- Demand is a quantity of a commodity which a consumer wishes to purchase at a given level of price and during a specified period of time.
- The law of demand states that quantity purchased varies inversely with price.
- The Marginal Benefit Theory: It is a maximum amount a consumer is willing to pay for an additional goods or services.
- Other than price, the other factors which affect the demand of a commodity are known as non-price determinants.
- The non-price determinants consist of: Income, price of related goods, Tastes and preferences and Demographics.
- The income and substitution effects
- Law of Diminishing Marginal Utility
- The law of supply states that quantity purchased varies directly with price. The higher the price, the larger the quantity produced.
- The non-price determinants consist of: Cost of production, price of related goods, taxes, subsidies, Technology, number of firms, expectations and supply shocks.
- Law Diminishing Marginal Returns
- Increasing marginal costs
|2.3 Competitive Market Equilibrium
- Demand and Supply curves in determining market equilibrium(Shifting of curves to form new market equilibrium)
- Social Surplus: It is defined as the point at which the SUM of consumer surplus and producer surplus is highest.
- Allocative efficiency: It means that the resources are allocated in such a way that the entire society benefits from the consumption, it answers the question, “What to produce?”
- Productive efficiency: It means producing with the fewest possible resources, it answers the question, “How to produce?”
- Determining consumer and producer surplus from a diagram.
|2.4 Critique of the Maximizing Behavior of Consumers and Producers
- Consumers’ surplus is a measure of consumer welfare and is defined as the excess of social valuation of product over the price actually paid.
- Producer surplus is the total amount that a producer benefits from producing and selling a quantity of a good at the market price.
- Rational Consumer Choice:
○ Assumptions: Consumer rationality, utility maximization, perfect information
○ Behavioral economics: Limitations of assumptions made in consumer rationality which include biases, self-control, bounded rationality, selfishness and imperfect information
- Behavioral economics in action:
○ Choice architecture: consists of default, mandated and restricted
○ Nudge Theory
- Business Objectives: primarily include profit maximization and alternative objectives are market share rise, growth of the business, corporate social responsibility and satisficing.
|2.5 Elasticity of demand
- Elasticity of demand is a measure of the degree of responsiveness of quantity demanded of a good to a change in its price or income or price of related goods.
- PED is a measure of responsiveness of the quantity demand of a product to the change in its price.
- Factors affecting PED: Nature of commodity, substitutes, proportion of income, addiction, time period.
- XED is a measure of responsiveness of the quantity demand of a product to the change in price of related products or substitute products.
- YED is a measure of the responsiveness of demand to changes in income, and involves demand curve shifts.
- Importance of PED for companies and the government to make decisions.
- Changing PED along a straight demand curve(diagram inclusive)
- Reasons as to why the PED for primary commodities is mostly lower than manufactured products
- YED for firms and sectoral structure of the economy
|2.6 Elasticity of supply
- Elasticity of supply is the degree of responsiveness of supply of a commodity due to change in its price.
- Reasons as to why the PES for primary commodities is mostly lower than manufactured products
|2.7 Role of Government in Microeconomics
- Indirect tax: It is a tax placed on the producer (his produced goods and services) which is then partly (partly paid by producer & partly by consumers) passed on to consumers in the form of higher prices.
- Subsidy: It is assistance by the government to individuals or firms like low interest or interest free loans to students, providing goods and services below the market price by the government.
- Price control: It is the setting of maximum/minimum prices by the government so prices can’t adjust to equilibrium. This causes excess demand or excess supply because there is disequilibrium.
- Consumer Nudges
- Calculating the effects on markets and stakeholders of maximum and minimum prices, indirect taxes and subsidies
|2.8 Market Failure–Externalities and Common Pool or Common Access Failures
- Market Failure: It occurs when the price mechanisms (forces of supply and demand) fail to allocate resources efficiently.
- An externality occurs when producer’s/consumer’s actions have positive/negative effects on other people not involved in the actions.
- Negative production externalities are external costs created by producers.
- Negative production externalities are external costs created by consumers.
- Positive externalities occur when production and consumption create benefits to third parties.
- Government intervention and policy implementation due to externalities and common pool resources and the strengths and weaknesses of these policies.
- International Cooperation: monitoring, enforcement, challenges in international cooperation and sustainability issues
Calculating welfare loss from diagram
|2.9 Market Failure–Public Goods
- A private good is rivalrous and excludable.
- A public good is non-rivalrous and non-excludable (AKA pure public good)
- A Quasi-public good is non-rivalrous but excludable.
- Free Rider Problem: It comes from non-excludability because people can’t be excluded from the use of a good. Because of the Free Rider Problem, private firms don’t make these goods, so there is resource misallocation.
|2.10 (HL) Market Failure–Asymmetric Information
- In any transaction, a state of asymmetric information exists if one party has information that the other lacks.
- Private and government responses to asymmetric information
|2.11 (HL) Market Failure–Market Power
- According to this theory, market failure results when power is concentrated into too few hands. A monopoly is a single provider of a product or service.A monopoly abuses their power by increasing prices.
- Types of competition: Perfect and Imperfect with their features and equilibrium diagrams in terms of loss, profit and supernormal profit
- Types of market under imperfect competition with their features and equilibrium diagrams in terms of loss, profit and supernormal profit:
○ Monopolistic Competition
- Government intervention methods in response to abuse of market power including fines, legislation and regulation and government ownership
|2.12 (HL) The Market’s Inability to Achieve Equality
- Equity (fairness) issues. Markets can generate an ‘unacceptable’ distribution of income and consequent social exclusion which the government may choose to change.