semester i portfolio review

Semester 1 Portfolio Review

Will Congleton

IB HL EconomicsWill Congleton

Diagrams

The following is a collection of a number of diagrams I have made that I feel accurately reflect my ability to assess and understand an economic event. I have included several different types of graphs in order to represent the variety of graphs which I have learned.


DefinitionsThe following is a complete list of all the definitions I have learned in our first semester of IB HL Economics, ranging from basic concepts such as supply and demand to more situation specific terms such as marginal revenue and shut down price.


Market Definitions

Scarcity


Scarcity is a fundamental economic concept as there are limited resources but unlimited human needs and wants.

e.g. The human need for oil is scarce, as people demand more of it, but there is only a limited supply available.


Market

A market is where consumers and producers come together to establish an equilibrium price and quantity for a good or service. It does not need to be an actual place.

e.g. The market for cocoa powder.


Supply & DemandSupply is the willingness and ability of a producer to produce a quantity of a good or service at a certain price over a given period of time.

Demand is the willingness and ability of a consumer to buy a quantity of a good or service at a certain price over a given period of time.

e.g. A company harvesting cocoa plants can supply a certain quantity of cocoa powder at a certain price over the course of a year.

e.g. A company making chocolate bars can demand a certain quantity of cocoa powder at a certain price over the course of a year.


Law of Supply

The law of supply states that as the price of good rises, the quantity supplied increases.

e.g. As the price of cocoa powder rises, the law of supply states that producers will release more cocoa powder in the market, increasing the quantity supplied.


Law of Demand

The law of demand states that as the price of good rises, the quantity demanded decreases.

e.g. As the price of cocoa powder rises, the law of demand states that consumers will buy less of in, decreasing the quantity demanded


Supply Curve

The supply curve is a graphical representation of the law of supply. It is an upward-sloping curve (or line) illustrating the direct relationship between price and quantity supplied.

e.g. The supply curve for cocoa powder is upward-sloping as more cocoa is supplied as the price rises.


Demand Curve

The demand curve is a graphical representation of the law of demand. It is a downward-sloping curve (or line) illustrating the direct relationship between price and quantity demanded.

e.g. The demand curve for cocoa powder is downward-sloping as less cocoa is demanded as the price rises.


Equilibrium Price

The equilibrium price is the market clearing price. It occurs where demand is equal to supply.

e.g. The equilibrium price for cocoa powder is the point at which the quantity of cocoa demanded and quantity of cocoa supplied are equal.


Buffer Stock Scheme

A buffer stock scheme sets a maximum and minimum price in a market to stabilize prices.

e.g. A buffer stock scheme can be set on cocoa to prevent prices from rising dramatically during seasons of bad harvest, or dropping during seasons of good harvest.


Maximum Price

A maximum price is also known as a ceiling price. It is a price set by the government, above which the market price is not allowed to rise. It may be set to protect consumers from high prices, and it may be used in markets for essential goods.

e.g. A maximum price is set on essential goods, such as rice, to protect consumers.


Minimum Price

A minimum price is also known as a floor price. It is a price set by the government, below which the market price is not allowed to fall. It may be set to protect producers from facing prices that are felt to be too low.

e.g. A minimum price is set on cocoa powder to protect producers during bad harvests.


Elasticity Definitions


Elastic & Inelastic

When something is elastic, it is very responsive to change.

e.g. Fruit prices are elastic, and they change from day-to-day.

When something is inelastic, it is very unresponsive to change.

e.g. Care prices are inelastic, and they don’t change from day-to-day.


Price Elasticity of Demand

The price elasticity of demand (PED) is a measure of the responsiveness of the quantity demanded of a good or service to a change in its price.

e.g. The price elasticity of demand of cocoa powder measures the responsiveness of cocoa demand in relation to its price. This value can be expected to be inelastic, as cocoa cannot be substituted in chocolate production.


Cross Elasticity of Demand

The cross elasticity of demand (XED) is a measure of the responsiveness of the demand for a good or service to a change in price of a related good.

e.g. The cross elasticity of demand of cocoa powder measures the responsiveness of cocoa demand in relation to the price of milk used for chocolate bar production.


Complimentary Goods

Complementary goods are goods which are used together. Complement goods have a negative cross elasticity of demand.

e.g. Cocoa powder and milk used for making chocolate bars are complimentary goods.


Substitute Goods

Substitute goods are goods that can be used instead of each other. Substitute goods have a positive cross elasticity of demand.

e.g. Butter and margarine are substitute goods.


Income Elasticity of Demand

Income elasticity of demand (YED) is a measure of the responsiveness of demand for a good to a change in income.

e.g. The income elasticity of demand of cocoa is very inelastic, as it is a necessity to making chocolate.


Normal Goods

A normal good has a positive income elasticity of demand. As income rises, demand increases

e.g. As income rises, the demand for luxury chocolates rises as well. This is because luxury chocolate is a normal good.


Inferior Goods

Inferior goods have a negative income elasticity of demand. As income rises, demand decreases.

e.g. As income rises, the demand for cheap chocolates decreases. This is because cheap chocolate is an inferior good.


