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IB Econ SL Flashcards

Learn unit 1 and 2

1
Q

Q: What is Classical Economics according to Adam Smith?

A

A: A theory that emphasizes minimal government intervention, with markets guided by the invisible hand of supply and demand.

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2
Q

Q: What is the Invisible Hand in economics?

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A: It refers to the unseen market forces that coordinate the best allocation of resources driven by consumer and producer self-interest.

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3
Q

Q: What does Laissez-faire mean in economic theory?

A

A: A policy advocating for no or minimal government intervention in markets, allowing for free competition.

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4
Q

Q: What is Say’s Law?

A

A: The principle that supply creates its own demand, meaning that production is the key to economic growth.

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5
Q

Q: Who was Karl Marx and what was his critique of capitalism?

A

A: A philosopher who critiqued that capitalism leads to worker exploitation and deepening inequality, eventually causing revolutions.

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6
Q

Q: What is Marginal Utility?

A

A: The additional satisfaction (utility) gained from consuming one more unit of a good. It generally decreases with each additional unit consumed.

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7
Q

Q: What are Keynesian Economics?

A

A: A theory by John Maynard Keynes emphasizing government intervention to stimulate demand during economic downturns, particularly through fiscal policy.

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8
Q

Q: What is Monetarism?

A

A: An economic theory, led by Milton Friedman, focusing on controlling the money supply to manage inflation, as opposed to using fiscal policy.

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9
Q

Q: What is Behavioural Economics?

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A: A field combining economics and psychology to study how individuals make irrational economic decisions due to biases and emotions.

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10
Q

Q: What is a Circular Economy?

A

A: An economic system aimed at eliminating waste and pollution, circulating products, and regenerating nature, promoting sustainability over traditional growth.

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11
Q

Q: What are Injections in the Circular Flow of Income?

A

A: Additions to the economy, such as government spending (G), investment (I), and exports (X), which increase economic activity.

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12
Q

Q: What are Leakages in the Circular Flow of Income?

A

A: Withdrawals from the economy, such as savings (S), taxation (T), and imports (M), which reduce economic activity.

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13
Q

Q: What is Normative Economics?

A

A: The study of economic policies based on value judgments, opinions, and beliefs about what is best for the economy.

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14
Q

Q: What is Positive Economics?

A

A: The study of economic statements that are based on facts and empirical evidence, which can be proven true or false.

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15
Q

Q: What is the role of government in Keynesian Economics?

A

A: To increase government spending to stimulate demand and stabilize the economy during a recession or depression.

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16
Q

Q: What is Ceteris Paribus?

A

A: A Latin phrase meaning “all other things being equal,” used to simplify economic models by isolating two variables while assuming others remain constant.

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17
Q

Q: What is demand?

A

A: Demand is the amount of a good/service that a consumer is willing and able to purchase at a given price in a given time period.

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18
Q

Q: What is the difference between demand and effective demand?

A

A: Effective demand occurs when a consumer is both willing and able to purchase a good, while demand alone doesn’t consider whether the consumer can afford it.

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19
Q

Q: What does a demand curve represent?

A

A: A demand curve is a graphical representation of the relationship between the price of a good and the quantity demanded (QD) by consumers.

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20
Q

Q: What is the law of demand?

A

A: The law of demand states that, ceteris paribus, there is an inverse relationship between price and quantity demanded—when price rises, QD falls; when price falls, QD rises.

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21
Q

Q: What is individual demand?

A

A: Individual demand is the quantity of a good/service demanded by a single consumer at different price levels.

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22
Q

Q: What is market demand?

A

A: Market demand is the total demand for a good/service from all consumers in a market, calculated by summing individual demands at each price level.

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23
Q

Q: How is market demand calculated?

A

A: Market demand is calculated by adding up the individual demand of all consumers at each price level.

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24
Q

Q: What happens to quantity demanded when price changes?

A

A: If price is the only changing factor (ceteris paribus), quantity demanded changes, leading to either a contraction (decrease in QD as price increases) or an extension (increase in QD as price decreases) along the demand curve.

