Notesale: Turn your study into money

Document Preview

Extracts from the notes are below, to see the PDF you'll receive please use the links above

---

IB Economics Notes: Microeconomics
1: Competitive markets: Demand & Supply
DEFINITIONS
1
...

2
...
This allows an
exchange to take place, and it enables the needs and wants of both parties to be
fulfilled
...
Demand is the willingness and ability to purchase a good or service at a certain price
over a given time period
...
Law of demand states as the price of a good falls, the quantity demanded of the
product normally increases, ceteris paribus
...
Change in demand is caused by a change in non-price factor, and it is represented by
a shift of the demand curve
...
Change in quantity demanded is caused by a change in price, and it is represented by
a movement along the demand curve
...
Supply is the willingness and ability to produce a quantity for a good or service at a
given price, in a given time period
...
Law of supply states as the price of the good rises, the quantity supplied of the
product normally increases, ceteris paribus
...
Change in supply is caused by a change in non-price factor, and it is represented by a
shift of the supply curve
...
Change in quantity supplied is caused by a change in price, and it is represented by a
movement along the supply curve
...
Market equilibrium is a situation where prices are stable, and the quantity of goods
and services supplied is equal to the quantity demanded
...
Consumer surplus is the extra satisfaction gained by consumers from paying a price
that is lower than that which they were prepared to pay
...

13
...
It is shown by an area above the supply curve and under the
equilibrium price
...
Allocative efficiency is when resources are allocated in the most efficient way from
society’s point of view, and occurs when demand equals supply and community
surplus is maximized
...
1 Demand
1
...
1 Law of Demand
•

•

•

Negative relationship between price
of goods and its quantity demanded
over a particular time period, ceteris
paribus
...

“Change in quantity demanded”:
movement along demand curve
...
1
...


Non-price determinants include:
1
...

○ Small increase in demand for necessities, such as food, clothes etc
...

● Inferior goods
○ As income rises → Demand for the product falls
...

○ Eg
...

2
...

o Eg
...

o Eg
...

o Price of shoes decreases → Quantity demanded for shoes and socks decrease
o Price of shoes increases → Quantity demanded for shoes and socks increase
● Unrelated goods: Products that are often purchased together
...
Pen and shoes
o Change in price of Pen will have no effect on the demand of shoes
3
...

• Demand curve shifts to the right
...

4
...


1
...
2
...

As price of a good increases, quantity
demanded increases; as the price
decreases, quantity demanded
decreases, ceteris paribus
...


1
...
2 Non-Price Determinants of Supply
At a given price:
• Increase in supply → Supply curve
shifts right
• Decrease in supply → supply curve
shifts left
• “Change in supply”: movement of
the supply curve
...
Costs of factors of production
• Factors of production: Land, Labour, Capital, Enterprise
• Price of factor increases → production cost increases → firm produces less (i
...

supply decreases)
• Price of factor decreases → production cost decreases → firm produces more (i
...

supply decreases)
2
...
Price of related
● Competitive supply: goods compete for the use of the same resources
○ Price of good A is higher than that of good B, so firm chooses to produce good
A
...

● Joint supply: production of goods derived from a single product
...
Butter and ice cream are derived from milk
○ Price of milk increases → Price of both butter and ice cream will increase
...
Expectations
● Firms expect price of good A will increase → Supply of good A increases
● Firms expect price of good A will decrease → Supply of good A decreases
5
...


1
...

● Excess demand (horizontal distance b/w point b and c) creates an upward pressure on
price
● Price increases from P1 to P2, causes a movement on D2 to point c (indicates final
equilibrium)
...

Changes in Supply (below)
According to figure a:
● Initial price and quantity at P1 and Q1 respectively
● Supply increases (shift from S1 to S2)
● At initial price P1, new supply is at point b
...

● Vice versa for figure b

---