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## 1.1 Markets: Supply and Demand

• Outline the meaning of the term market.

• Explain the negative causal relationship between price and quantity demanded.

• Describe the relationship between an individual consumer's demand and market demand.

• Explain that a demand curve represents the relationship between the price and the quantity demanded of a product, ceteris paribus.

• Draw a demand curve.

• Explain how factors including changes in income (in the cases of normal and inferior goods), preferences, prices of related goods (in the cases of substitutes and complements) and demographic changes may change demand.

• Distinguish between movements along the demand curve and shifts of the demand curve.

• Draw diagrams to show the difference between movements along the demand curve and shifts of the demand curve.

• Explain a demand function (equation) of the form Qd=a-bP. (HL)

• Plot a demand curve from a linear function (eg. Qd=60-5P). (HL)

• Identify the slope of the demand curve as the slope of the demand function Qd=a-bP, that is -b (the coefficient of P). (HL)

• Outline why, if the "a" term changes, there will be a shift of the demand curve. (HL)

• Outline how a change in "b" affects the steepness of the demand curve. (HL)

• Explain the positive causal relationship between price and quantity supplied.

• Describe the relationship between an individual producer's supply and market supply.

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

• Draw a supply curve.

• 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.

• Distinguish between movements along the supply curve and shifts of the supply curve.

• Draw diagrams to show the difference between movements along the supply curve and shifts of the supply curve.

• Explain a supply function (equation) of the form Qs=c + dP. (HL)

• Plot a supply curve from a linear function (eg, Qs=-30 + 20 P). (HL)

• Identify the slope of the supply curve as the slope of the supply function Qs=c + dP, that is d (the coefficient of P). (HL)

• Outline why, if the "c" term changes, there will be a shift of the supply curve. (HL)

• Outline how a change in "d" affects the steepness of the supply curve. (HL)

• Explain, using diagrams, how demand and supply interact to produce market equilibrium.

• 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.

• Calculate the equilibrium price and equilibrium quantity from linear demand and supply functions. (HL)

• Plot demand and supply curves from linear functions, and identify the equilibrium price and equilibrium quantity. (HL)

• Calculate the quantity of excess demand or excess supply in the above diagrams. (HL)

• Explain why scarcity necessitates choices the answer the "What to produce?" question.

• Explain why choice results in an opportunity cost.

• Explain, using diagrams, that price has a signaling function, which result in a reallocation of resources when prices change as a result of a change in demand or supply conditions.

• Explain the concept of consumer surplus.

• Identify consumer surplus on a demand and supply diagram.

• Explain the concept of producer surplus.

• Identify producer surplus on a demand and supply diagram.

• Evaluate the view 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).

## 1.2 Elasticity

• Explain the concept of price elasticity of demand, understanding that it involves responsiveness of quantity demanded to a change in price, along a given demand curve.

• Calculate PED using the following equation:  PED = percentage change in quantity demanded / percentage change in price.

• State that the PED value is treated as if it were positive although its mathematical value is usually negative.

• Explain, using diagrams and PED values, the concepts of price elastic demand, price inelastic demand, unit elastic demand, perfectly elastic demand and perfectly inelastic demand.

• Explain the determinants of PED, including the number of closeness of substitutes, the degree of necessity, time and the proportion of income spent on the good.

• Calculate PED between two designated points on a demand curve using the PED equation above.

• Explain why PED varies along a straight line demand curve and is not represented by the slope of the demand curve.

• Examine the role of PED for firms in making decisions regarding price changes and their effect on total revenue.

• Explain why the PED for any primary commodities is relatively low and the PED for manufactured products is relatively high.

• Examine the significance of PED for government in relation to indirect taxes.

• Explain the concept of cross price elasticity of demand, understanding that it involves responsiveness of demand for one good (and hence a shifting demand curve) to a change in the price of another good.

• Calculate XED using the following equation: XED = percentage change in the quantity demanded of good x / percentage change in price of good y.

• Show that substitute goods have a positive value of XED and complementary goods have a negative value of XED.

• Explain that the (absolute) value of XED depends on the closeness of the relationship between two goods.

• Examine the implications of XED for businesses if prices of substitutes or complements change.

• Explain the concept of income elasticity of demand, understanding that it involves responsiveness of demand (and hence a shifting demand curve) to a change in income.

• Calculate YED using the following equation:  YED = percentage change in quantity demanded / percentage change in income.

• Show that normal goods have a positive value of YED and inferior goods have a negative value of YED.