Price Elasticity of Supply

The price elasticity of supply (PES) is a measure of the responsiveness of the quantity supplied of a good or service to a change in its price.

e.g. The price elasticity of supply for cocoa powder is very inelastic, as farmers will continue to supply the powder despite fluctuations in price.


Indirect Tax

An indirect tax is an expenditure tax on a good or service. An indirect tax is shown on a supply and demand curve as an upward shift in the supply curve, where the vertical distance between the two curves represents the amount of the tax.

e.g. An indirect tax placed on the production of cocoa powder would result in an upward shift in the supply curve.


Tax Incidence (Burden)

The incidence (or burden) of tax refers to the amount of tax paid by the producer or the consumer. If the demand for a good in inelastic, the greater incidence of the tax falls on the consumer. If the demand for a good is elastic, the greater incidence of the tax falls on the producer. e.g. The incidence of a tax placed on cocoa powder would be placed on the consumer, as the demand for cocoa powder is very inelastic.


Theory of the Firm

Definitions


Fixed Costs

Fixed costs are costs of production that do not change with the level of output. They will be the same for once or any other number of units produced.

e.g. The rent on a factory property is a fixed cost.


Variable Costs

Variable costs are costs of production that vary with the level of output. They will be individual for one or any other number of units.

e.g. The cost of employees salaries at a factory is a variable cost.


Total Costs

Total costs are the total costs of producing a certain level of output (fixed costs plus variable costs).

e.g. The cost of all factors of production for cocoa powder is the total cost.


Average Cost

Average cost is the average (total) cost of production per unit. It is calculated by dividing the total cost by the quantity produced.

e.g. The total cost of cocoa powder divided by the number of units produced is the average cost.


Marginal Cost

Marginal cost is the additional cost of producing an additional unit of output.

e.g. The marginal cost of producing cocoa powder shifts as the variable costs fluctuate with production.


Short Run

The short run is the period of time in which at least once factor of production is fixed.

e.g. The time in which one season of harvest for the cocoa plants passes is considered the short run.


Long Run

The long run is the period of time in which all factors of production are variable.

e.g. A ten year period comprised of ten separate harvest seasons is a long run for the cocoa industry.


Law of Diminishing Returns

The law of diminishing returns states that as extra units of a variable factor are applied to a fixed factor, the output per unit of the variable factor will eventually diminish.

e.g. As more machines are used to harvest the cocoa crops, eventually the returns per unit added will diminish, according to the law of diminishing returns.


Economies and Diseconomiesof Scale

Economies of scale are any fall in the long-run (average) costs that come about as a result of a firm increasing its scale of production (output).

e.g. As machines are initially added to harvest the cocoa crops, the average costs will drop. This is an economy of scale.

Diseconomies of scale are any rise in the long-run (average) costs that come about as a result of a firm increasing its scale of production (output).

e.g. As more machines are added to harvest the cocoa crops, the average costs will drop. This is a diseconomy of scale.


Total Revenue

Total revenue is the aggregate revenue gained by a firm from the sale of a particular quantity of output (equal to the price times quantity sold).

e.g. The immediate money gained from the sale of cocoa powder is the total revenue.


Average Revenue

Average revenue is the total revenue received divided by the number of unites sold. Usually, price is equal to average revenue.

e.g. The total revenue divided by the number of cocoa powder units produced is the average revenue.


Marginal Revenue

Marginal revenue is the extra revenue gained from selling an additional unit of a good or service.

e.g. The marginal revenue of a cocoa powder plant is the revenue gained by producing an additional unit of cocoa powder.


Normal Profit

Normal profits are the amount of revenue needed to cover the total costs of production, including the opportunity costs.

e.g. When a cocoa powder company is producing enough revenue to cover it’s exact production costs, it is experiencing normal profits.


Abnormal Profit

Abnormal profits are any level of profit that is greater than that required to ensure that a firm will continue to supply its existing good or service. It is an amount of revenue greater than the total costs of production, including opportunity costs.

e.g. When a cocoa powder company is producing enough revenue to cover it’s production costs while still having excess, it is experiencing abnormal profits.


Profit-Maximizing Level of Output

The profit-maximizing level of output is the level of output where the marginal revenue is equal to the marginal cost.

e.g. When a cocoa powder company is producing at the point at which is marginal revenue is equal to the marginal cost, it will be maximizing it’s profit, or producing at the profit-maximizing level of output.


Shut-Down Price

The shut-down price is the price where the average revenue is equal to the variable cost. Below this price, the firm will shut down in the short run.

e.g. When a cocoa powder company’s revenue is equal to the variable cost, it is at it’s shut-down price. If the revenue falls below this point, the company will shut down.


Break-Even Price

The break-even price is the price where the average revenue is equal to the average total cost. Below this price, the firm will shut down in the long run.

e.g. When a cocoa powder company’s revenue is equal to the average total cost, it is at it’s break-even price. If the revenue falls below this point, the company will shut down.


