ECONOMICS-HL&SL for the IB Diploma

1
Demand, supply, and the market equilibrium1Key concepts1
The market1
Ceteris paribus1
The law of demand2
Determinants of demand3
The law of supply3
Determinants of supply4
Movement £¨quantity demanded/supplied£©¡¡vs£® shift5
Why does price tend to form around the equilibrium price5
How can the market equilibrium be changed6
Resource allocation and the signaling and incentive functions of price7
Scarcity7
Market efficiency8
Example questions and answers8
Question group 1£º Determinants of demand and supply8
Question group 2£º The signaling and incentive functions of price10
Exercises122
Elasticities14Key concepts14
Price elasticity of demand £¨PED£©14
PED£¬ revenue£¬ and marginal revenue15
Cross price elasticity of demand £¨XED£©16
Income elasticity of demand £¨YED£©16
Price elasticity of supply £¨PES£©17
Example questions and answers18
Question group 1£º Determinants of elasticities18
Question group 2£º Usefulness of the knowledge of elasticities20
Exercises263
Taxes£¬ subsidies£¬ and price controls
£¨government intervention in the free market£©29Key concepts29
Indirect tax29
Market outcomes of an indirect tax30
Impact on stakeholders from an indirect tax31
How to find the tax burden £¨tax incidence£©¡¡for consumers and
producers £¨HL only£©31
Subsidy32
Price ceilings £¨maximum prices£©33
Price floors £¨minimum prices£©34
Impacts on stakeholders35
Example questions and answers35
Question group 1£º Comparing the effects of government interventions35
Question group 2£º Government intervention vs£® the free market40
Exercises474
Market failure49Key concepts49
Market failure49
Social welfare and allocative efficiency50
Public goods51
Excludability and rivalry51
Common access resources52
Externalities53
Positive externality of production54
Positive externality of consumption £¨merit goods£©56
Negative externality of production57
Negative externality of consumption58
Asymmetric information £¨HL only£©59
The abuse of monopoly power £¨HL only£©59
How to explain that a certain case is one of market failure60
Common evaluation perspectives on government intervention
in market failure61
Example questions and answers61
Question group 1£º Explaining market failure61
Question group 2£º Evaluating government responses to market failure64
Exercises675
Cost£¬ revenue£¬ and profit £¨HL only£©69Key concepts69
The short run £¨microeconomics£©69
The law of diminishing returns70
The concept of the “margin”70
Economic cost71
Opportunity cost71
Marginal cost71
Average revenue£¬ marginal revenue and total revenue71
The long run £¨microeconomics£©72
LRAC and £¨dis£©economies of scale73
Economic profit/loss74
The break even point and the shut down point74
How MC and MR help us find the profit maximizing quantity of
production75
How to find profit/loss with AC and AR76
Example questions and answers77
Question group 1£º SRAC and LRAC77
Question group 2£º Profit maximization80
Exercises846
Market structures £¨HL only£©88Key concepts88
How market structures compare88
Perfect competition89
Monopolistic competition90
Oligopoly90
Game theory£º the prisoner s dilemma91
Monopoly92
Common barriers to entry93
Market structures and efficiencies93
Example questions and answers94
Question group 1£º The short run and the long run94
Question group 2£º Comparing market structures97
Exercises1027
Price discrimination £¨HL only£©105Key concepts105
Price discrimination105
Conditions for price discrimination105
Third degree price discrimination106
Exercises1078
The macroeconomic equilibrium108Key concepts108
Aggregate demand £¨AD£©108
The macroeconomic short run and long run111
Short run aggregate supply £¨SRAS£©111
Long run aggregate supply £¨LRAS£©112
The new classical short run/long run transition113
Keynesian aggregate supply114
The Keynesian multiplier £¨HL only£©115
Example questions and answers115
Question group£º The short run and the long run115
Exercises1229
Unemployment124Key concepts124
Unemployment124
Unemployment rate124
Cyclical/demand deficient/Keynesian unemployment125
Frictional unemployment£¬ structural unemployment£¬ and seasonal
unemployment126
Why unemployment is undesirable127
Can unemployment be eliminated127
Example questions and answers127
Exercises12710
Inflation130Key concepts130
Inflation130
Consumer price index £¨CPI£©130
Core inflation131
Producer price index £¨PPI£©131
Macroeconomic objective£º low inflation131
Demand pull inflation132
Cost push inflation132
