Markets

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These are some key words and definitions which must be learnt as in the exams you must define the terms that you use to demonstrate you true understanding.

Scarcity: the condition of having unlimited wants/desires and limited resources (or distribution /dissemination of them)

Market: a place where buyers and sellers meet and agree on a price of goods or services.

Opportunity cost: the cost of any activity measured in terms of the value of the next best alternative foregone

Demand

Demand: the willingness and ability of the consumer to consume a good or service in a given amount of time.

The law of demand: as the price of a product falls, the quantity demanded of the product will usually increase, ceteris paribus.

The market demand gives the total quantity demanded by all consumers. The individual demand is the demand of one individual or firm.

The demand curve represents the relationship between the price and the quantity demanded of a product.

The change in the price of a good causes a movement along the demand curve. For instance, as price falls from P to P1 the demand moves down the demand curve, which increase the quantity demanded from Q to Q1.

The non-price determinants of demand

A change in the non-price determinants shift the demand curve because the quantity demanded at the price has changed.

Substitutes: Goods that can be used in place of one another as they satisfy the same needs

If the price of a substitute rises, demand for the good will increase

If the price of coffee falls, many people will shift from drinking tea to drinking coffee and the demand curve for tea shifts in to the left

Complements: Goods which tend to be used jointly

If the price of a complement rises, demand will decrease.

If the price of petrol rises people are motivated to use their car less, and the demand for cars shifts to the left.

Population: if the population grows/changes composition (old/young) there are more consumers and demand will shift out to the right

Tastes and preferences: more people may want the product or service (a product becomes ‘fashionable’) and demand shifts out

Real income: when income rises, more people can afford to buy cars and the demand curve for cars shifts to the right for normal goods and a decrease in demand for inferior goods. (Don’t worry too much about this definition, it will become clearer once you have studied income elasticity, just remember real income affects demand)

Advertising: the more effective the advertising the greater the demand, unless the government uses negative advertising for things such as the dangers to health from cigarette smoking

So just remember SCRIPTA for this (substitutes, complements, real income, population,  tastes, advertising)

Linear demand functions (equations), demand schedules and graphs (HL)

Demand function: Qd = a – bP

‘A’ causes a shift in the demand curve because a= the quantity demanded when the price is 0, so, if a decreases the curve will shift to the left (non-price factors)

The slope will depend on ‘–b’ (negative because the relation QD=P is inverse)   that is the responsiveness of the consumer to a change in price. It can depend on the number of substitutes. So if it becomes less responsive to substitutes the steepness of the curve will increase

Supply

Supply: the total amount of goods and services that producers are willing and able to purchase at a given

The law of supply: as the price of a product rises, the quantity supplied of the product will usually increase, ceteris paribus.

The market supply gives the total quantity supplied by all individual producers.

The supply curve represents the relationship between the price and the quantity supplied of a product, ceteris paribus.

The change in the price of a good causes a movement along the supply curve. For instance, as price increases from P to P1 the supply moves up the supply curve, which increases the quantity supplies from Q to Q1.

Non-price determinants of supply

Factors of production: changes in costs of factors of production, including land, labour, capital and entrepreneurship (human capital or intellectual capital).

If these costs increase, then supply shifts to the left.

If the government suddenly increased the minimum wage then this could greatly increase the costs of labour to a shoe making factory, this would cause a shift in supply to the left.

Subsidy: effectively reduces the firm’s costs of production, so supply shifts outwards.

A change in the non-price determinants shift the supply curve because the quantity supplied at the price has changed

Indirect tax: effectively increases the firm’s variable costs, so supply shifts inwards.

Expectations: If demand for a product is likely to rise, for example due to a successful advertisement campaign or celebrity endorsements, supply increases.

Price of relating product: if producer could produce another product with higher profitability, due to limited resources, the quantity supplied of the original product would decrease.

Number of firms in the market: more firms producing shifts supply to the right as more is being supplied at each price

Transportation and infrastructure: if these improve then supply shifts outwards because the firm’s average costs are lowered.

State of technology: If technology improves then supply shifts to the left. As the firm can become more efficient with the same amount of costs so increase output.

So just remember PERSISTT for this (production, expectations, related, size, infrastructure, subsidy, tax and technology)

Linear supply functions, equations and graphs (HL)

Supply function: Qs = c + dP

‘C’ causes a shift in the supply curve because c = the quantity supplied when the price is 0, so, if c decreases the curve will shift to the left (non-price factors)

The slope will depend on d (positive because the relation QD=P is)   that is the responsiveness of the producer to a change in price. It can depend on the number of factors of production.

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