# Microeconomics

> IB Economics SL · IB SL Economics
> Source: https://www.owlsprep.com/study/ib-economics-sl-u2-overview/
> Weight: 30% of overall IB Economics SL exam

This unit introduces core microeconomic principles explaining how individual consumers, firms, and markets operate. It is the foundation of all IB Economics and makes up a large share of your final exam score.

**Prerequisites:** [Unit 1: Basic Economic Concepts](https://www.owlsprep.com/study/ib-economics-sl-u1-overview/)

## Learning objectives

- Explain how consumer demand and producer supply interact to set prices and quantities in competitive markets
- Calculate and interpret elasticity measures to predict how market outcomes change in response to shocks
- Evaluate the intended and unintended impacts of common government interventions in markets
- Identify types of market failure and evaluate potential policy responses to correct them
- Compare firm behavior and economic efficiency across the four core market structures

## Unit at a Glance

We build this unit from the ground up, starting with the two core components of any market: demand from consumers and supply from producers. Next, we explore how these two forces interact to set market prices, then extend the model to measure sensitivity to price changes (elasticity). We then analyze government intervention, market failure, firm behavior, and finish by comparing outcomes across different market structures.

This unit is split into 8 interconnected sub-topics:
- [Demand](https://www.owlsprep.com/study/ib-economics-sl-u2-demand/) — Introduces the law of demand, determinants of demand, and the difference between movement along and shifts of the demand curve.
- [Supply](https://www.owlsprep.com/study/ib-economics-sl-u2-supply/) — Covers the law of supply, determinants of supply, and how supply curves shift in response to changing market conditions.
- [Competitive market equilibrium](https://www.owlsprep.com/study/ib-economics-sl-u2-competitive-market-equilibrium/) — Explains how demand and supply interact to find the market-clearing price and quantity, and how disequilibrium works.
- [Elasticity](https://www.owlsprep.com/study/ib-economics-sl-u2-elasticity/) — Covers price, income, and cross elasticity of demand and supply, and their real-world applications.
- [Government intervention in markets](https://www.owlsprep.com/study/ib-economics-sl-u2-government-intervention-in-markets/) — Explores price controls, taxes, and subsidies, and their impact on market outcomes and social welfare.
- [Types of market failure](https://www.owlsprep.com/study/ib-economics-sl-u2-types-of-market-failure/) — Identifies common sources of market failure and evaluates different policy responses to correct them.
- [Theory of the firm](https://www.owlsprep.com/study/ib-economics-sl-u2-theory-of-the-firm/) — Covers production, costs, revenues, and profit for firms operating in the short run and long run.
- [Market structures](https://www.owlsprep.com/study/ib-economics-sl-u2-market-structures/) — Compares firm behavior and efficiency across perfect competition, monopoly, monopolistic competition, and oligopoly.

## Common pitfalls

- **Wrong:** Confusing movement along a curve with a shift of the entire curve
  - Why it fails: This mistake appears repeatedly across demand, supply, and market analysis exam questions
  - Correct: Always check if the change is caused by price (movement along) or a non-price determinant (shift of the curve)
- **Wrong:** Mixing up the definitions and interpretations of different elasticity types
  - Why it fails: Each elasticity measures a different relationship and has distinct policy implications
  - Correct: Memorize what each elasticity measures first, before memorizing its formula
- **Wrong:** Labeling any high market price as market failure
  - Why it fails: Market failure is defined by inefficient outcomes, not just high prices
  - Correct: Only classify an outcome as market failure if it results in a divergence between marginal social cost and marginal social benefit

## Cheatsheet

| Concept | Key Formula / Definition |
| --- | --- |
| Market Equilibrium | $Q_d = Q_s$ |
| Price Elasticity of Demand | $PED = \frac{\% \Delta Q_d}{\% \Delta P}$ |
| Price Elasticity of Supply | $PES = \frac{\% \Delta Q_s}{\% \Delta P}$ |
| Cross Elasticity of Demand | $XED = \frac{\% \Delta Q_{d1}}{\% \Delta P_2}$ |
| Income Elasticity of Demand | $YED = \frac{\% \Delta Q_d}{\% \Delta Y}$ |
| Total Cost | $TC = TFC + TVC$ |
| Profit Maximization Rule | $MR = MC$ |
| Allocative Efficiency Condition | $MC = MB$ |

## What's next

Start your study of this unit with the first sub-topic, Demand, to build the foundational model of consumer behavior that all subsequent topics rely on. Once you complete all sub-topics in this unit, you will move on to the next unit on Macroeconomics, where you will apply core economic principles to the overall economy instead of individual markets and firms.

- [Demand](https://www.owlsprep.com/study/ib-economics-sl-u2-demand/)
- [Supply](https://www.owlsprep.com/study/ib-economics-sl-u2-supply/)
- [Competitive market equilibrium](https://www.owlsprep.com/study/ib-economics-sl-u2-competitive-market-equilibrium/)

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