1.1 Competitive Markets: Demand & Supply
Sub-topic
The nature of markets
DEMAND
The law of Demand
The Demand Curve
Non-price
determinants of
demand
Movements along and
shifts of the demand
curve.
SL/HL Core – Assessment Objectives
AO1 – Outline the meaning of the term market.
a group of buyers and sellers of a good or resource
AO1 – Define Demand.
The ability & willingness of consumers to buy a quantity of a good or service at a
certain price in a given time period.
AO2 – Explain the negative causal relationship between price and quantity
demanded.
The relationship is such that the higher the price is, the less quantity will be bought,
ceteris paribus.
AO1 – Describe the relationship between an individual consumer’s demand and
market demand.
Market demand is all of the individuals’ consumers demand together
AO4 – Draw a 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.)
Tastes will affect a certain product if people lose interest in it.
If the amount of buyers is changed then this will also affect demand.
The rise of the price of related goods will change the demand for a good since it
could be a substitute for the other good (inferior good) or if it is a complement good
then the demand will increase.
The income of buyers might also affect the demand since people have more money to
spend on it if it a normal good but could also decrease in demand if it is inferior and
people buy a different brand of the same good.
Expectations could also change the demand e.g. before Christmas where people buy
gifts.
AO2 – Distinguish between movements along the demand curve and shifts of the
demand curve.
Movement along the demand curve is caused by a change in price, ceteris paribus,
while a shift is caused by other factors that are not price.
AO4 – Draw diagrams to show the difference.
SUPPLY
The law of Supply
The Supply curve
Non-price
determinants of supply
Movements along and
shifts of the supply
curve.
AO1 – Define Supply.
The ability & willingness of producers to produce a quantity of a good or service at a
certain price in a given time period.
AO2 – Explain the positive causal relationship between price and quantity
supplied. (include ceteris paribus)
The higher the price, the more supplied, ceteris paribus.
AO1 – Describe the relationship between an individual consumer’s demand and
market demand.
Market demand is all of the individuals’ consumers demand together
AO4 – Draw a supply curve.
AO2 – Explain the non-price determinants of supply. RENT TP. (Include
references to 4 factors of production.)
The technology used to make the certain product could improve, making more.
The prices in other kind of markets may decrease, increasing the supply for this
market since it is cheaper.
The cost of the resources may change the supply.
The expectations of the buyers could also change the supply.
The number of people selling the product you make can also affect how much is
supplied
Higher taxes on the good can decrease supply since it is more expensive to make.
AO2 – Distinguish between movements along the supply curve and shifts of the
supply curve.
A change in price results in a movement while a change in anything else except price
shifts the curve.
AO4 – Draw diagrams to show the difference.
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)
A reason for this shift from D to D1 might be any of the TBPIE reasons. In this case
the demand increases so that there is a shortage of supply, which is the area of the
triangle.
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.
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.
Consumer surplus is how the price of purchase is under the price they would have
bought it for.
AO2 – Explain the concept of producer surplus.
Producer surplus is how much the profit is over that of which they expected.
AO4 – Identify consumer and producer surplus on a demand and supply
diagram.