Download supply demand study guide

1.1 Competitive Markets: Demand & Supply
Sub-topic
The nature of
markets
DEMAND
The law of Demand
SL/HL Core – Assessment Objectives
AO1 – Outline the meaning of the term market.
A place where buyers and sellers come together to carry out an economic transaction.
AO1 – Define Demand.
The ability and willingness of consumers to buy a quantity of a good or service at a
certain price in a given time period, ceteris paribus.
AO2 – Explain the negative causal relationship between price and quantity
demanded. (Include ceteris paribus)
As the price of a product falls, the quantity demanded of the product will usually
increase, ceteris paribus.
The Demand Curve
AO1 – Describe the relationship between an individual consumer’s demand and
market demand.
Market demand is the sum total of all individual consumers’ demand.
The demand curve represents the relationship between the price and the quantity
demanded of a product, ceteris paribus.
AO4 – Draw a demand curve.
Non-price
determinants of
demand
Movements along
and shifts of the
demand curve.
AO2 – Explain the non-price determinants of demand. T,B,P,I,E. (Include
references to normal vs. inferior goods, substitutes vs. complements, and
demographics.)
The non-price determinants of demand include tastes of consumers (can change due to
seasonal changes or simply new trends), number of buyers (if the demographics of a
population mean there are a large number of old people, there will be a higher demand
for products they use, e.g. walking sticks), prices of substitutes of complements of the
product (if a substitute good has a lower price, demand for the higher priced product
will decrease in most cases, if the price of complements go down, e.g. DVD players, the
demand for the complementary product will go up, e.g. DVDs), income of consumers
(if the income of consumers rises the demand for normal goods, e.g. foreign holidays,
will increase, however inferior goods, e.g. second hand clothing, will have a decrease
in demand) and expectations of consumers (e.g. if consumers expect the price of a
product to rise they may stock up on it and demand will increase in the short term).
AO2 – Distinguish between movements along the demand curve and shifts of the
demand curve.
A change in price results in a movement along the demand curve. A change in nonprice determinants, a change in demand at every price, results in a shift of the demand
curve.
AO4 – Draw diagrams to show the difference.
Movement along Demand Curve
HL ONLY
Linear Demand
Functions
SUPPLY
The law of Supply
Shift of Demand Curve
Qd = a – bP. Slope = -b. Change in “a” = shift in demand curve. Change in “b”
affects the steepness of the demand curve.
AO4 – Plot a demand curve from the linear function (eg. Qd = 60 – 5P).
AO1 – Define Supply.
The ability and willingness of producers to produce a quantity of a good or service at a
certain price in a given time period, ceteris paribus.
AO2 – Explain the positive causal relationship between price and quantity
supplied. (include ceteris paribus)
As the price of a product rises, the quantity supplied of the product will usually
increase, ceteris paribus.
The Supply curve
Non-price
determinants of
supply
Movements along
and shifts of the
supply curve.
AO1 – Describe the relationship between an individual consumer’s demand and
market demand.
Market supply is the sum total of all individual producers’ supply of a particular good
or service.
The supply curve represents the relationship between the price and the quantity
supplied of a product, ceteris paribus.
AO4 – Draw a supply curve.
AO2 – Explain the non-price determinants of supply. RENT TP. (Include
references to 4 factors of production.)
AO2 – Distinguish between movements along the supply curve and shifts of the
supply curve.
A change in price results in a movement along the supply curve. A change in non-price
determinants, a change in supply at every price, results in a shift of the supply curve.
AO4 – Draw diagrams to show the difference.
HL ONLY
Linear supply
function
Qs = c + dope. Slope = d. Change in “c” = shift in supply curve. Change in “d”
affects the steepness of the demand curve.
AO4 – Plot a supply curve from the linear function (eg. Qs = –30 + 20P).
MARKET EQUILIBRIUM
Equilibrium and
AO3 – Analyze, using diagrams, how changes in the determinants of demand or
changes to equilibrium supply result in a new market equilibrium (Include references to excess demand
and excess supply)
AO4 – Calculate the equilibrium price and equilibrium quantity from linear
demand and supply functions.
AO4 – Plot demand and supply functions, and identify the equilibrium price
and quantity.
AO4 – Calculate the quantity of excess demand or excess supply using linear
equations.
THE ROLE OF THE PRICE MECHANISM
Resource allocation
AO2 – Explain how price acts as a signal and an incentive to consumers and
producers, which results in a reallocation of resources.
HL ONLY
Calculating and
illustrating equilibrium
using linear equations
MARKET EFFICIENCY
Consumer surplus and
Allocative Efficiency: The best allocation of resources from society’s point of view is
Producer surplus
at competitive market equilibrium, where community surplus (consumer surplus plus
producer surplus) is maximized.
AO2 – Explain the concept of consumer surplus.
AO2 – Explain the concept of producer surplus.
AO4 – Identify consumer and producer surplus on a demand and supply
diagram.