IB Economics - ESSENTIALS

329 Pages·2014·26.644 MB·English

by  David Finamore

STANDARD LEVEL
HIGHER LEVEL
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l
a
PEARSON BACCALAUREATE
i
t
Economics
n
DAVID FINAMORE
SERIES EDITOR: CHRISTIAN BRYAN
Supporting every learner across the IB continuum e
s
s
e
A01_ECON_SB_0370_PRE.indd 1 18/09/2014 10:41
Published by Pearson Education Limited, The author and publisher would like to thank
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Acknowledgements
the content of any external internet sites. It is
The authors and publisher would like to thank
essential for tutors to preview each website before
Ellen Vriniotis of ACS Athens, Rizma Rizwan
using it in class so as to ensure that the URL is still
of City and Islington College, Ellen Dittmar of
accurate, relevant and appropriate. We suggest
Western Academy of Beijing, Susanna Joachim
that tutors bookmark useful websites and consider
of Nymphenburger Schulen, Kania Grazyna of 33
enabling students to access them through the
Liceum IMM Kopernika, Sami Sorvali of Kannas
school/college intranet.
School, Diane Howlett of Szczecin International
School, Brian Hull of AIS Kuwait, Jacques Weber The assessment criteria, level descriptors, learning
of British International School of Jeddah, Adrianna outcomes and command terms have been
Anderson of International Community School, reproduced from IBO documents. Our thanks go
and Michael Ashleman of Wellington, for their to the International Baccalaureate Organization
invaluable help in the development of this series for permission to reproduce its intellectual
by piloting the concept material. copyright.
With thanks to the EAL reviewer Baljit Nijjar The material has been developed independently
and the subject specialist Graham Mallard, for by the publisher and the content is in no way
their helpful and constructive advice that greatly connected with or endorsed by the International
improved the clarity and accuracy of the text. Baccalaureate (IB). International Baccalaureate®
is a registered trademark of the International
Baccalaureate Organization.
Dedications
To Rosemary, Emma and Chloe
A01_ECON_SB_0370_PRE.indd 2 18/09/2014 10:41
Contents
Introduction iv
How to use your enhanced eBook viii
Section 1: Competitive markets: Demand and supply
Competitive markets 2
Elasticity 19
Government intervention 32
Market failure 46
Theory of the fi rm and market structures (HL only) 64
Section 2: Macroeconomics
Economic activity 107
Aggregate demand and aggregate supply 118
Macroeconomic objectives 138
Fiscal policy 174
Monetary policy 181
Supply-side policies 189
Section 3: International economics
International trade 196
Exchange rates 214
The balance of payments 227
Economic integration 238
Terms of trade (HL only) 243
Section 4: Development economics
Economic development 249
Measuring development 254
The role of domestic factors 258
The role of international trade 262
The role of foreign direct investment (FDI) 267
The roles of foreign aid and multilateral development
assistance 271
The role of international debt 280
The balance between markets and intervention 283
Internal Assessment 292
Extended Essay 300
Glossary: Command terms 310
Index 311
iii
Contents
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Introduction
Welcome to your Essential Guide to Economics. This book has been designed to solve the key
problems of many Diploma students:
•
relating material you have been taught to the syllabus goals and outcomes
•
remembering it from one lesson to the next
•
recalling it months later in an exam situation
•
demonstrating your understanding of it in an exam situation within a strict time limit.
Who should use Essential Guides?
Essential Guides have been carefully designed with all IB (International Baccalaureate) students in
mind as they serve as highly effective summaries and revision guides.
However, they have also been created with the particular interests in mind of IB students whose
fi rst language is not English, and who would like further support. As a result, the content in all
Essential Guides has been edited by an EAL (English as an additional language) expert to make sure
that the language used is clear and accessible, key terms are explained, and essential vocabulary is
defi ned and reinforced.
Key features of an Essential Guide
Reduced content: Essentials guides are not intended to be comprehensive textbooks – they
contain the essential information you need to understand and respond to each Learning Outcome
(LO) published in the IB subject guide. This allows you to understand, review, and revise material
quickly and still be confi dent you are meeting the essential aims of the syllabus. The content is
precise and to the point. We have reduced the number of words as much as possible to ensure
everything you read has a clear meaning, is clearly related to the LO, and will help you in an exam.
