IB Economics Revision Checklist:

Microeconomics
(syllabus section 1)

NAME
:_______________________________________________

Can You…
HL Skill Yes - Just Not
only: well about at all
1.1 Competitive markets: Demand and supply
Outline the meaning of the term market.
Explain the negative causal relationship between price and quantity demanded. [law
of demand]
Describe the relationship between an individual consumer’s demand and market
demand.
Explain that a demand curve represents the relationship between the price and the
quantity demanded of a product, ceteris paribus.
Draw a demand curve.
Explain how factors including changes in income (in the cases of normal and inferior
goods), preferences, prices of related goods (in the cases of substitutes and
complements) and demographic changes may change demand. [non-price
determinants of demand, i.e. factors that shift the demand curve]
Distinguish between movements along the demand curve and shifts of the demand
curve.
Draw diagrams to show the difference between movements along the demand curve
and shifts of the demand curve.
Explain the positive causal relationship between price and quantity supplied. [law of
supply]
Describe the relationship between an individual producer’s supply and market supply.
Explain that a supply curve represents the relationship between the price and the
quantity supplied of a product, ceteris paribus.
Draw a supply curve.
Explain how factors including changes in costs of factors of production (land, labour,
capital and entrepreneurship), technology, prices of related goods (joint/competitive
supply), expectations, indirect taxes and subsidies and the number of firms in the
market can change supply. [non-price determinants of supply, i.e. factors that shift
the supply curve]
Distinguish between movements along the supply curve and shifts of the supply
curve.
Draw diagrams to show the difference between movements along the supply curve
and shifts of the supply curve.
Explain, using diagrams, how demand and supply interact to produce market
equilibrium.
HL Skill Yes - Just Not
only: well about at all
Analyse, using diagrams and with reference to excess demand or excess supply, how
changes in the determinants of demand and/or supply result in a new market
equilibrium.
√ Calculate the quantity of excess demand or excess supply using diagrams.
Explain why scarcity necessitates choices that answer the “What to produce?”
question. [resource allocation]
Explain why choice results in an opportunity cost.
Explain, using diagrams, that price has a signalling function and an incentive function,
which result in a reallocation of resources when prices change as a result of a change
in demand or supply conditions. [price mechanism]
Explain the concept of consumer surplus.
Identify consumer surplus on a demand and supply diagram.
Explain the concept of producer surplus.
Identify producer surplus on a demand and supply diagram.
Evaluate the view that the best allocation of resources from society’s point of view is
at competitive market equilibrium, where social (community) surplus (consumer
surplus and producer surplus) is maximized (marginal benefit = marginal cost).
[allocative efficiency: MB = MC]
1.2 Elasticity
Explain the concept of price elasticity of demand (PED), understanding that it involves
responsiveness of quantity demanded to a change in price, along a given demand
curve.
Calculate PED using the following equation: PED = (percentage change in quantity
demanded) / (percentage change in price)
State that the PED value is treated as if it were positive although its mathematical
value is usually negative.
Explain, using diagrams and PED values, the concepts of price elastic demand, price
inelastic demand, unit elastic demand, perfectly elastic demand and perfectly inelastic
demand.
Explain the determinants of PED, including the number and closeness of substitutes,
the degree of necessity, time and the proportion of income spent on the good.
Calculate PED between two designated points on a demand curve using the PED
equation above.
Explain why PED varies along a straight line demand curve and is not represented by
the slope of the demand curve.
Examine the role of PED for firms in making decisions regarding price changes and
their effect on total revenue. [applications of PED]
Explain why the PED for many primary commodities is relatively low and the PED for
manufactured products is relatively high.
Examine the significance of PED for government in relation to indirect taxes.

