IB Economics HL - 2.1-2.3 Supply, Demand, & Market Equilibrium

Demand

The quantity of a good or service that consumers are willing and able to purchase at different prices in a given time period

Law of Demand

As the price of a product falls, the quantity demanded of the product will usually increase, ceteris paribus.

Income Effect

When the price falls, people's income has more purchasing power

Substitution Effect

As prices increase, consumers seek cheaper substitutes

Law of Diminishing Marginal Utility

The more units of something consumed, the less utility is gained from it

Shifters of demand

number of Buyers, Income, Tastes and preferences, Expectations, Related goods

Compliments

products usually purchased together

Substitutes

replacements for a product

Normal Goods

goods for which the demand increases when consumer income increases

Inferior Goods

goods for which the demand decreases when consumer income increases

Supply

The quantity of a good or service that producers are willing and able to supply at different prices in a given time period.

Law of Supply

As the price of a good rises, the quantity supplied will usually increase, ceteris paribus.

shifters of supply

Subsidies and taxes, Technology, Other goods, Number of sellers, Expectations, Resource cost, Shocks

subsidy

money given to firms by the government to lower production costs

tax

money paid to the government

competitive supply

other products a firm could make with its factors of production

joint supply

increase/decrease in supply of one product causes increase/decrease in supply of a by-product

equilibrium price

the price at which the quantity demanded is equal to the quantity supplied so the market is cleared

price mechanism

Forces of supply and demand: what moves the market to equilibrium and allocates scarce resources, by the functions of signaling, incentive, and rationing.

consumer surplus

extra utility gained by consumers paying less than they were willing to pained

producer surplus

extra utility gained by producers selling goods for higher than they were willing to sell

community surplus

the sum of consumer and producer surplus

allocative efficiency

When the market is producing the optimal level of goods and services to satisfy consumers and producers in society

marginal social cost

The total cost to society for producing a good or service

marginal social benefit

The total utility gained by consumers from consumption of a good or service