Allocative Efficiency

Allocative efficiency is the level of output where the marginal cost is equal to the average revenue, or price. The firm sells the last unit it produces at the amount that it cost it to make it.

e.g. When a cocoa powder company is producing enough to sell each unit for the exact price it costs to produce, it is applying allocative efficiency.


Productive Efficiency

Productive efficiency exists when the production is achieved at the lowest cost per unit of output. This is achieved at the point where the average total cost is at its lowest value.

e.g. When a cocoa powder company is producing at the point at which the average total cost is the lowest, it is able to maximize its productive efficiency.


Perfect Competition

Perfect competition is a market structure where there is a very large number of small firms, producing identical products. No individual firm is capable of affecting the market supply curve and this cannot affect the market price. Because of this, the firms are price takers. There are no barriers to entry or exit and all the firms have perfect knowledge of the market.

e.g. When a market has no intervention by the government and enough firms to ensure no single firm can affect the supply curve, the market is experiencing perfect competition.


Monopolistic Competition

Monopolistic competition is a market structure where there are many buyers and sellers producing differentiated products, with no barriers to entry or exit.

e.g. A market in which the consumers buy based on brand loyalty rather than the differences between the values and prices of products is a market of monopolistic competition. An example is the toothpaste market


Oligopoly

An oligopoly is a market structure where there is a small number of large firms that dominate the market.

e.g. A market in which a handful of large firms control the market prices is an oligopoly. An example is the petrol market.


Monopoly

A monopoly is a market form in which only a single firm is allowed to produce. Henceforth, the firm is the industry in the market.

e.g. A market in which a single firm produces is a monopoly. An example would be the salt industry in British-ruled India.


Barriers to Entry

Barriers to entry are obstacles that may be in the way of potential newcomers to a market.

e.g. Economies of scale, product differentiation and legal protection are all barriers to entry.


Price Discrimination

Price discrimination occurs when a producer charges a different price to different customers for an identical good or service.

e.g. Price discrimination often occurs at movie theatres, where prices are differentiated by age group.


EvaluationBeing able to effectively use CRAMPSS in order to determine the pros and

cons of an economic development is crucial in determining why certain economic developments are occurring in the first place. By being able to evaluate these factors, we as economists can come to better understand market decisions.

Here I will be demonstrating my ability to weigh the pros and cons of a recent move by architecture firms in the U.S. to Chinese clients. Here is a small clip from the article:

Full Article at:http://www.nytimes.com/2011/01/16/business/16build.html?_r=1&ref=business


Pros Cons• Allows an entrance into a market that has been very unaffected by the recent economic downturn. This has provided the new firms with a multitude of jobs and opportunities.• A new market with little existing competition capable of meeting the new prospects created by the new firms. While older design do companies exist, very few are willing to compete with the new design extravagance.• The designers are being contracted by clients with larger pay scales, allowing for more extensive and well-paid contracts.• The developers are able to expand to a new market, and in doing so receive revenue outside of the lulled U.S. economy, which has failed to provide firms with an adequate number of projects in recent years..

• Many economists surmise that the Chinese economy is experiencing a bubble growth, and that before long developers will be locked in contracts without pay due to an inevitable burst and economic downturn.• Firms are being forced to use materials and supply companies from outside of the U.S., adding a hefting surcharge to imported materials and delays in delivery dates due to government imposed tariffs in China.


ConclusionAs more developers begin to look for contracts in flourishing economies,

it can be expected that the economic growth of these nations will continue while supplied with these new luxuries. By using CRAMPSS to weigh the pros and cons of the decision by developers to look elsewhere for work, we are able to gain a reasonable understanding of the situations development, and that this expansion of Western luxuries will continue in the Eastern world for the time being, even in only temporarily. In addition, we can use this understanding to evaluate a decision regarding the recent economic activity presented to us with the information. One decision that could be made regarding the secondary effects of the development would be to raise the price of tariffs on construction luxuries being imported to China. This decision can be made based on the increase in demand for foreign building materials by the recent influx of developers in China.


Collaboration

Diigo:I have currently submitted and shared 7 articles (along with brief summaries) to my my classmates via the Diigo group, IB Economics @ CA.


ReflectionsThe following are two reflections on my past work in the IB HL Economics course. I feel both of thee reflections show my understanding of the subjects we have covered in class and my ability to assess my own work and decisions.

Showcase


I felt that at many points throughout the semester I was able to express my understanding of economics well, and demonstrate my understanding with my classmates. I felt my blog has been a very effective tool in both making this understanding of mine publicly accessible and easy to find. For this reason, I have chosen to highlight one of my previous blog posts, highlighting the JAL case study. I have chosen to highlight this blog post as I feel in it I have effectively deconstructed many of the individual factors that played into the downturn of JAL and analyzed them both individually and as having a summed effect on JAL in an international setting.

The original post can be found here:http://12congwi.wordpress.com/2010/11/14/jal-case-study-lessons-to-be-learned/

semester i portfolio review

Education

economicswill congleton

price of cocoa powder

certain price

price of good rises

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supply curvethe supply

equilibrium price

quantity demandedib