Markets and Elasticities: Performance Objectives

Demand and PED
  1. Introduce concept of demand as an economic principle
  2. Define demand versus desire
  3. Learn how demand is represented through a demand schedule and in demand curve (2 economic models)
  4. Introduce concept of Utility as an economic measure of well-being and the law of diminishing marginal utility
  5. Learn how determinants of demand shift the demand curve to right or left
  6. Explain the downward sloping Demand curve as representing the economic principles of diminishing marginal utility, income and substitution effects
  7. Apply knowledge of determinants of demand to various scenarios
  8. Introduce the concept of consumer surplus
  9. Define price elasticity of demand
  10. Apply the law of demand to the price elasticity of demand
  11. Understand the factors that determine whether the price elasticity of demand is elastic or inelastic
  12. Compare the elasticities of different goods
  13. Calculate the price elasticity of a good
  14. Identify the determinants of elasticity of Demand
  15. Understand the factors that determine whether the price elasticity of demand is elastic or inelastic.
  16. Be able to recognize that the slope of the demand curve reflects relative elasticity
  17. Learn the difference between price elasticity, cross elasticity and income elasticity

Supply and PES and Market Equlibrium
  1. Simulate an oral auction in order to introduce the concept of a Supply schedule
  2. Derive supply, the law of supply, the supply curve from the simulation
  3. Brainstorm the determinants of supply and apply these to the example from the auction
  4. Practice creating supply schedule, curves, shifting supply curves
  5. Introduce market equilibrium as the intersection of the Demand and Supply curves
  6. Learn about the determinants of supply elasticity
  7. Understand that equilibrium price represents a trade-off for buyer and seller
  8. Examine the impacts of government intervention in the market equilibrium
  9. Examine the impact on efficiency of excise taxes, price ceilings and price floors
  10. Learn how a tax burden is shared between producers and consumers.
  11. Practice graphing the impacts of government interventions (ceilings, floors and excise taxes) on consumer and producer surplus, illustrating efficiency loss
  12. Review concepts on Demand, Elasticity, Supply, Equilibrium and government interventions

Unit 2.1 and 2.2 Graphs
  • Graphically demonstrate the difference between shifts and movements along demand and supply curves
  • Show the effects of a price ceiling and price floors
  • Draw and illustrate an elastic and inelastic demand curves and supply curves
  • Draw and illustrate consumer/producer tax burden given an elastic and inelastic demand curve
  • Given a change in supply, compare and contrast the effects of price and quantity changes with elastic and inelastic demand curves

Unit 2.2.1 Theory of Consumer Choice: Performance Objectives (AP only)

  1. Identify the factors that affect consumer behavior.
  2. Learn about utility and the role it plays in maximizing the satisfaction of a consumer.
  3. Learn how consumers measure and use their utility for a product/s as a way to make decision about the bundle of goods and services that they purchase.
  4. Examine how these ideas when applied to real life situations explain why people or companies behave the way that they do
  5. Understand how to calculate marginal utility per dollar
  6. Learn how to use the utility maximization rule and use it given a set income,
  7. Learn how to identify implicit versus explicit costs of production,
  8. Calculate accounting, economic and normal profits given a production scenarios

Unit 2.2.1 Graphs: No new graphs in this unit

Unit 2.3 Theory of the Firm: Performance Objectives
Costs, revenue and profit
  1. Production functions: short and long run
  2. Marginal product and diminishing returns
  3. Short-run costs
  4. Long-run costs and economies of scale
  5. Cost minimizing input combination
  6. Explain the law of diminishing returns
  7. Compute marginal and average product when given total product data
  8. Explain the relationship between total, marginal, and average product
  9. Distinguish between fixed, variable and total costs
  10. Explain the difference between average and marginal costs
  11. Compute and graph AFC, AVC, ATC, and marginal cost when given total cost data
  12. Explain how AVC, ATC, and marginal cost relate to one another
  13. Relate average product to average variable cost, and marginal product to marginal cost
  14. Explain what can cause cost curves to rise or fall
  15. Explain the difference between short‑run and long‑run costs
  16. State why the long‑run average cost is expected to be U‑shaped
  17. List causes of economies and diseconomies of scale
  18. Indicate relationship between economies of scale and number of firms in an industry
  19. Understand the relationship between the shape of a long-run ATC curve and market structure