HL Skill Yes - Just Not

only: well about at all
Explain the concept of income elasticity of demand (YED), understanding that it
involves responsiveness of demand (and hence a shifting demand curve) to a change in
income.
Calculate YED using the following equation: YED = (percentage change in quantity
demanded) / (percentage change in income)
 Show that normal goods have a positive value of YED and inferior goods have a
negative value of YED.
Distinguish, with reference to YED, between necessity (income inelastic) goods and
luxury (income elastic) goods.
Examine the implications for producers and for the economy of a relatively low YED for
primary products, a relatively higher YED for manufactured products and an even
higher YED for services. [applications of YED]
Explain the concept of price elasticity of supply (PES), understanding that it involves
responsiveness of quantity supplied to a change in price along a given supply curve.
Calculate PES using the following equation: PES = (percentage change in quantity
supplied) / (percentage change in price)
Explain, using diagrams and PES values, the concepts of elastic supply, inelastic supply,
unit elastic supply, perfectly elastic supply and perfectly inelastic supply.
Explain the determinants of PES, including time, mobility of factors of production,
unused capacity and ability to store stocks.
Explain why the PES for primary commodities is relatively low and the PES for
manufactured products is relatively high. [applications of PES]
1.3 Government intervention
Explain why governments impose indirect (= excise) taxes.
Distinguish between specific (fixed amount) and ad valorem (percentage) taxes.
Draw diagrams to show specific and ad valorem taxes, and analyse their impacts on
market outcomes.
Discuss the consequences of imposing an indirect tax on the stakeholders in a market,
including consumers, producers and the government.
√ Explain, using diagrams, how the incidence of indirect taxes on consumers and firms
differs, depending on the price elasticity of demand and on the price elasticity of
supply.
Explain why governments provide subsidies, and describe examples of subsidies.
Draw a diagram to show a subsidy, and analyse the impacts of a subsidy on market
outcomes.
Discuss the consequences of providing a subsidy on the stakeholders in a market,
including consumers, producers and the government.
Explain why governments impose price ceilings (maximum prices), and describe
examples of price ceilings, including food price controls and rent controls.
Draw a diagram to show a price ceiling, and analyse the impacts of a price ceiling on
market outcomes.
Examine the possible consequences of a price ceiling, including shortages, inefficient
resource allocation, welfare impacts, underground parallel markets and non-price
rationing mechanisms.
Discuss the consequences of imposing a price ceiling on the stakeholders in a market,
including consumers, producers and the government.
√ Calculate possible effects from the price ceiling diagram, including the resulting
shortage and the change in consumer expenditure (which is equal to the change in
firm revenue).
HL Skill Yes - Just Not
only: well about at all
Explain why governments impose price floors (minimum prices), and describe
examples of price floors, including price support for agricultural products and
minimum wages.
Draw a diagram of a price floor, and analyse the impacts of a price floor on market
outcomes.
Examine the possible consequences of a price floor, including surpluses and
government measures to dispose of the surpluses, inefficient resource allocation and
welfare impacts.
Discuss the consequences of imposing a price floor on the stakeholders in a market,
including consumers, producers and the government.
√ Calculate possible effects from the price floor diagram, including the resulting surplus,
the change in consumer expenditure, the change in producer revenue, and government
expenditure to purchase the surplus.
1.4 Market failure
Examine the concept of market failure as a failure of the market to achieve allocative
efficiency, resulting in an over-allocation of resources (over-provision of a good) or an
under-allocation of resources (under-provision of a good).
Explain the concepts of marginal private benefits (MPB), marginal social benefits
(MSB), marginal private costs (MPC) and marginal social costs (MSC).
Describe the meaning of externalities as the failure of the market to achieve a social
optimum where MSB = MSC.
Explain, using diagrams and examples, the concepts of negative externalities of
production and consumption, and the welfare loss associated with the production or
consumption of a good or service.
Explain that demerit goods are goods whose consumption creates external costs.
Evaluate, using diagrams, the use of policy responses, including market-based policies
(taxation and tradable permits), and government regulations, to the problem of
negative externalities of production and consumption
Explain, using diagrams and examples, the concepts of positive externalities of
production and consumption, and the welfare loss associated with the production or
consumption of a good or service.
Explain that merit goods are goods whose consumption creates external benefits.
Evaluate, using diagrams, the use of government responses, including subsidies,
legislation, advertising to influence behaviour, and direct provision of goods and
services.
Using the concepts of rivalry and excludability, and providing examples, distinguish
between public goods (non-rivalrous and nonexcludable) and private goods (rivalrous
and excludable).
Explain, with reference to the free rider problem, how the lack of public goods
indicates market failure.
Discuss the implications of the direct provision of public goods by government.
Explain, using examples, common access resources.
Apply the concept of sustainability to the problem of common access resources.
Examine the consequences of the lack of a pricing mechanism for common access
resources in terms of goods being overused/ depleted/degraded as a result of
activities of producers and consumers who do not pay for the resources that they use,
and that this poses a threat to sustainability.
 Discuss, using negative externalities diagrams, the view that economic activity
requiring the use of fossil fuels to satisfy demand poses a threat to sustainability.
Discuss the view that the existence of poverty in economically less developed
countries creates negative externalities through overexploitation of land for
agriculture, and that this poses a threat to sustainability.
Evaluate, using diagrams, possible government responses to threats to sustainability,
including legislation, carbon taxes, cap and trade schemes, and funding for clean
technologies.

