Unit Overview

Microeconomics

IB Economics Higher Level· 5 min read 📊 25-30% of overall IB Economics HL exam

1. Unit at a Glance

This unit follows a logical learning progression, starting from core foundational concepts and building up to advanced HL-only topics. The first half covers the fundamentals of demand, supply, and market equilibrium, before moving into welfare analysis, government intervention, and market failure.

The second half of the unit focuses on the theory of the firm, analyzing how firms operate and perform under different market structures from perfect competition to oligopoly. HL-only extensions add game theory for interdependent firms and advanced quantitative analysis for exam preparation.

All sub-topics in this unit are listed below, in order of learning:

Demand theory

Covers the law of demand, determinants of demand, and the difference between movements along and shifts of the demand curve.

★★⏱ 8 min

Supply theory

Explains the law of supply, key non-price determinants, and how to distinguish between movements and shifts.

★★⏱ 8 min

Competitive market equilibrium

Explores how demand and supply interact to set market-clearing prices and adjust to external shocks.

★★⏱ 10 min

Consumer and producer surplus

Introduces welfare analysis to measure how gains from trade are distributed between consumers and producers.

★★⏱ 8 min

Government intervention in markets

Analyzes the impact of price controls, taxes, subsidies, and quotas on equilibrium and social welfare.

★★★⏱ 12 min

Overview of market failure

Introduces why unregulated free markets may fail to achieve socially efficient outcomes.

★★⏱ 7 min

Types and remedies of market failure

Covers key categories of market failure and evaluates policy options to correct inefficient outcomes.

★★★⏱ 12 min

Theory of the firm and production costs

Explores production theory, cost classification, and the relationship between short-run and long-run costs.

★★★⏱ 15 min

Perfect competition

Analyzes firm behavior, equilibrium, and efficiency outcomes in perfectly competitive markets.

★★★⏱ 12 min

Monopoly

Covers monopoly power, pricing behavior, efficiency comparisons, and policy responses to monopolies.

★★★⏱ 12 min

Monopolistic competition and oligopoly

Explores characteristics, equilibrium, and efficiency of two key imperfectly competitive market structures.

★★★★⏱ 15 min

Price discrimination

Explains conditions for and welfare impacts of different types of price discrimination by firms.

★★★★⏱ 10 min

Game theory for oligopoly (HL only)

Covers core game theory concepts to analyze interdependent decision-making by oligopoly firms (HL only).

★★★★★⏱ 12 min

Microeconomics quantitative analysis (HL only)

Builds HL-specific quantitative skills for calculating elasticities, costs, and profit for exam assessment.

★★★★⏱ 15 min

2. Common Pitfalls

Wrong move:

Confusing movements along a curve vs shifts of the entire demand/supply curve

Why:

This common early error leads to incorrect predictions of how market equilibrium changes after external shocks

Correct move:

Always check: price changes cause movements along the curve, non-price determinants cause full shifts of the curve

Wrong move:

Assuming all government intervention is always inefficient

Why:

While intervention can create deadweight loss in perfectly competitive markets, it can improve welfare when market failure exists

Correct move:

Evaluate intervention against the actual unregulated market outcome, not an idealized perfectly efficient baseline

Wrong move:

Mixing up short-run and long-run firm equilibrium conditions

Why:

Firm entry/exit is only possible in the long run, so equilibrium outcomes differ significantly between time frames

Correct move:

Always explicitly state the time frame you are using when analyzing firm profit and market equilibrium

3. Quick Reference Cheatsheet

Concept	Key Formula / Rule
Price Elasticity of Demand	$P E D = \frac{%Δ Q _{d}}{%Δ P}$
Total Cost	$T C = T F C + T V C$
Economic Profit	$π = T R - T C = (P - A T C) \times Q$
Profit Maximization Rule	All firms maximize profit where $M R = M C$
Individual Consumer Surplus	$C S = W i l l in g n ess t o P a y - M a r k e t P r i ce$
Total Social Surplus	$T S = C S + P S$
Marginal Cost	$M C = \frac{Δ T C}{Δ Q}$
Price Elasticity of Supply	$P E S = \frac{%Δ Q _{s}}{%Δ P}$

What's Next

Start your learning of this unit with the first sub-topic below on demand theory, the foundational building block of all microeconomics. Progress through the sub-topics in order to build your understanding step-by-step from core concepts to advanced HL topics. Once you complete all topics in this unit, you will move on to the first sub-topic of the next unit on macroeconomics.