IB SL Microeconomics Demand and Supply Defnition (copy)

equity

equity

distribution of income and wealth is fair

equality

distribution of income and wealth is equal for everyone

deduction vs induction

theory (hypothesis) and with real examples

ceteris paribus

all other thing being equal

demand

amount of goods and services consumers willing and able to purchase at different price over certain time period

change in demand vs price

(negatively correlated) when price increases, the quantity demanded of consumer decreases

income and substitution effect

• income increase —> more money to spent —> demand for goods increases —> income effect of demand

• price of a good increases —> substitute the consumption of the good with others good —> demand decreases

market demand

• assume the consumers have no power on the price - all price taker

• market demand = sum of all the individual consumers’ demand

necessity

essential to people → income changes → demand unchanged

normal goods

income increases → increase in purchasing power → demand of the good increases

inferior goods

image of not preferable → income increases → substitute the consumption of them with other goods → decrease in demand

(fast food, bread and potato)

non-price determinantes of demand

income, tastes and preferences, further price exxpectations, subsitute and complement

substitues

good which satisfy similar need (one consumed to replace another)

complementary goods

goods which tends to be consumed together (bread and jam)

law of supply

amounts of goods or services the producers willing and able to produce at different prices over certain time period

non-price determinates of supply

cost of factors of production, indirect tax and subsidies, joint and competitive supply, change in technology (efficiency), number of firms (competition), future price expectation

market and market equilibrum

• the arrangement where buyers and sellers exchange resource, good or services

• situation when the quantity demanded equals the quantity supplied

price mechanism

process to reach the market equilibrium by the forces of demand and supply through the change in price

rationing

as resources scare, we need to allocate them carefully in different productions → decided the distribution of goods to different people in shortage of goos

surplus

difference between actual spend or earn and how much they are willing to spend or earn

allocative efficiency

when resources are allocated in the best possible way - any change of allocation of resources to benefit an individual will harm other

elasticity

degree of change of a variable in response to the change of another variable

PED

Price elasticity of demand: degree of change of quantity demanded in response to the change of price

percentage change in quantity demanded/percentage change in price

PES

price elasticity of supply: degree of change of quantity supplied in response to the change of price

percentage change in supply/ percentage change in price

YED

• income elasticity of demand: degree of change of quantity demanded in response to the change of income

• percentage change in demand/ percentage change in income

• low positive YED: necessities, normal goods, primary sector goods

• high positive YED: luxuries

• negative YED: inferior goods

PED = 0

perfectly inelastic

PED = 1

perfectly elastic

determinate of PED

available of close substitutions, degree of necessity, proportion of income spent on the good, time

income

the money an individual earns from contributing his or her labour - money a firm earns from selling its goods and services

determinate of PES

time period, excess capacity of production, storage

PES on primary vs manufactured products

• primary - low pes

• manufactured - high pes