Unit Overview

Microeconomics

IB Economics SL· 5 min read 📊 30% of overall IB Economics SL exam

1. 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

Introduces the law of demand, determinants of demand, and the difference between movement along and shifts of the demand curve.

★⏱ 8 min

Supply

Covers the law of supply, determinants of supply, and how supply curves shift in response to changing market conditions.

★⏱ 7 min

Competitive market equilibrium

Explains how demand and supply interact to find the market-clearing price and quantity, and how disequilibrium works.

★★⏱ 10 min

Elasticity

Covers price, income, and cross elasticity of demand and supply, and their real-world applications.

★★★⏱ 12 min

Government intervention in markets

Explores price controls, taxes, and subsidies, and their impact on market outcomes and social welfare.

★★★⏱ 15 min

Types of market failure

Identifies common sources of market failure and evaluates different policy responses to correct them.

★★★★⏱ 14 min

Theory of the firm

Covers production, costs, revenues, and profit for firms operating in the short run and long run.

★★★★⏱ 12 min

Market structures

Compares firm behavior and efficiency across perfect competition, monopoly, monopolistic competition, and oligopoly.

★★★★★⏱ 18 min

2. Common Pitfalls

Wrong move:

Confusing movement along a curve with a shift of the entire curve

Why:

This mistake appears repeatedly across demand, supply, and market analysis exam questions

Correct move:

Always check if the change is caused by price (movement along) or a non-price determinant (shift of the curve)

Wrong move:

Mixing up the definitions and interpretations of different elasticity types

Why:

Each elasticity measures a different relationship and has distinct policy implications

Correct move:

Memorize what each elasticity measures first, before memorizing its formula

Wrong move:

Labeling any high market price as market failure

Why:

Market failure is defined by inefficient outcomes, not just high prices

Correct move:

Only classify an outcome as market failure if it results in a divergence between marginal social cost and marginal social benefit

3. Quick Reference Cheatsheet

Concept	Key Formula / Definition
Market Equilibrium	$Q_{d} = Q_{s}$
Price Elasticity of Demand	$P E D = \frac{%Δ Q _{d}}{%Δ P}$
Price Elasticity of Supply	$P E S = \frac{%Δ Q _{s}}{%Δ P}$
Cross Elasticity of Demand	$X E D = \frac{%Δ Q _{d 1}}{%Δ P _{2}}$
Income Elasticity of Demand	$Y E D = \frac{%Δ Q _{d}}{%Δ Y}$
Total Cost	$T C = T F C + T V C$
Profit Maximization Rule	$M R = M C$
Allocative Efficiency Condition	$M C = M B$

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.