28 terms

IB Economics Chapter 2

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Market
Where buyers and sellers come together to carry out an economic transaction. Physical, online.
Demand
The quantity of a good or service that consumers are willing and able to purchase at a given price in a given time period.
The law of demand
"As the price of a product falls, the quantity demanded of it will usually increase, ceteris paribus".
A demand curve
The non-price determinants of demand
Income
- Normal, inferior goods
Price of other products
- Substitutes, complements, unrelated goods
Tastes/preferences
Normal goods
As income rises, the demand for normal goods will also rise.
Inferior goods
As income rises, the demand for inferior goods will fall as consumers starts to buy higher priced substitutes. Example; cheap wine vs. expensive wine
Substitutes
A change in the price of product X will lead to a change in the demand for product Y. Example; a change in the price of chicken can give a change in the quantity demanded of beef.
Complements
Products that are often purchased together. A change in the price of product X will lead to a change in demand for product Y. Example; DVDs and DVD-players.
Unrelated goods
A change in the price of product X will lead to no change in the demand for product Y.
Tastes/preferences
Firms may use taste and preferences to shift the demand curve to the right to increase revenue.
Other determinants of demand
The size of the population.
Changes in the age structure of the population.
Changes in income distribution.
Government policy changes.
Seasonal changes.
Movement along a demand curve
Caused by a change in the price of the product.
Shift of a demand curve
Caused by a change in one of the determinants of demand.
Supply
The willingness and ability of producers to produce a quantity of a good or service at a given price in a given time period.
The law of supply
"As the price of a product rises, the quantity supplied of the product will usually increase, ceteris paribus".
A supply curve
The non-price determinants of supply
The cost of factors of production.
The price of other products, which the producer could produce instead of the existing product.
The state of technology.
Expectations.
Government intervention.
The cost of factors of production
If there is an increase in the cost of the factors of production, this will increase the firm's cost, and so they have to produce less.
The price of other products
Often, producers have a choice as to what they are going to produce and can make their decisions which product is more profitable.
The state of technology
Improvements in the state of technology in a firm or an industry should give an increase in supply. Technology moves forward but in the case of war or a natural disaster, the state of technology could actually go back.
Expectations
Producers make decisions about what to produce and supply based on their expectations of future prices.
Government intervention
Governments can intervene in two very common ways: through indirect tax and through subsidies.
Movement along a supply curve
Caused by a change in the price of the good or service itself.
Shift of a supply curve
Caused by a change in one of the determinants of supply.
subsidy
government payment to encourage or protect a certain economic activity
Supply substitute
a good that can be produced in a similar way, with similar inputs and processes, as another good
supply shock
a sudden shortage of a good