Yukihiro Murakami
Economics – Competitive markets: Demand and supply
Sub-topic
SL/HL Core – Assessment Objectives
Markets
The nature of markets
AO1 - Outline the meaning of the term market.
A market is where buyers and sellers come together to carry out an economic
transaction. Goods or services exchanged for money; Online markets where money
transfers or credit cards are used.
Demand
The law of demand
AO2 - Explain the negative causal relationship between price and quantity
demanded.
When price decreases, quantity demanded increases.
AO1 - Describe the relationship between an individual consumer’s demand and
market demand.
Many individual consumer’s demand adds up to become the market demand, which is
the total goods and services bought and sold in a community.
The demand curve
AO2 - Explain that a demand curve represents the relationship between the price
and the quantity demanded of a product, ceteris paribus.
The demand curve represents the relationship between the price and the quantity
demanded since it has a negative slope, increasing the quantity demanded while
decreasing the price.
The non-price determinants of
demand (factors that change
demand or shift the demand
curve)
AO4 - Draw a demand curve.
At the bottom.
AO2 - Explain how factors including changes in income (in the cases of normal
and inferior goods), taste, prices of related goods, (in the cases of substitutes and
complements) and demographic changes may change demand.
If there were increased income, demand would increase for normal goods. If a product
were considered to be inferior, there’d be decrease in demand since people would start
buying higher priced brands instead of inferior goods.
If there were decreased income, demand would decrease for normal goods. If a product
were considered to be inferior, there’d be increase in demand since people would start
buying inferior brands instead of normal goods.
If everyone’s taste changed on a certain product, the demand would increase if
everyone started to like that certain product possibly because of advertisement
campaigns.
If everyone’s taste changed on a certain product, the demand would decrease if
everyone started to hate that certain product possibly because of consistency.
If prices of related goods decreases, the demand for the substitute would decrease since
more people would buy the related good because it’s cheaper. For complement goods, if
prices of related goods decrease, the demand for the related goods will increase thus
resulting in increased demand for the complements.
If prices of related goods increase, the demand for the substitute would increase since
more people would buy the substitute good because it’s cheaper. For complement
Yukihiro Murakami
goods, if prices of related goods increase, the demand for the related goods will
decrease thus resulting in decreased demand for the complements.
All of these factors may shift the demand curve to the left or the right, increasing
quantity demanded when shifted right and decreasing quantity demanded when shifted
left.
Movements along and shifts of
the demand curve
AO2 - Distinguish between movements along the demand curve and shifts of the
demand curve.
Movements along the demand curve means that there was a change in, and shifts of the
demand curve mean that there were non-price determinants of demand such as income
and substitutes.
AO4 - Draw diagrams to show
the difference between movements along the
demand curve and shifts of the demand curve.
At the bottom.
Linear demand functions
(equations), demand schedules
and graphs
AO2 - Explain a demand function (equation) of the form Qd = a – bP.
Qd is quantity demanded: x-axis
a is the quantity that would be demanded if the price was zero: y-intercept
b is the slope of the curve.
P is the price: y - axis
AO4 - Plot a demand curve from a linear function (eg. Qd = 60 – 5P).
At the bottom
AO4 - Identify the slope of the demand curve as the slope of the demand function
Qd = a – bP, that is –b
(the coefficient of P).
-5
AO1 - Outline why, if the “a” term changes, there will be a shift of the demand
curve.
a is the y-intercept, so if that value is changed, the graph either translates up or down.
AO1 - Outline how a change in “b” affects the steepness of the demand curve.
Increase in b will make the slope steeper and decrease in b will make the slope more
flat.
Supply
The law of supply
AO2 - Explain the positive causal relationship between price and quantity
supplied.
As price increases, quantity supplied increases.
AO1 - Describe the relationship between an individual producer’s supply and
market supply.
Yukihiro Murakami
Many individual producers’ supply adds up to become the market supply.
The supply curve
AO2 - Explain that a supply curve represents the relationship between the price
and the quantity supplied of a product, ceteris paribus.
The supply curve has a positive slope thus when price increases quantity supplied also
increases.
AO4 - Draw a supply curve.
The non-price determinants of
supply (factors that change
supply or shift the supply curve)
At the bottom.
AO2 - Explain how factors including changes in costs of factors
of production
(land, labour, capital and entrepreneurship), technology, prices of related goods
(joint/competitive supply), expectations, indirect taxes and subsidies and the
number of firms in the market can change supply.
The non-price determinants of supply as listed above shifts the supply curve either to
the right or the left.
Movements along and shifts of
the supply curve
AO2 - Distinguish between movements along the supply curve and shifts of the
supply curve.