Format and approach: The content of the book is organized according to the Learning Outcomes
(LOs). Each LO is looked at separately, which allows you to use the book as a fi rst-text, or a revision
guide, or as a way to help you understand material you have been given from other sources. The
content is explained as clearly as possible, and you can be sure the information relates directly to
the LOs.
Sub-headings: The pages are organized using logical sub-headings to help you understand the
most important points of the LO. This organization also provides you with a guide on what an
effective exam answer might look like. The sub-headings can be used to help you during revision,
as a planning model before you start writing your answer, or for the actual answer to help you
focus the examiner on how you are addressing the question.
Model sentences: These summarize key concepts so that you gain a clearer understanding of
them. They are examples of the sort of sentences you could use in an exam. Set out below are a
few examples:
Model sentence: If MR > MC increasing output increases profi t, if MC > MR reducing
output increases profi t therefore profi t is maximized where MR = MC.
Model sentence: A change in a non-price determinant of demand or supply causes the
market to be in disequilibrium at the original equilibrium price. Price must change in
order to eliminate the excess demand or excess supply and continues to change until
the market clears at the new equilibrium price and equilibrium quantity.
Model sentence: In the long-run fi rms enter the industry when economic profi t
is positive and some existing fi rms exit when economic profi t is negative thereby
altering market supply until P = ATC and restoring the long-run position under
perfect competition where only normal profi t is made.
iv
Introduction
A01_ECON_SB_0370_PRE.indd 4 18/09/2014 10:41
Trouble shooters: These are step-by-step guides aimed at helping you to answer a question or
complete a calculation. Two examples are set out below:
Explain how market failure is caused by imperfect information – a step-by-step
guide
Trouble shooter
When suppliers have negative information about a good that is not shared with the
consumers marginal private benefi t will be greater than marginal social benefi t.
The market equilibrium is socially ineffi cient because marginal social cost is greater
than marginal social benefi t meaning that the cost of the resources used to produce
the next unit is greater than the benefi t society gains from the consumption of it.
There is a misallocation of resources: too many resources are allocated to the
production of the good so price and output are too high.
When consumers have all the information demand falls and market failure caused by
asymmetric information is corrected.
Consumers now have all the information and place a lower value on the consumption of
the next unit. Price, output and consumption fall. Fewer resources are now allocated to
the production of the good.
The social optimum equilibrium is achieved where MSB = MSC.
Calculations of AP and MP – a step-by-step guide
Trouble shooter
Add the fi rst worker. Quantity of workers changes from 0 to 1 and output changes from
0 to 4:
AP = TP/V = 4/1 = 4
MP = ∆TP/∆V = (4 – 0)/(1 – 0) = 4/1 = 4 units
Add the next worker. Quantity of workers changes from 1 to 2 and output increases from
4 to 9 units:
AP = TP/V = 9/2= 4.5 units
MP = ∆TP/∆V = (9 – 4)/(2 – 1) = 5/1 = 5 units
Add the next worker. Quantity of workers changes from 2 to 3. Output changes from 9 to
15 units:
AP = TP/V = 15/3 = 5 units
MP = ∆TP/∆V = (15 – 9)/(3 – 2) = 6/1 = 6 units
Add one more worker. Quantity of workers changes from 3 to 4. Output changes from
15 to 20 units:
AP = TP/V = 20/4 = 5 units
MP = ∆TP/∆V = (20 – 15)/(5 – 4) = 5/1 = 5 units
Vocabulary and synonym boxes: These are included to
Glossary
help identify and support your understanding of subject-
specifi c and diffi cult words. These useful words and assembly line an arrangement
of workers and machines in a
phrases are colour-coded in the margins. We have avoided factory along which the good
using a highly academic tone, which is often found in being made passes from one
operation to the next until the
many textbooks, in order to make the text more accessible
good is completed
to students whose fi rst language is not English. However,
elite a group of people with a
at the same time we have ensured that the complexity of high level of power/infl uence
the content is at the level required by successful Diploma because they have money/
knowledge/skills
students, and so the key subject-specifi c vocabulary
needed is highlighted in a separate box.
v
Introduction
A01_ECON_SB_0370_PRE.indd 5 18/09/2014 10:41
Internal Assessment section: This is intended to help you gain excellent marks for your IAs.