• Distinguish, with reference to YED, between necessity (income inelastic) goods and luxury (income elastic) goods.

• Examine the implications for producers and for the economy of a relatively low YED for producers and for the economy of a relatively low YED for primary products, a relatively higher YED for manufactured products and an even higher YED for services.

• Explain the concept of price elasticity of supply, understanding that it involves responsiveness of quantity supplied to a change in price along a given supply curve.

• Calculate PES using the following equation:  PES = percentage change in quantity supplied / percentage change in price.

• Explain, using diagrams and PES values, the concepts of elastic supply, inelastic supply, unit elastic supply, perfectly elastic supply and perfectly inelastic supply.

• Explain the determinants of PES, including time, mobility of factors of production, unused capacity and ability to store stocks.

• Explain why the PES for primary commodities is relatively low and the PES for manufactures products is relatively high.

## 1.3 Government Intervention

• Explain why governments impose indirect (excise) taxes.

• Distinguish between specific and ad valorem taxes.

• Draw diagrams to show specific and ad valorem taxes, and analyze their impacts on market outcomes.

• Discuss the consequences of imposing an indirect tax on the stakeholders in a market, including consumers, producers and the government.

• Explain, using diagrams, how the incidence of indirect taxes on consumers and firms differs, depending on the price elasticity of demand and on the price elasticity of supply. (HL)

• Plot demand and supply curves for a product from linear functions and then illustrate and/or calculate the effects of the imposition of a specific tax on the market (on price, quantity, consumer expenditure, producer revenue, government revenue, consumer surplus and producer surplus). (HL)

• Explain why governments provide subsidies, and describe examples of subsidies.

• Draw a diagram to show a subsidy, and analyze the impacts of a subsidy on market outcomes.

• Discuss the consequences of providing a subsidy on the stakeholders in a market, including consumers, producers and the government.

• Plot demand and supply curves for a product from linear functions and then illustrate and/or calculate the effects of the provision of a subsidy on the market (on price, quantity, consumer expenditure, producer revenue, government expenditure, consumer surplus and producer surplus). (HL)

• Explain why governments impose ceilings, and describe examples of price ceilings, including food price controls and rent controls.

• Draw a diagram to show a price ceiling, and analyze the impacts of a price ceiling on market outcomes.

• Examine the possible consequences of a price ceiling, including shortages, inefficient resource allocation, welfare impacts, underground parallel markets and non-price rationing mechanisms.

• Discuss the consequences of imposing a price ceiling on the stakeholders in a market, including consumers, producers and the government.

• Calculate possible effects from the price ceiling diagram, including the resulting shortage and the change in consumer expenditure (which is equal to the change in firm revenue). (HL)

• Explain why governments impose price floors, and describe examples of price floors, including price support for agricultural products and minimum wages.

• Draw a diagram of a price floor, and analyze the impacts of a price floor on market outcomes.

• Examine the possible consequences of a price floor, including surpluses and government measures to dispose of the surpluses, inefficient resource allocation and welfare impacts.

• Discuss the consequences of imposing a price floor on the stakeholders in a market, including consumers, producers and the government.

• Calculate possible effects from the price floor diagram, including the resulting surplus, the change in consumer expenditure, the change in producer revenue, and government expenditure to purchase the surplus. (HL)

## 1.4 Market Failure

• Market failure as a failure to allocate resources efficiently

• The meaning of externalities

• Negative externalities of production and consumption

• Positive externalities of production and consumption

• Lack of public goods

• Common access resources and the threat to sustainability

• Asymmetric information

• Abuse of monopoly power

## 1.5 Theory of the Firm (HL)

• Production in the short run: the law of diminishing returns

• Costs of production: economic costs

• Costs of production in the short run

• Production in the long run: returns to scale

• Costs of production in the long run

• Total revenue, average revenue and marginal revenue

• Economic profit (sometimes known as abnormal profit) and normal profit (zero economic profit occurring at the break-even point)

• Profit maximization

• Alternative goals of firms

• Assumptions of the model

• Revenue curves

• Profit maximization in the short run

• Profit maximization in the long run

• Shut-down price and break-even price

• Efficiency

• Barriers to Entry

• Natural monopoly

• Monopoly and efficiency

• Policies to regulate monopoly power

• Non-price competition

• Oligopoly

• Game theory

• Open/formal collusion

• Tacit/informal collusion

• Non-collusive oligopoly

• Necessary conditions for the practice of price discrimination bottom of page