| Subtopic Name |
Subtopic Number |
Key points |
| Demand |
2.1 |
- Demand refers to the quantity of a good or service that consumers are willing and able to buy at a particular price and time.
- Law of Demand: This law states that as the price of a good or service increases, the quantity demanded decreases, and vice versa, all other things being equal.
- Shifts in Demand: There are factors other than price that can cause a change in demand, such as changes in consumer income, tastes and preferences, the prices of related goods or services, and the number of consumers in the market.
- Demand Curve: The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity demanded, holding all other factors constant. It slopes downward due to the law of demand.
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| Supply |
2.2 |
- Supply refers to the quantity of a good or service that producers are willing and able to sell at a particular price and time.
- Law of Supply: This law states that as the price of a good or service increases, the quantity supplied also increases, and vice versa, all other things being equal.
- Shifts in Supply: There are factors other than price that can cause a change in supply, such as changes in the cost of production, technology, government policies, and the number of suppliers in the market.
- Supply Curve: The supply curve is a graphical representation of the relationship between the price of a good or service and the quantity supplied, holding all other factors constant. It slopes upward due to the law of supply.
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| Price Elasticity of Demand |
2.3 |
- Price elasticity of demand refers to the responsiveness of quantity demanded to changes in the price of a good or service.
- Price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price.
- A price elasticity of demand greater than 1 indicates that demand is elastic, meaning that a small change in price leads to a relatively larger change in quantity demanded. A price elasticity of demand less than 1 indicates that demand is inelastic, meaning that a change in price leads to a relatively smaller change in quantity demanded.
- Factors affecting elasticity: The price elasticity of demand is affected by factors such as the availability of substitutes, the proportion of income spent on the good or service, and the time period considered.
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| Price Elasticity of Supply |
2.4 |
- Price elasticity of supply refers to the responsiveness of quantity supplied to changes in the price of a good or service.
- Price elasticity of supply is calculated as the percentage change in quantity supplied divided by the percentage change in price.
- Interpretation: A price elasticity of supply greater than 1 indicates that supply is elastic, meaning that a small change in price leads to a relatively larger change in quantity supplied. A price elasticity of supply less than 1 indicates that supply is inelastic, meaning that a change in price leads to a relatively smaller change in quantity supplied.
- Factors affecting elasticity: The price elasticity of supply is affected by factors such as the availability of inputs, the time period considered, and the ability of producers to switch to alternative products or production methods.
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| Other Elasticities |
2.5 |
- Cross-price elasticity of demand: This measures the responsiveness of quantity demanded of one good to changes in the price of another good. It is calculated as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good.
- Income elasticity of demand: This measures the responsiveness of quantity demanded to changes in consumer income. It is calculated as the percentage change in quantity demanded divided by the percentage change in income.
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| Market Equilibrium and Consumer and Producer Surplus |
2.6 |
- Market equilibrium: This occurs when the quantity demanded equals the quantity supplied at a particular price, resulting in no shortage or surplus of the good or service in the market.
- Consumer surplus: This measures the difference between the highest price a consumer is willing to pay for a good or service and the actual price they pay. It represents the benefit or surplus that consumers receive from consuming the good or service.
- Producer surplus: This measures the difference between the lowest price a producer is willing to accept for a good or service and the actual price they receive. It represents the benefit or surplus that producers receive from producing and selling the good or service.
- Efficient allocation of resources: The market equilibrium, along with consumer and producer surplus, leads to an efficient allocation of resources, where the marginal cost of production equals the marginal benefit of consumption.
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| Market Disequilibrium and Changes in Equilibrium |
2.7 |
- Market disequilibrium: This occurs when the quantity demanded and quantity supplied in a market are not equal at a particular price, resulting in either a shortage or surplus of the good or service.
- Surplus and shortage: A surplus occurs when the quantity supplied exceeds the quantity demanded at a given price, leading to downward pressure on price. A shortage occurs when the quantity demanded exceeds the quantity supplied at a given price, leading to upward pressure on price.
- Shifts in demand and supply: Changes in demand or supply can shift the demand or supply curve, leading to a new equilibrium price and quantity in the market.
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| The Effects of Government Intervention in Markets |
2.8 |
- Price floors and ceilings: Government-imposed price floors and ceilings can create surpluses or shortages in markets, leading to deadweight loss and inefficiency.
- Taxes and subsidies: Taxes on goods and services can decrease demand, while subsidies can increase supply. Both can have a significant effect on market equilibrium and can be used to achieve specific policy goals.
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| International Trade and Public Policy |
2.9 |
- Tariffs and trade barriers: Tariffs and other trade barriers can create deadweight loss and inefficiency, although they can also protect domestic industries from foreign competition.
- Trade agreements: Trade agreements can reduce or eliminate tariffs and other trade barriers, leading to increased trade and economic welfare.
- Exchange rates: Changes in exchange rates can affect the relative prices of imports and exports, leading to changes in the volume of trade between countries. Government intervention in exchange rates can have significant effects on international trade and economic welfare.
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