It contains advice on choosing an article and writing your fi rst draft. There is also a detailed
explanation on how to gain maximum marks under each of the IB assessment criteria that includes
examples of economic analysis and evaluation to show you what the examiners are looking for.
Extended Essay section: This contains lots of advice on how to complete your EE successfully.
You will fi nd advice on choosing an essay title and on how to present your essay in a formal and
academic way. There is a detailed explanation of how to gain maximum marks for each of the IB
assessment criteria. There is also advice on how to write an email requesting help from an outside
source, how to reference books and articles, and how to write up your bibliography.
In the accompanying eBook you will fi nd a complete digital version of the book. There are also
links to spoken audio fi les of the model sentences and vocabulary terms and defi nitions, to help
with comprehension and pronunciation. In addition, all the vocabulary lists are located together as
downloadable fi les.
Above all, we hope this book helps you to understand, consolidate, and revise your course content
more easily than ever, helping you to achieve the highest possible result in your exams.
David Finamore
vi
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vii
A01_ECON_SB_0370_PRE.indd 7 18/09/2014 10:41
How to use your enhanced eBook
Jump to any page Highlight parts of the text Search the whole book
Switch from single- to
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1.3 Government intervention – Indirect taxes 1.3 Government intervention
Audio
Select the icons to hear Tsuhbes itnitcurteea isme pino crotestds gleoaodds sto f oar fdaoll mine isnttiecarnllayt piornoadlu ccoemd pgeotoitdivse. ness. The higher price causes consumers to Subject vocabulary
audio of the headers and Learning Outcomes imported goods goods sold
The imposition of tax can lead to infl ation. The disadvantages of infl ation are discussed in detail on into a country from another
model sentences pages 149–50. country
● Explain the government intervention of imposing indirect ● Draw diagrams to show specifi c and ad valorem taxes,
(excise) taxes. and analyse their impacts on market outcomes. Model sentence: When a tax is levied on a normal good demand falls due to higher prices, ignefln aetriaol nle vaenl ionfc preraicsees ion ft ghoeo ds/
● Show the distinction between specifi c and ad valorem ● Discuss the consequences of imposing an indirect tax pmraotdeuricaelrss i nrecdreuacsee os ufi trpmust’, caonsdt su onfe pmropdlouycmtieonnt, pinr itchee t ihnedruesftorrye irnicseres aasneds .t Ahe t afi xr mon b reacwo mes less sgeivrevinc etism ine apne reiocodn, uosmuayl loyv ae ry eaa r
taxes. on the stakeholders in a market, including consumers, internationally competitive leading to higher unemployment in exporting industries. tax revenue the income the
producers, and the government. government receives through
The government must raise tax revenue to pay for the provision of goods and services that would be the levying and collection of
Synonyms What is the distinction between specifi c and ad valorem taxes? underconsumed and undersupplied if left to the free market. (This will be discussed later in the chapter taxes
on market failure.) A tax generates revenue for the government that it can use to provide things such as free market a market
leexvpieedn d..i.t.u..r.e. .. p splaecneddin, img/posed Athna ti npdroiredcutc tearxs ihs aav eta txo l epvaiye fdo ro ena ecxhp uennitd oitfu ar eg.o Ao dsp theecyifi sce tlla. xIt iiss aa cphear-rguen iet xtpaxre ossr ead fl aast -ar amteo tnaext. aAryn veaxlaume ple infrastructure, healthcare, education, the armed forces, and welfare payments. waonphdee rrsaeut epth pwely itf ohaorrceue ats l aloonfwy d efeodmr mtaons do f
money spent is an excise tax or duty which is a tax placed on a selected number of goods, such as tobacco and alcohol. There are many effects of a tax on the economy and these will be discussed further in later units. intervention
Ad valorem tax is a charge that producers have to pay for each unit of a good they sell, but expressed as a
recuperate .. greecto bvaecrk/ percentage of the price of the good. T•est your understanding of this unit by answering the following questions wmealdfea rbey p tahyem goevnetr an mpaeynmt teon t
imposition ..introduction The producer pays the tax to the government. The producer must raise the price the consumer pays for • Distinguish between a direct tax and an indirect tax. spoemrsoeonn ise ,u unseumalplyl obyeecda uosre e tahren s
incentive ..... encouragement/ each unit in order to recuperate the tax. It is called an indirect tax because the tax is not paid directly by the Using diagrams to illustrate your answer, explain the difference between a specifi c tax and an a low income
m enoctoivuartaiogenment/ ccoonnssuummeerr ttoo tthhee ggoovveerrnnmmeenntt,, uunnlliikkee aann income tax which is a direct tax. • ad valorem tax.
