IB ECON HL - 2.1 Demand and 2.2 Supply

demand of one person for a product

All Individual demand for a product at EVERY price

Rational Behaviour - maximize utility 

Clear stable preferences

Analytical skills

Perfect knowledge

Income effect = decrease in price = increase in real income = increase in quantity demanded of normal goods

Substitution effect - decrease in price = moves over to substitute good = increase in qd of good 

As each additional unit of a good is consumed, the marginal utility of benefit from consumption decreases

• Income 

  • Increase in income = outward shift of D for normal goods and inward shift of D for inferior goods 

  • Normal goods = Goods whose value increases as people’s income increases 

  • inferior goods = goods whose value decrease as income increases

• Price of Substitutes

  • Increase in price for substitute goods = outward shift of D for other

  • Close substitutes - similar characteristics and uses, easily switch between

  • Remote substitutes - less similar characterstics and uses, less easy

• Price of Complementary

  • Increase in price for complementary = increase in price for other goods = inwards shift of D 

  • Close complement - consumed together, little use without other

  • Remote complement, independent of each other 

• Tastes and Preferences

  • Increase in taste or prefernce = outward shift in D

• Future expectations

  • Self-fulfilling prophecy

  • Expect price to increase later = demand more now shifting out D = increases price

  • Expect economy to do well in the future = increase in jobs and income = increase consumption = consumer and business confidence 

Supply of one product from one firm at every price

Sum of all individual supplies of a product at every price

Law of supply - as price of product increases, the quantity supplied will usually increase, ceteris paribus

Reasons

• Firms are profit driven = firms can make more profit at higher prices = incentive to produce more

• Low prices mean low profitability = motivated to produce less

Law of diminishing marginal returns (output/product)

• adding more of one factor of production (input), while holding at least one other factor of production constant, will at some point yield lower marginal returns (output/product).

Increasing marginal costs of production

• Marginal cost - the cost of producing one more unit of a good

• SR - Marginal cost increases as output increases and marginal returns decrease = increases the quantity supplied (higher price in the market for selling the product)

Costs of factors of production - Increases = decrease in supply (shifts left(

Technological change - increase = increase in productivity = increase in supply (shifts right)

Future expectations about future prices - expect increase = hoarding (withhold current production) = decrease in supply (shifts left)

• Self fulfilling prophecy

Future expectations about economy - Increase in business confidence = increase in supply (shifts right)

Number of firms in the market - increase = increase in supply (shifts right)

Joint supply (by-product goods derived from same product) - price of one good increases = increase in QS for that good + increase in supply for other good (shifts right)

Competitive Supply - increase in popularity for one good (prices rise) = decrease in supply of other to decline (shifts left)

Government Intervention - Indirect taxes (increases COP = decrease in supply) , Subsidies (decreases COP = increase in supply), Regulations (increaseS COP = decrease in COP_