HL Skill Yes - Just Not

only: well about at all
Explain, using examples, that government responses to threats to sustainability are
limited by the global nature of the problems and the lack of ownership of common
access resources, and that effective responses require international cooperation.
√ Explain, using examples, that market failure may occur when one party in an economic
transaction (either the buyer or the seller) possesses more information than the other
party. [Asymmetric information]
√ Evaluate possible government responses, including legislation, regulation and
provision of information.
√ Explain how monopoly power can create a welfare loss and is therefore a type of
market failure. [Abuse of monopoly power]
√ Discuss possible government responses, including legislation, regulation,
nationalization and trade liberalization.
1.5 Theory of the firm and market structures (HL only)
√ Distinguish between the short run and long run in the context of production.
[Production in the short run: the law of diminishing marginal returns]
√ Define total product, average product and marginal product, and construct diagrams
to show their relationship.
√ Explain the law of diminishing marginal returns.

√ Calculate total, average and marginal product from a set of data and/or diagrams.

√ Explain the meaning of economic costs as the opportunity cost of all resources
employed by the firm (including entrepreneurship).
√ Distinguish between explicit costs and implicit costs as the two components of
economic costs.
√ Explain the distinction between the short run and the long run, with reference to
fixed factors and variable factors.
√ Distinguish between total costs, marginal costs and average costs. [short run
production costs]
√ Draw diagrams illustrating the relationship between marginal costs and average costs,
and explain the connection with production in the short run.
√ Explain the relationship between the product curves (average product and marginal
product) and the cost curves (average variable cost and marginal cost), with reference
to the law of diminishing marginal returns.
√ Calculate total fixed costs, total variable costs, total costs, average fixed costs, average
variable costs, average total costs and marginal costs from a set of data and/or
diagrams.
√ Distinguish between increasing returns to scale, decreasing returns to scale and
constant returns to scale. [production in the long run: returns to scale]
 √ Explain the relationship between short-run average costs and long-run average costs.
[long run production costs]
√ Explain, using a diagram, the reason for the shape of the long-run average total cost
curve.
√ Explain factors giving rise to economies of scale, including specialization, efficiency,
marketing and indivisibilities.
√ Explain factors giving rise to diseconomies of scale, including problems of coordination
and communication.
√ Distinguish between total revenue, average revenue and marginal revenue. [revenues]

√ Draw diagrams illustrating the relationship between total revenue, average revenue
and marginal revenue.
√ Calculate total revenue, average revenue and marginal revenue from a set of data
and/or diagrams.
√ Describe economic profit (abnormal [=supernormal] profit) as the case where total
revenue exceeds economic cost.