MMooddeell sseenntteennccee:: The effect of a tax is to increase the producer’s costs of production. When Discuss the effect the imposition of a tax has on a consumer. Glossary
Subject vocabulary aa ttaaxx iiss ppllaacceedd oonn aa unit of output or an existing tax is increased profi t at each price falls. infrastructure the basic
Therefore the producer will reduce supply and the supply curve shifts up and to the left. structure/systems of a country
specifi c tax a charge (e.g. roads/railways)
expressed as a monetary value
tuhnaitt porf oad guocoedrs spoaldy on each P S1 S P S1 Learning Outcomes
ad valorem tax a tax based on $50 S
aasa sp leveasr lctuaeexn atadgdee od ft tahxe ( VpAriTce) asnudc h P1 tax ● Etaxxpelsa ionn, ucsoinngsu dmiaegrrsa amnsd, hfi ormw st hdeif fienrcsi,d deenpceen odfin ing doinre tcht e ● Pfulontc dtieomnsa nandd a nthde snu ipllpulsyt rcauterv aens dfo/or ra c parlcoudluactet ftrhoem e flfiencetas r
$20
producer a business that tax price elasticity of demand and on the price elasticity of of the imposition of a specifi c tax on the market (on
makes goods P $20 supply. (HL) price, quantity, consumer expenditure, producer revenue,
tax
income tax a direct tax on government revenue, consumer surplus, and producer
individual earnings (wages, surplus). (HL)
rtoen tth, ep groofiv te, rinnmteerenstt) and paid Q1 Q Q1 Q2 Q
direct taxes a tax that is paid Figure 13.1 Figure 13.2 What are the effects on price and quantity of the imposition of a specifi c Synonyms
directly by an individual or tax (HL) – a step-by-step guide
fi rm to the governmnent. For As shown in Figure 13.1 the placement of a specifi c per-unit tax of $20 causes a parallel shift of the supply curve incidence ....... occurence/
eexxaammppllee iinnccoommee ttaaxx oonn wwaaggeess up and to the left (S to S)) aatt eeaacchh lleevveell ooff oouuttppuutt bbyy tthhee aammoouunntt ooff tthhee ttaaxx.. frequency
aanndd ccoommPppaaRnnIyyV ppArrooTfifi ttEss.. NOTE 1 Trouble shooter (see Figure 14.1 and Figure 14.2)
ccoossttss ooff pprroodduuccttiioonn the As shown in Figure 13.2 the imposition of an aadd vvaalloorreemm tax causes the supply curve to pivot anti-clockwise Subject vocabulary
Note afafaammccttoooouurrssnn ttoo ttffhh pp-eerr oofifiR ddrrmmeuuccv ppttiiiaaoosyynness uufftoossheerr ddttihhs ttee,oo look aapapgrrrraooiiccuuieennn iidd nna ccttthhrree eetaa hqsqseeuuessaa ttnndhhtteeiiittf yyaaf mmessuurooppeuuppnnnlliitteec oodde f fww ttbaahhxxeee iinnnnt wccpprrrreeeiiccaaeeessee neessqq aauunnaaddllss tt zzhheeeerr oodd ii((ssSSttaa ttnnoocc SSee1 )bb. eeTtthwweee teeannx SSis aaann pdde SSrc egnettasg bei gogfe trh. eF oprr iecxea tmheprleef, owreh eans bTheeca tuasxe c tahues etas xt hraet seu ips pgliyv ecnu rbvye tthoe s vheifrtt iucpal adnisdt atonc teh eb eletwft ebeyn t hthee a omrioguinnat l oafn tdh en etawx s(furopmply S c tuor vSetasx). price elasticity of demand
pprroodduuccee ggooooddss oorr sseerrvviicceess 1 (PED) a measure of how