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25
Q: What is a contraction in quantity demanded?
A: A contraction in quantity demanded occurs when the price of a good increases, causing the QD to decrease, represented by a movement up the demand curve.
26
Q: What is an extension in quantity demanded?
A: An extension in quantity demanded occurs when the price of a good decreases, leading to an increase in QD, represented by a movement down the demand curve.
27
Q: What are non-price determinants of demand?
A: Non-price determinants are factors that change demand for a good/service, regardless of price. They include changes in real income, tastes/preferences, prices of related goods (substitutes and complements), the number of consumers, and future price expectations.
28
Q: How do changes in non-price determinants affect the demand curve?
A: Changes in non-price determinants shift the entire demand curve either left (decrease) or right (increase), at every price level.
29
Q: What is the effect of an increase in real income on demand?
A: If real income increases, demand increases, shifting the demand curve to the right (D→D1).
30
Q: What happens to demand if real income decreases?
A: If real income decreases, demand decreases, shifting the demand curve to the left (D→D2).
31
Q: How do changes in tastes/preferences affect demand?
A: If goods become more preferable due to factors like advertising, demand increases and shifts the curve right. If preferences decrease, demand shifts left.
32
Q: What is the impact of the price of a substitute good on demand?
A: When the price of a substitute increases, demand for the alternative good increases, shifting the demand curve right. A price decrease for a substitute decreases demand, shifting the curve left.
33
Q: What is the effect of population size on demand?
A: An increase in population increases demand, shifting the curve right. A decrease in population decreases demand, shifting the curve left.
34
Q: How do future price expectations affect demand?
A: If consumers expect prices to rise, demand increases now, shifting the curve right. If they expect prices to fall, demand decreases, shifting the curve left.
35
Q: What is supply?
A: Supply is the amount of a good or service that a producer is willing and able to supply at a given price in a given time period.
36
Q: What is a supply curve?
A: A supply curve is a graphical representation of the price and quantity supplied by producers, typically depicted as a straight line for easier analysis.
37
Q: Why is the supply curve upward-sloping?
A: The supply curve slopes upward because there is a positive relationship between price and quantity supplied (QS); producers supply more as prices increase to maximize profits.
38
Q: What does the law of supply state?
A: The law of supply states that there is a positive (direct) relationship between price and quantity supplied (QS), ceteris paribus. When price rises, QS rises; when price falls, QS falls.
39
Q: What is market supply?
A: Market supply is the total supply of a good or service from all individual suppliers in the market, calculated by summing the individual supply at each price level.
40
Q: What is an example of market supply?
A: In a small town, if Bakery 1 supplies 300 loaves, Bakery 2 supplies 600 loaves, Bakery 3 supplies 180 loaves, and Bakery 4 supplies 320 loaves, the market supply is 1,400 loaves.
41
Q: What does a movement along the supply curve represent?
A: A movement along the supply curve represents a change in the quantity supplied (QS) due to a change in price, ceteris paribus.
42
Q: What is an extension in quantity supplied (QS)?
A: An extension in QS occurs when an increase in price causes the QS to rise, shown by a movement up the supply curve.
43
Q: What is a contraction in quantity supplied (QS)?
A: A contraction in QS occurs when a decrease in price causes the QS to fall, shown by a movement down the supply curve.
44
Q: What are non-price determinants of supply?
A: Non-price determinants of supply are factors that change the supply of a good or service irrespective of the price level, shifting the entire supply curve.
45
Q: What are some examples of non-price determinants of supply?
A: Changes in costs of production, indirect taxes and subsidies, technology, number of firms, weather events, future price expectations, and goods in joint and competitive supply.
46
Q: How do changes in costs of production (COP) affect supply?
If COP increases, supply decreases, shifting the supply curve left (S → S1). If COP decreases, supply increases, shifting the supply curve right (S → S2).
47
Q: How do changes in indirect taxes affect supply?
If taxes increase, supply decreases, shifting left (S → S1). If taxes decrease, supply increases, shifting right (S → S2).
48
Q: How do subsidies affect supply?
If subsidies increase, supply increases, shifting right (S → S2). If subsidies decrease, supply decreases, shifting left (S → S1).
49
Q: How does new technology affect supply?
If technology improves, supply increases, shifting right (S → S2). If technology worsens or becomes outdated, supply decreases, shifting left (S → S1).
50
Q: How does the number of firms in the industry affect supply?
If the number of firms increases, supply increases, shifting right (S → S2). If the number of firms decreases, supply decreases, shifting left (S → S1).
