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.
Market is where buyers and sellers come together to carry out an economic
transaction.
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. (Include ceteris paribus)
As the price falls, the quantity demanded would increase, ceteris paribus.
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.
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
--number of Buyers
--Price of related goods (Substitutes: As the price of substitute goods increase, the
price of original goods would also increase. Complements: As the price of complement
goods increase, the price of original goods would decrease.)
--Income (Normal goods: As income rises, the quantity will increase. Inferior goods:
As income rises, the quantity will decrease.)
--Expectation
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.
Movements along the demand curve
HL ONLY
Linear Demand
Shifts of the demand curve
Qd = a – bP. Slope = -b. Change in “a” = shift in demand curve. Change in “b”
affects the steepness of the demand curve.
Functions
SUPPLY
The law of Supply
The Supply curve
Non-price
determinants of
supply
Movements along
and shifts of the
supply curve.
AO4 – Plot a demand curve from the linear function (eg. Qd = 60 – 5P).
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)
As the price falls, the quantity supplied would decrease, ceteris paribus.
AO1 – Describe the relationship between an individual consumer’s demand and
market demand.
Market supply is the sum total of all individual producers’ supply.
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.)
--Technology
--Price of other goods
--Resources
--Expectation
--number of Sellers
--Taxes& subsidies
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.
Shifts of the supply curve
HL ONLY
Linear supply
function
Movement along the supply curve
Qs = c + dP. 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)
Equilibrium is the market-clearing price and quantity where demand equals supply.
Excess supply: Quantity supplied minus quantity demanded. And more is being
supplied than demanded at this price, which causes downward pressure on the price.
To eliminate the surplus, suppliers will have to lower prices. And this will cause the
quantity demanded increase and quantity supplied decrease until equilibrium is
reached.
Excess demand: Quantity demanded minus quantity supplied. And more is being
demanded than supplied at this price, which causes upward pressure on the price. To
eliminate the shortage, suppliers will have to raise prices. And this will cause the
quantity demanded decrease and quantity supplied increase until equilibrium is
reached.
HL ONLY
AO4 – Calculate the equilibrium price and equilibrium quantity from linear
Calculating and
demand and supply functions.
illustrating equilibrium AO4 – Plot demand and supply functions, and identify the equilibrium price
using linear equations
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.
“Green light”: When the demand of a good increase, the price of the good rise, the
producers are going to increase their output.
“Red light”: When the demand of a good decrease, the price of the good reduce, the
producers are going to decrease their output.
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.
The extra satisfaction gained by consumers from paying a price that is lower than
that which they are prepared to pay.
AO2 – Explain the concept of producer surplus.
The excess of actual earnings that a producer makes from a given quantity of output,
over and above the amount the producer would be prepared to accept for that output.
AO4 – Identify consumer and producer surplus on a demand and supply
diagram.