direct tax and inditthhreee crraattt eet aooffx aa a ssaanlleedss ttlaaexxa iissr 22n00 %%th aaenndd pprriiccee iiss $$110000 tthhee aammoouunntt ooff ttaaxx iiss $$2200.. WWhheenn tthhee pprriiccee iiss $$225500 tthhee aammoouunntt ooff The fi rm wants to make consumers pay all the tax by setting price at P. quantity demanded responds
uouorrnn ssiittee rroovvffii ccooeeuu ppttpprroocuuddott uuancc seesiddne gbbqleyyu aag oefifi onrrmmdc es of itmax pis o$5s0in. g different kinds of tax. However at P2 quantity supplied > quantity demanded. To eliminate th2e excess supply price must tpoe rac echnatanggee tienr mprsice in
ppuurrcchhaassiinngg ppoowweerr a measure fall from P2 to Ptax. price elasticity of supply
ososeeff rrhhvvooiiccwweess mm aa aaggnniivvyyee ggnnoo aaoommddssoo uuaannnnddtt ooff HHooww ddooeess aa ttaaxx aaffffeecctt ccoonnssuummeerrss,, pprroodduucceerrss,, aanndd tthhee ggoovveerrnnmmeenntt?? Price increases from Pe to Ptax and quantity falls from Qe to Qtax. (qPuEaSn) tait ym seuapspulriee do fr ehsopwo nds
mmoonneeyy ccaann bbuuyy AA ttaaxx iinnccrreeaasseess tthhee pprriiccee ccoonnssuummeerrss hhaavvee ttoo ppaayy tthheerreebbyy rreedduucciinngg tthhee purchasing power of income. This to a change in price in
nnoorrmmaall ggooooddss goods for mmeeaannss ffeewweerr ggooooddss ccaann bbee bboouugghhtt wwiitthh tthhee ssaammee iinnccoommee aanndd tthheerreeffoorree ccoonnssuummppttiioonn ffaallllss.. percentage terms
wwhhiicchh ddeemmaanndd iinnccrreeaasseess wwhheenn linear function an equation,
iinnccoommee iinnccrreeaasseess,, aanndd ffaallllss AAfftteerr aa ttaaxx iiss lleevviieedd ccoonnssuummeerrss hhaavvee lleessss ddiissppoossaabbllee iinnccoommee ttoo ssppeenndd aanndd tthheerreeffoorree ddeemmaanndd ffoorr normal goods the graph of which is a straight
wwhheenn iinnccoommee ffaallllss ffaallllss.. line
rtaekailn ign icnotom aec icnocuonmt eth aef teefrf ects As demand falls producers of taxed goods reduce output because people are buying fewer goods. eqxucaenstist ys usupppplyli eodc cisu grsr ewahteern
opof iwnefl ration on purchasing Producers need fewer workers and unemployment increases. Government will therefore have to pay more in than quantity demanded
welfare payments.
A tax placed on raw materials increases fi rms’ costs of production leading to a fall in profi t at each price. There
is now less incentive to supply so the producer reduces supply causing the supply curve to shift up and to the
left. The price of the fi nal good increases leading to a fall in consumers’ real income.
32 Section 1: Microeconomics 33
viii
Introduction M03_ECON_SB_0370_CH03.indd 32-33 17/09/2014 13:10
A01_ECON_SB_0370_PRE.indd 8 18/09/2014 10:41
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1.3 Government intervention – Indirect taxes 1.3 Government intervention
The increase in costs leads to a fall in international competitiveness. The higher price causes consumers to Subject vocabulary
substitute imported goods for domestically produced goods.
