IB Notes
Microeconomics
CROSS- PRICE ELASTICITY OF DEMAND (CED / XED)
- The measure of how much the demand for one product changes for a given change in price of another product.
- % change in quantity demanded of X = CED
% change in price of Y
- CED can be positive or negative.
- Substitutes have a positive CED.
- Complements have a negative CED.
- Non-related goods have a CED of 0.
- The larger the value, the stronger the relationship.
- Knowing the CED value, firms try to increase the level of relationship between complementary goods (phones and phone battery).
- Firms try to decrease the level of relationship between substitutes.
PRICE ELASTICITY OF SUPPLY
- The measure of how much supply changes given a price change.
- Spare capacity can increase supply (to meet demand)
- PES is more inelastic in the short run because it takes time to produce a product.
Determinants of PES:
- Barriers to entry (high barrier = less competitors = unresponsive / low PES)
- Resources (technology results in a higher PES)
- Inventories (amount of stock- high stock = high PES)
- Time lags (production time and delivery time)
- Spare capacity
- Perfectly inelastic supply includes famous paintings, concert tickets.
MARKET FAILURE
- Market failure is where the market mechanism fails to allocate resources efficiently.
- Occurs when knowledge is not perfect (ignorance, trade secrets).
- Resources are immobile.
- Market power is significant (abuse of monopoly power).
- Goods and services would or could not be provided in sufficient quantities by the free market.
- External costs and benefits exist.
- Inequalities exist.
- Littering. When we pay for fast food but if we litter the paper bags, wrappings on the floor, we do not need to pay a price.
- Fast food and gambling (over consumption).
- Air pollution and acid rain.
- Efficiency = where external costs and benefits are accounted for.
- Technical efficiency= production of goods and services using the minimum amount of resources.
- Productive efficiency= production of goods and services at the lowest factor cost.
- Allocative efficiency= resources cannot be readjusted to make one consumer group better off without making another worse off (opportunity cost). Any point on the PPF is maximum efficiency.