    Market structure
    - Pure competition
    1. List the four basic market models and characteristics of each.
    2. Describe characteristics of a purely competitive firm and industry.
    3. Explain how a purely competitive firm views demand for its product and marginal revenue from each additional unit sale.
    4. Compute average, total, and marginal revenue when given a demand schedule for a purely competitive firm
    5. Use both total-revenue—total-cost and marginal-revenue—marginal-cost approaches to determine short‑run price and output that maximizes profits (or minimizes losses) for a competitive firm
    6. Use both total-revenue/total-cost and marginal-revenue/marginal-cost approaches to determine short‑run price and output that maximizes profits (or minimizes losses) for a competitive firm
    7. Find the short‑run supply curve when given short‑run cost schedules for a competitive firm
    8. Explain how to construct an industry short‑run supply curve from information on single competitive firms in the industry
    9. Learn how to find Long Run Equilibrium, Long Run Profit Maximization
    10. Draw and illustrate a Long Run Supply Curve for a Constant Cost Industry, (Perfectly Elastic Long Run Supply Curve) and for an Increasing Costs Industry/Decreasing Costs Industry
    11. Explain how the behavior of a purely competitive firm/industry demonstrates productive and allocative efficiency
    12. Draw and illustrate a Long Run Supply Curve for a Constant Cost Industry, (Perfectly Elastic Long Run Supply Curve) and for an Increasing Costs Industry/Decreasing Costs Industry
    13. Explain how the behavior of a purely competitive firm/industry demonstrates productive and allocative efficiency

    Monopoly
    1. List the five characteristics of pure monopoly
    2. Explain the difference between a “pure” monopoly and a “near” monopoly
    3. List and give examples of the four barriers to entry
    4. Describe the demand curve facing a pure monopoly and how it differs from that facing a firm in a purely competitive market
    5. Compute marginal revenue when given a monopoly demand schedule
    6. Explain why the marginal revenue is equal to the price in pure competition but not in monopoly
    7. Determine the price and output level the monopoly will choose given demand and cost information in both table and graphic form.
    8. Learn about the possibility of losses by monopolists,
    9. Examine the economic effects of monopoly (price, output and efficiency, income transfer, cost complications, rent seeking expenditures, the effects of monopolies on society)
    10. Identify tools governments use to regulate monopolies and the effects of regulation, price determination and the dilemma of regulation.
    11. List three conditions necessary for price discrimination.
    12. Explain why profits and output will be higher for a discriminating monopoly as compared to non-discriminating monopoly.
    13. Identify two pricing strategies of monopoly regulation and explain the dilemma the regulators face in utilizing these strategies.

    Monopolistic Competition
    1. List the characteristics of monopolistic competition
    2. Explain how product differentiation occurs in similar products
    3. Determine the profit‑maximizing price and output level for a monopolistic competitor in the short run when given cost and demand data
    4. Explain why a monopolistic competitor will realize only normal profit in the long run
    5. Identify the reasons for excess capacity in monopolistic competition
    6. Explain how product differentiation may offset these inefficiencies

    Oligopoly
    1. Describe the characteristics of an oligopolistic industry
    2. Differentiate between homogeneous and differentiated oligopolies
    3. Identify and explain the most important causes of oligopoly
    4. Describe and compare the concentration ratio and the Herfindahl index as ways to measure market dominance in an industry
    5. Use a profit-payoffs matrix (game theory) to explain the mutual interdependence of two rival firms and why oligopolists might tempt to cheat on a collusive agreement
    6. Explain the major advantages of collusion for oligopolistic producers
    7. List the obstacles to collusion behavior
    8. Explain price leadership as a form of tacit collusion
    9. Explain why oligopolies may prefer non-price competition over price competition
    10. List the positive and negative effects of advertising
    11. Explain why some economists assert that oligopoly is less desirable than pure monopoly
    12. Explain the three ways that the power of olipogolists may be diminished

    Unit 2.3 Graphs

    • Draw and interpret a production function graph.
    • Draw and interpret a total-cost graph and average-cost graphs.
    • Identify average-fixed, average-variable, and average-cost curves and marginal cost.
    • Draw graphs and differentiate between a competitive firm and a competitive industry.
    • Draw graphs and correctly label a competitive firm that makes excessive profits, earns zero profits, and minimizes losses.
    • Draw a sequence of graphs that show a competitive firm making excessive profits (or minimizing its losses) with a return to long-run equilibrium.
    • Draw and label a monopoly firm that makes excessive profits (and minimization of losses).
    • Draw a graph to illustrate the effects in output, price, and profits if the demand increases (or decreases) in a monopolistic firm.
    • Illustrate graphically the problems of monopoly inefficiency (allocative and technical).
    • Draw and label a monopolistic competitive firm and illustrate long-run equilibrium.