Learning Outcomes imported goods goods sold
The imposition of tax can lead to infl ation. The disadvantages of infl ation are discussed in detail on into a country from another
pages 149–50. country
● Explain the government intervention of imposing indirect ● Draw diagrams to show specifi c and ad valorem taxes,
(excise) taxes. and analyse their impacts on market outcomes. Model sentence: When a tax is levied on a normal good demand falls due to higher prices, ginefln aetriaol nle vaenl ionfc preraicsees ion ft ghoeo ds/
● Show the distinction between specifi c and ad valorem ● Discuss the consequences of imposing an indirect tax pmraotdeuricaelrss i nrecdreuacsee os ufi trpmust’, caonsdt su onfe pmropdlouycmtieonnt, pinr itchee t ihnedruesftorrye irnicseres aasneds .t Ahe t afi xr mon b reacwo mes less sgeivrevinc etism ine apne reiocodn, uosmuayl loyv ae ry eaa r
taxes. on the stakeholders in a market, including consumers, internationally competitive leading to higher unemployment in exporting industries. tax revenue the income the
producers, and the government. government receives through
The government must raise tax revenue to pay for the provision of goods and services that would be the levying and collection of
Synonyms What is the distinction between specifi c and ad valorem taxes? underconsumed and undersupplied if left to the free market. (This will be discussed later in the chapter taxes
on market failure.) A tax generates revenue for the government that it can use to provide things such as free market a market
leexvpieedn d..i.t.u..r.e. .. p splaecneddin, img/posed Athna ti npdroiredcutc tearxs ihs aav eta txo l epvaiye fdo ro ena ecxhp uennitd oitfu ar eg.o Ao dsp theecyifi sce tlla. xIt iiss aa cphear-rguen iet xtpaxre ossr ead fl aast -ar amteo tnaext. aAryn veaxlaume ple infrastructure, healthcare, education, the armed forces, and welfare payments. waonphdee rrsaeut epth pwely itf ohaorrceue ats l aloonfwy d efeodmr mtaons do f
money spent is an excise tax or duty which is a tax placed on a selected number of goods, such as tobacco and alcohol. There are many effects of a tax on the economy and these will be discussed further in later units. intervention
Ad valorem tax is a charge that producers have to pay for each unit of a good they sell, but expressed as a
recuperate .. greecto bvaecrk/ percentage of the price of the good. T•est your understanding of this unit by answering the following questions wmealdfea rbey p tahyem goevnetr an mpaeynmt teon t
imposition ..introduction The producer pays the tax to the government. The producer must raise the price the consumer pays for • Distinguish between a direct tax and an indirect tax. spoemrsoeonn ise ,u unseumalplyl obyeecda uosre e tahren s
incentive ..... encouragement/ each unit in order to recuperate the tax. It is called an indirect tax because the tax is not paid directly by the Using diagrams to illustrate your answer, explain the difference between a specifi c tax and an a low income
motivation consumer to the government, unlike an income tax which is a direct tax. • ad valorem tax. Defi nitions with audio
Model sentence: The effect of a tax is to increase the producer’s costs of production. When Discuss the effect the imposition of a tax has on a consumer. Glossary Click on highlighted
Subject vocabulary a tax is placed on a unit of output or an existing tax is increased profi t at each price falls. infrastructure the basic terms to see the
Therefore the producer will reduce supply and the supply curve shifts up and to the left. structure/systems of a country
specifi c tax a charge (e.g. roads/railways) defi nition and hear
expressed as a monetary value
tuhnaitt porf oad guocoedrs spoaldy on each P S1 S P S1 Learning Outcomes the audio.