A movement along the supply curve means that there was a change in price. Shifts of
the supply curve means that a non-price determinant of supply was present.
AO4 - Construct diagrams to show the difference between movements along the
supply curve and shifts of the supply curve.
At the bottom.
Linear supply functions,
equations, and graphs
AO2 - Explain a supply function (equation) of the form Qs = c + dP.
Qs is quantity supplied: x-axis
c is the quantity supplied when price is 0.: y-intercept
d is the slope of the curve
P is the price: y-axis
AO4 - Plot a supply curve from a linear function (eg, Qs = –30 + 20 P).
At the bottom.
AO4 - Identify the slope of the supply curve as the slope of the supply function Qs
= c + dP, that is d (the coefficient of P).
20
AO1 - Outline why, if the “c” term changes, there will be a shift of the supply
curve.
c is the y-intercept, so if that value is changed, the graph either translates up or down.
AO1 - Outline how a change in “d” affects the steepness of the supply curve.
Increase in d will make the slope steeper and decrease in d will make the slope more
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flat.
Market equilibrium
Equilibrium and changes to
equilibrium
AO2 - Explain, using diagrams, how demand and supply interact to produce
market equilibrium.
Market equilibrium is where supply and demand meets. When either a supply curve
shifts to the left or a demand curve shifts to the right, there is an increase in price. When
either a supply curve shifts to the right or a demand curve shifts to the left, there is a
decrease in price. When there is movement along either the supply or the demand curve,
the price will increase or decrease back to its original equilibrium due to excess demand
or excess supply.
AO2 - Analyze, using diagrams
and with reference to excess demand or excess
supply, how changes in the determinants of demand and/or supply result in a new
market equilibrium.
A change in the determinants of demand and/or supply shifts the supply/demand curve
to the left or to the right causing either an upward or a downward pressure on price.
Calculating and illustrating
equilibrium using linear
equations
AO4 - Calculate the equilibrium price and equilibrium quantity from linear
demand and supply functions. (I used Qd = 60 – 5P and Qs = –30 + 20 P)
Qd = Qs
60 – 5p = -30 + 20p
90 = 25p
price = $3.60
Qd = 60 – 5(3.6)
= 60 – 18
= 42
Qs = -30 + 20(3.6)
= -30 + 72
= 42
Qd = Qs when p = $3.60
Qd = Qs = 42 units
AO4 - Plot demand and supply curves from linear functions, and identify the
equilibrium price and equilibrium quantity.
At the bottom.
AO1 - State the quantity of excess demand or excess supply in the above diagrams.
If the seller increases the price, there would be excess supply and if the seller decreases
the price, there would be excess demand.
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The role of the price
mechanism
Resource allocation
AO2 - Explain why scarcity necessitates choices that answer the “What to
produce?” question.
Because there is limited resources, choices must be made to be as efficient as one can
be in a society when answering “What to produce?”.
AO2 - Explain why choice results in an opportunity cost.
When one makes a choice, there is always another option that cannot be achieved
because of the decision one has made.
AO2 - Explain, using diagrams, that price has a signalling function and an
incentive function, which result in a reallocation of resources when prices change
as a result of a change in demand or supply conditions.
Price has a signaling function and an incentive function, because when price goes up,
sellers are more willing to make more products while consumers are less willing to buy
the product because of its expensiveness. If price goes down, sellers are less willing to
make products while consumers are more willing to buy products. Rise in price gives an
incentive for the sellers to make more of the product.
Market efficiency
Consumer surplus
AO2 - Explain the concept of consumer surplus.
Consumer surplus is the extra satisfaction (or utility) gained by consumers from paying
a price that is lower than that which they are prepared to pay
AO4 - Identify consumer surplus on a demand and supply diagram.
At the bottom.
Producer surplus
AO2 - Explain the concept of producer surplus.
Producer surplus is 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 producer surplus on a demand and supply diagram.
At the bottom.
Allocative efficiency
AO2 - Explain that the best allocation of resources from society’s point of view is
at competitive market equilibrium, where social (community) surplus (consumer
surplus and producer surplus) is maximized (marginal benefit = marginal cost).
At market equilibrium, the consumer surplus and the producer surplus is the same thus
customers and sellers make most profit. This is where the market is socially efficient.
Yukihiro Murakami
Yukihiro Murakami
Qd = 60 - 5p
14
12
Price ($)
10
8
6
4
2
0
0
10
20
30
40
Quantity
50
60
70
Yukihiro Murakami
Yukihiro Murakami
Qs = -30 + 20p
10
9
8
Price ($)
7
6
5
4
3
2
1
0
0
20
40
60
80
Quantity
100
120
140
160
Yukihiro Murakami
Yukihiro Murakami