51
Q: How do weather events affect supply?
Bad weather (e.g., drought) causes supply to decrease, shifting left (S → S1). Good weather increases supply, shifting right (S → S2).
52
Q: How do future price expectations affect supply?
If firms expect prices to rise, they increase supply, shifting right (S → S2). If firms expect prices to fall, they decrease supply, shifting left (S → S1).
53
Q: How do goods in joint supply affect supply?
A: When the supply of one good (e.g., beef) increases, the supply of the related good (e.g., leather) also increases, shifting right (S → S2).
54
Q: How do goods in competitive supply affect supply?
If the supply of one good (e.g., potatoes) increases, the supply of another competitive good (e.g., wheat) decreases, shifting left (S → S1). If the supply of one good falls, the supply of the other increases, shifting right (S → S2)
55
Q: How are prices for goods/services determined in a market system?
A: Prices are determined by the interaction of demand and supply.
56
Q: What is a market?
A: A market is any place that brings buyers and sellers together, and can be physical (e.g., McDonald's) or virtual (e.g., eBay).
57
Q: What happens when buyers and sellers agree on a price?
A: Buyers purchase the good/service, and sellers adjust prices until they reach an equilibrium price and quantity that satisfies both parties.
58
Q: What is equilibrium in a market?
A: Equilibrium occurs when demand equals supply, and the price at this point is called the equilibrium or market-clearing price.
59
Q: What happens at the equilibrium price?
A: Sellers are satisfied with their sales rate, and buyers are satisfied with the utility the product provides.
60
Q: What is disequilibrium?
A: Disequilibrium occurs whenever there is excess demand or excess supply in the market, causing the price to be above or below the equilibrium price.
61
Q: What is excess demand?
A: Excess demand occurs when the quantity demanded is greater than the quantity supplied, often because the price is too low.
62
Q: How do sellers respond to excess demand?
A: Sellers increase prices, which causes a contraction in quantity demanded and an extension in quantity supplied, eventually restoring equilibrium.
63
Q: What is excess supply?
A: Excess supply occurs when the quantity supplied is greater than the quantity demanded, often because the price is too high.
64
Q: How do sellers respond to excess supply?
A: Sellers lower prices, which causes a contraction in quantity supplied and an extension in quantity demanded, eventually restoring equilibrium.
65
Q: What is consumer sovereignty?
A: Consumer sovereignty refers to the power of consumers to decide what is produced by choosing whether or not to purchase goods at a given price.
66
Q: How long does it take for markets to return to equilibrium?
A: It varies: some markets like retail clothing may resolve disequilibrium in days, while others like the housing market may take months or years.
67
Q: What is consumer surplus?
A: Consumer surplus is the difference between the amount a consumer is willing to pay for a product and the actual price they pay.
68
Q: Give an example of consumer surplus.
A: If a consumer is willing to pay £18 for a movie but the price is £15, their consumer surplus is £3.
69
Q: What is producer surplus?
A: Producer surplus is the difference between the price a producer is willing to sell a product for and the price they actually sell it for.
70
Q: Give an example of producer surplus.
A: If a producer is willing to sell a laptop for £450 but sells it for £595, their producer surplus is £145.
71
Q: Where is consumer surplus located on a market diagram?
A: Consumer surplus is the area between the equilibrium price and the demand curve, lying underneath the demand curve.
72
Q: Where is producer surplus located on a market diagram?
A: Producer surplus is the area between the equilibrium price and the supply curve, lying above the supply curve.
73
Q: What happens to consumer and producer surplus at equilibrium?
A: At equilibrium, both consumer and producer surplus are maximized.
74
Q: What is social/community surplus?
A: Social surplus is the sum of consumer surplus and producer surplus.
75
Q: How does disequilibrium affect social surplus?
A: Disequilibrium reduces social surplus by creating excess demand or supply.
76
Q: What is allocative efficiency?
A: Allocative efficiency occurs when marginal benefit (MB) equals marginal cost (MC), maximizing the benefit for both consumers and producers.
77
Q: What happens at the allocative efficiency point?
A: Resources are allocated optimally, and no one can be made better off without making someone else worse off.
78
Q: What is productive efficiency?
A: Productive efficiency occurs when average costs are minimized, meaning resources are used efficiently with minimal wastage.
79
Q: What does the demand curve represent in terms of efficiency?
A: The demand curve represents the marginal benefit (MB) to the consumer.
80
Q: What does the supply curve represent in terms of efficiency?
A: The supply curve represents the marginal cost (MC) to the producer.
81
Q: When is a market considered allocatively efficient?
A: A market is allocatively efficient when MB equals MC, and community surplus is maximized.

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