Policy solutions to inflation133
Phillips curve133
Example questions and answers133
Question group£º Consequences of inflation and deflation133
Exercises13611
Economic growth138Key concepts138
Economic growth138
Gross domestic product £¨GDP£©138
“Real” vs£® “nominal”138
The production possibilities curve £¨PPC£©139
Investment and growth140
Consequences of economic growth140
Example questions and answers141
Question group£º Economic growth and the standard of living141
Exercises14412
Equity in the distribution of income146Key concepts146
Equity vs£® equality in the distribution of income146
The market economy and equality146
The market economy and equity147
Income redistribution policies and efficiency147
The Lorenz curve and the Gini coefficient147
Absolute poverty and relative poverty148
Ways to mitigate income inequality/inequity149
Tax as a means to income redistribution149
Transfer payment150
Example questions and answers151
Exercises15113
Macroeconomic objectives and policies153Key concepts153
Demand side policies153
Fiscal policy154
Fiscal policies and AD154
Automatic stabilizers155
Fiscal policies and long term growth £¨or the supply side effects£©155
The effectiveness of fiscal policies155
Monetary policy157
What to target? Money supply£¬ interest rates£¬ or inflation rate157
Monetary policies and AD158
The effectiveness of monetary policies158
Supply side policies159
Interventionist supply side policies159
Market based supply side policies160
Policies£¬ theoretical perspectives£¬ and macroeconomic objectives161
Conflicts among macroeconomic objectives162
Unemployment rate£¬ inflation rate£¬ and the Phillips curves£¨HL only£©163
Example questions and answers164
Question group 1£º Fiscal/monetary policies vs£® supply side policies164
Question group 1£º Conflicts among objectives and policies173
Exercises17814
Measurement problems180Key concepts180
Macroeconomic variables and measurement180
Example questions and answers181
Question group£º Difficulties in measurement181
Exercises18315
Free trade vs£® protectionism184Key concepts184
Free trade184
Absolute advantage £¨HL only£©185
Comparative advantage £¨HL only£©186
Limitations of the theory of comparative advantage £¨HL only£©187
The World Trade Organization £¨WTO£©188
Trade protectionism189
The base model of international trade190
Tariff191
Quota192
Subsidy193
Administrative barriers195
Example questions and answers195
2 mark definitions195
4 mark explanation questions195
8 mark evaluation questions197
Exercises19916
Exchange rate201Key concepts201
Exchange rate201
Floating exchange rate system201
Factors that influence the exchange rate201
Changes in exchange rates in a floating exchange rate system202
Evaluating the free exchange rate system203
Fixed exchange rate system204
Changes in exchange rates in a fixed exchange rate system204
How central banks fix the exchange rate204
Evaluating the fixed exchange rate system205
Managed exchange rate system205
Consequences of an overvalued currency206
Example questions and answers206
2 mark definitions206
4 mark explanation questions207
8 mark evaluation questions208
Exercises21117
Balance of payments213Key concepts213
Balance of payments213
Current account213
Capital account214
Financial account214
The foreign exchange reserves215
Relationship between these accounts215
Current account deficit216
Implications of a persistent current account deficit £¨HL only£©216
Methods to correct a persistent current account deficit £¨HL only£©216
The Marshall Lerner condition £¨HL only£©217
The J curve218
Current account surpluses218
Implications of a persistent current account surplus £¨HL only£©219
Example questions and answers219
2 mark definitions219
4 mark explanation questions219
8 mark evaluation questions220
Exercises22318
Economic integration and terms of trade225Key concepts225
Economic integration225
Levels of economic integration225
Preferential trade agreement £¨PTA£©226
Free trade area £¨FTA£©226
Customs union226
Common market226
Comparing FTA£¬ customs union£¬ and common market £¨HL only£©227
Economic and monetary union227
Trade creation £¨HL only£©228
Trade diversion £¨HL only£©229
Terms of trade £¨HL only£©229
Short run causes to changes in terms of trade £¨HL only£©230
Long run causes to changes in terms of trade £¨HL only£©230
Example questions and answers231
2 mark definitions231
4 mark explanation questions231
8 mark evaluation questions232
Exercises235