ad valorem tax a tax based on $50 S
aasa sp leveasr lctuaeexn atadgdee od ft tahxe ( VpAriTce) asnudc h P1 tax ● Etaxxpelsa ionn, ucsoinngsu dmiaegrrsa amnsd, hfi ormw st hdeif fienrcsi,d deenpceen odfin ing doinre tcht e ● Pfulontc dtieomnsa nandd a nthde snu ipllpulsyt rcauterv aens dfo/or ra c parlcoudluactet ftrhoem e flfiencetas r
$20
producer a business that tax price elasticity of demand and on the price elasticity of of the imposition of a specifi c tax on the market (on
makes goods P $20 supply. (HL) price, quantity, consumer expenditure, producer revenue,
tax
income tax a direct tax on government revenue, consumer surplus, and producer
individual earnings (wages, surplus). (HL)
rtoen tth, ep groofiv te, rinnmteerenstt) and paid Q1 Q Q1 Q2 Q
direct taxes a tax that is paid Figure 13.1 Figure 13.2 What are the effects on price and quantity of the imposition of a specifi c Synonyms
directly by an individual or tax (HL) – a step-by-step guide
fi rm to the governmnent. For As shown in Figure 13.1 the placement of a specifi c per-unit tax of $20 causes a parallel shift of the supply curve incidence ....... occurence/
example income tax on wages up and to the left (S to S) at each level of output by the amount of the tax. frequency
and company profi ts. 1 Trouble shooter (see Figure 14.1 and Figure 14.2)
costs of production the As shown in Figure 13.2 the imposition of an ad valorem tax causes the supply curve to pivot anti-clockwise Subject vocabulary
afamctooursn to tfh per ofi drmuc ptiaoyns ufoser dth teo parroicuen idn cthreea sqeusa tnhteit ya msuopupnlite odf w tahxe inn cprreicaese esq aunadls t zheer od i(sSta tnoc Se1 )b. eTthwee teanx Sis aan pde Src egnettasg bei gogfe trh. eF oprr iecxea tmheprleef, owreh eans Tbheeca tuasxe c tahues etas xt hraet seu ips pgliyv ecnu rbvye tthoe s vheifrtt iucpal adnisdt aton cteh eb eletfwt ebeyn t hthee a omrioguinnat l oafn tdh en etawx s(furopmply S c tuor vSetasx). price elasticity of demand Vocabulary lists
produce goods or services 1 (PED) a measure of how
unit of output a single good tthaxe irsa $te5 0o.f a sales tax is 20% and price is $100 the amount of tax is $20. When the price is $250 the amount of The fi rm wants to make consumers pay all the tax by setting price at P2. qtou aan cthitayn dgeem ina npdriecde rines ponds Select the icons at the
or service produced by a fi rm However at P2 quantity supplied > quantity demanded. To eliminate the excess supply price must percentage terms back of the book to see
purchasing power a measure fall from P2 to Ptax. price elasticity of supply complete vocabulary lists
osef rhvoicwes m a agnivye gno aomdso uanndt of How does a tax affect consumers, producers, and the government? Price increases from Pe to Ptax and quantity falls from Qe to Qtax. (qPuEaSn) tait ym seuapspulriee do fr ehsopwo nds
money can buy A tax increases the price consumers have to pay thereby reducing the purchasing power of income. This to a change in price in
normal goods goods for means fewer goods can be bought with the same income and therefore consumption falls. percentage terms
which demand increases when linear function an equation,
income increases, and falls After a tax is levied consumers have less disposable income to spend and therefore demand for normal goods the graph of which is a straight
when income falls falls. line
rtaekailn ign icnotom aec icnocuonmt eth aef teefrf ects As demand falls producers of taxed goods reduce output because people are buying fewer goods. eqxucaenstist ys usupppplyli eodc cisu grsr ewahteern
opof iwnefl ration on purchasing Producers need fewer workers and unemployment increases. Government will therefore have to pay more in tttthhhhaaaannnn qqqquuuuaaaannnnttttiiiittttyyyy ddddeeeemmmmaaaannnnddddeeeedddd
welfare payments.
A tax placed on raw materials increases fi rms’ costs of production leading to a fall in profi t at each price. There
is now less incentive to supply so the producer reduces supply causing the supply curve to shift up and to the
left. The price of the fi nal good increases leading to a fall in consumers’ real income.
32 Section 1: Microeconomics 33
ix
M03_ECON_SB_0370_CH03.indd 32-33 17/09/2014 13:10 Introduction
A01_ECON_SB_0370_PRE.indd 9 18/09/2014 10:41