HL Skill Yes - Just Not

only: well about at all
√ Explain the concept of normal profit (= zero economic profit) as the amount of
revenue needed to cover the costs of employing self-owned resources (implicit costs,
including entrepreneurship) or the amount of revenue needed to just keep the firm in
business. [break-even point]
√ Explain that economic profit (abnormal profit) is profit over and above normal profit
(zero economic profit), and that the firm earns normal profit when economic profit
(abnormal profit) is zero.
√ Explain why a firm will continue to operate even when it earns zero economic profit
(i.e. earns normal profit).
√ Explain the meaning of loss as negative economic profit arising when total revenue is
less than total cost.
√ Calculate different profit levels from a set of data and/or diagrams.

√ Explain the goal of profit maximization where the difference between total revenue
and total cost is maximized or where marginal revenue equals marginal cost. (MC =
MR)
√ Explain alternative goals of firms, including revenue maximization, growth
maximization, satisficing and corporate social responsibility.
√ Describe, using examples, the assumed characteristics of perfect competition: a large
number of firms; a homogeneous product; freedom of entry and exit; perfect
information; perfect resource mobility.
√ Explain, using a diagram, the shape of the perfectly competitive firm’s average
revenue and marginal revenue curves, indicating that the assumptions of perfect
competition imply that each firm is a price taker.
√ Explain, using a diagram, that the perfectly competitive firm’s average revenue and
marginal revenue curves are derived from market equilibrium for the industry.
[revenue curves]
√ Explain, using diagrams, that it is possible for a perfectly competitive firm to make
economic profit (abnormal profit), normal profit (zero economic profit) or negative
economic profit in the short run based on the marginal cost and marginal revenue
profit maximization rule. [Profit maximization in the short run]
 √ Explain, using a diagram, why, in the long run, a perfectly competitive firm will make
normal profit (zero economic profit). [Profit maximization in the long run]
√ Explain, using a diagram, how a perfectly competitive market will move from short run
equilibrium to long-run equilibrium.
√ Distinguish between the short run shut-down price (P = AVC) and the break-even
price (P = ATC).
√ Explain, using a diagram, when a loss-making firm would shut down in the short run.

√ Explain, using a diagram, when a loss-making firm would shut down and exit the
market in the long run.
√ Calculate the short run shutdown price and the breakeven price from a set of data.

√ Explain the meaning of the term allocative efficiency.

√ Explain that the condition for allocative efficiency is P = MC (or, with externalities, MSB
= MSC).
√ Explain, using a diagram, why a perfectly competitive market leads to allocative
efficiency in both the short run and the long run.
√ Explain the meaning of the term productive/technical efficiency.

√ Explain that the condition for productive efficiency is that production takes place at
minimum average total cost. (= lowest point on ATC curve)
√ Explain, using a diagram, why a perfectly competitive firm will be productively efficient
in the long run, though not necessarily in the short run.
√ Describe, using examples, the assumed characteristics of a monopoly: a single or
dominant firm in the market; no close substitutes; significant barriers to entry.

HL Skill Yes - Just Not

only: well about at all
√ Explain, using examples, barriers to entry, including economies of scale, branding and
legal barriers.
√ Explain that the average revenue curve for a monopolist is the market demand curve,
which will be downward sloping. [revenue curves] [price maker]
√ Explain, using a diagram, the relationship between demand, average revenue and
marginal revenue in a monopoly.
√ Explain why a monopolist will never choose to operate on the inelastic portion of its
average revenue curve.
√ Explain, using a diagram, the short- and long-run equilibrium output and pricing
decision of a profit maximizing (loss minimizing) monopolist, identifying the firm’s
economic profit (abnormal profit), or losses. [profit maximization; MC = MR]
√ Examine the role of barriers to entry in permitting the firm to earn economic profit
(abnormal profit).
√ Explain, using a diagram, the output and pricing decision of a revenue maximizing
monopoly firm. [revenue maximization; MR = 0]
√ Compare and contrast, using a diagram, the equilibrium positions of a profit
maximizing monopoly firm and a revenue maximizing monopoly firm.
√ Calculate from a set of data and/or diagrams the revenue maximizing level of output.