    Unit 2.4 Market Failure: Performance Objectives

    1. Explain how government alters the income distribution.
    2. Define and explain the effects of spillover benefits and spillover costs.
    3. Describe how the government can correct the effects of spillover costs and benefits.
    4. Explain what is meant by a “public good” and why government must provide these goods and services.
    5. Describe graphically the collective demand curve for a particular public good and explain this curve.
    6. Explain why the supply curve for public goods is upward sloping and explain how the optimal quantity of a public good is determined.
    7. Identify the purpose of cost-benefit analysis and explain the major difficulty in applying this analysis.
    8. Explain what is meant by spillovers or externalities.
    9. Describe graphically and verbally how an overallocation of resources results when spillover costs are present and how this can be corrected by government action.
    10. Describe graphically and verbally how an underallocation of resources occurs when spillover benefits are present and how this can be corrected by government action.
    11. Explain the Coase theorem, its significance, and the three conditions necessary for it to work.
    12. Describe three policies that would reduce negative externalities.
    13. Use an example to explain a market for pollution rights and how this market would lead to a better allocation of resources.
    14. Apply knowledge of government interventions and society’s optimal amount of externality reduction to present proposals to various externality scenarios,
    15. Use graphical illustrations of proposed solutions
    16. Describe graphically and verbally how an overallocation of resources results when spillover costs are present and how this can be corrected by government action.
    17. Describe graphically and verbally how an underallocation of resources occurs when spillover benefits are present and how this can be corrected by government action.
    18. Explain the Coase theorem, its significance, and the three conditions necessary for it to work.
    19. Describe three policies that would reduce negative externalities.
    20. Use an example to explain a market for pollution rights and how this market would lead to a better allocation of resources.
    21. Discuss the predicted effects of global warming and how cost-benefit could be used to determine international policies and goals

    Unit 2.4 Graphs
    • Illustrate the effects of externalities and spillovers on a demand/supply graph.
    • Illustrate the effects of a government regulation on producers and/or consumers.
    • Illustrate price ceilings and floors.

    Unit 2.5 Resource Markets: Performance Objectives

    1. Explain the concept of derived D as it applies to resource D.
    2. Determine the marginal-revenue-product schedule for an input when given appropriate data.
    3. State the principle employed by a profit‑maximizing firm in determining how much of a resource it will employ.
    4. Apply the MRC = MRP principle to find the quantity of a resource a firm will employ when given the necessary data.
    5. Explain why the MRP schedule of a resource is the firm’s D schedule for the resource in a purely competitive product market.
    6. Explain why the resource D curve is downward sloping when a firm is selling output in a purely competitive product market; an imperfectly competitive product market.
    7. List the three determinants of D for a resource and explain how a change in each of the determinants would affect the D for the resource.
    8. List four determinants of the price‑elasticity of D for a resource, and state how changes in each would affect the elasticity of D for a resource.
    9. State the rule for determining the least‑cost combination of resources.
    10. Find the least‑cost combination of resources when given appropriate data.
    11. State the rule used by a profit‑maximizing firm to determine how much of each of several resources to employ.
    12. Explain the marginal productivity theory of income distribution and present two criticisms of it.
    13. Practice concepts related to MRP and MRC.
    14. State the rule for determining the least‑cost combination of resources.
    15. Find the least‑cost combination of resources when given appropriate data.
    16. State the rule used by a profit‑maximizing firm to determine how much of each of several resources to employ.
    17. Differentiate between nominal and real wages.
    18. List those factors that have led to an increasing level of real wages in the U.S. historically.
    19. Determine the equilibrium wage rate and employment level when given appropriate data for a firm operating in a purely competitive product and labor market; a firm operating in a monopolistically competitive product market and a purely competitive labor market; and a firm operating in a purely competitive product market and a monopsonistic labor markets.
    20. Present the major points in the cases for and against the minimum wage.
    21. Understand the concept of economic rent.
    22. Graphically demonstrate how land rent is determined
    23. Explain the effects of changes in demand on economic rent
    24. Explain how land rent is a surplus payment
    25. Explain what determines rent differentials.
    26. Explain how rent functions as a cost to the individual firm.
    27. Describe how the interest rate is determined.
    28. Explain how business firms make investment decisions.
    29. Distinguish between nominal and real interest rates--Explain why profits are received by some firms and not by others.
    30. List three sources of economic profits.
    31. Describe the general function of profits.

    Unit 2.5 Graphs
    • Draw and illustrate a demand curve for labor.
    • Draw and illustrate a supply curve for labor in a single competitive firm and a competitive market.
    • Draw and illustrate an effective minimum wage.
    • Draw and illustrate the demand and supply curve for labor in a monopolistic market.
    • Draw and illustrate the various effects of labor union negotiations on wages and employment in a monopolistic industry.



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    JacksonMduma economics 2 Oct 19 2012, 10:57 PM EDT by Overy1970
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    about elasticies
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    thamim microeconomics 0 Jul 23 2011, 10:44 PM EDT by thamim
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    Cigarettes in Russia and China are researched to have a price elasticity of -0.15. Explain what this means?
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    Taraadhikari hello 0 May 13 2011, 4:21 AM EDT by Taraadhikari
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    Im just wodering to know the different between diminishing marginal return and decreasing ecnomic scale.want to know the clear concept in the curve
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