√ With reference to economies of scale, and using examples, explain the meaning of the
term “natural monopoly”.
 √ Draw a diagram illustrating a natural monopoly.

√ Explain, using diagrams, why the profit maximizing choices of a monopoly firm lead to
allocative inefficiency (welfare loss) and productive inefficiency.
√ Evaluate reasons why, despite inefficiencies, a monopoly may be considered desirable
for a variety of reasons, including the ability to finance research and development
(R&D) from economic profits, the need to innovate to maintain economic profit
(abnormal profit), and the possibility of economies of scale.
√ Evaluate the role of legislation and regulation in reducing monopoly power. [Policies
to regulate monopoly power]
√ Draw diagrams and use them to compare and contrast a monopoly market with a
perfectly competitive market, with reference to factors including efficiency, price and
output, research and development (R&D) and economies of scale.
√ Describe, using examples, the assumed characteristics of a monopolistic competition:
a large number of firms; differentiated products; absence of barriers to entry and exit.
√ Explain that product differentiation leads to a small degree of monopoly power and
therefore to a negatively sloping demand curve for the product.
√ Explain, using a diagram, the short-run equilibrium output and pricing decisions of a
profit maximizing (loss minimizing) firm in monopolistic competition, identifying the
firm’s economic profit (or loss). [Profit maximization in the short run]
√ Explain, using diagrams, why in the long run a firm in monopolistic competition will
make normal profit. [Profit maximization in the long run]
√ Distinguish between price competition and non-price competition.
√ Describe examples of non-price competition, including advertising, packaging, product
development and quality of service.
√ Explain, using a diagram, why neither allocative efficiency nor productive efficiency
are achieved by monopolistically competitive firms.
√ Compare and contrast, using diagrams, monopolistic competition with perfect
competition, and monopolistic competition with monopoly, with reference to factors
including short run, long run, market power, allocative and productive efficiency,
number of producers, economies of scale, ease of entry and exit, size of firms and
product differentiation.
√ Describe, using examples, the assumed characteristics of an oligopoly: the dominance
of the industry by a small number of firms; the importance of interdependence;
differentiated or homogeneous products; high barriers to entry.
HL Skill Yes - Just Not
only: well about at all
√ Discuss the role of interdependence in the dilemma faced by oligopolistic firms—
whether to compete or to collude.
√ Explain how a concentration ratio may be used to identify an oligopoly.
√ Explain how game theory (the simple prisoner’s dilemma) can illustrate strategic
interdependence and the options available to oligopolies.
√ Explain the term “collusion”, give examples, and state that it is usually (in most
countries) illegal. [Open/formal collusion]
√ Explain the term “cartel”.
√ Explain that the primary goal of a cartel is to limit competition between member firms
and to maximize joint profits as if the firms were collectively a monopoly.
√ Explain the incentive of cartel members to cheat.
√ Examine the conditions that make cartel structures difficult to maintain.
√ Explain the term “tacit collusion”, including reference to price leadership by a
dominant firm. [Tacit/informal collusion]
√ Explain that the behaviour of firms in a non-collusive oligopoly is strategic in order to
take account of possible actions by rivals.
√ Explain, using a diagram, the existence of price rigidities, with reference to the kinked
demand curve.
√ Explain why non-price competition is common in oligopolistic markets, with reference
to the risk of price wars.
√ Describe, using examples, types of non-price competition.
√ Describe price discrimination as the practice of charging different prices to different
consumer groups for the same product, where the price difference is not justified by
differences in cost.
√ Explain that price discrimination may only take place if all of the following conditions
exist: the firm must possess some degree of market power; there must be groups of
consumers with differing price elasticities of demand for the product; the firm must
be able to separate groups to ensure that no resale of the product occurs. [Necessary
conditions for the practice of price discrimination]
√ Draw a diagram to illustrate how a firm maximizes profit in third degree price
discrimination, explaining why the higher price is set in the market with the relatively
more inelastic demand.