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KEY CONCEPTS AND SKILLS:
Unit 1.1a – Markets, Demand & Supply
Definitions:
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Market: any arrangement where buyers and selllers of goods or services come together to carry
out an exchange
o Competitive Market: a market in which there are many buyers and sellers of the same
good or service, each acting independently so that no individual buyer or seller can
influence the price of the product sold.
Demand: the quantities of a good that a consumer or consumers are willing to buy at various
prices, ceteris paribus
Supply: the quantities of a good that a suppler or suppliers are willing to sell at various prices,
ceteris paribus
Marginal Benefit (or Marginal Utility): the extra benefit you receive from an additional unit of
something you buy
Types of goods:
o Normal Good: a good for which the demand increases as income increases
o Inferior Good: a good for which demand decreases as income increases (e.g., used cars,
bus tickets)
o Substitutes: two or more goods that satisfy a similar need, so that one good can be used
in place of another (e.g., Coke and Pepsi; Metro fares and taxi fares)
o Complements: two or more goods that tend to be used together (e.g., MP3 songs and
MP3 players; paint and paintbrushes)
Subsidy: money paid by a government to a firm for a variety of reasons (to create jobs, support
R&D, protect an industry against imported goods, etc.)
Equilibrium: a state of balance such that there is no tendency to change
o Market Equilibrium: occurs when quantity demanded equals quantity supplied and there is
no tendency for the price or quantity to change.
Surplus: the amount by which quantity supplied exceeds quantity demanded
Shortage: the amount by which quantity demanded exceed quantity supplied
Concepts and Applications:
Markets (pg. 21 – 24)
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Outline the meaning of the economic term “market” and provide examples.
Identify the most important characteristics of a competitive market.
(HL only) Distinguish among perfect competition, monopolistic competition, oligopoly and monopoly.
Demand (pgs. 24 – 31)
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State the law of demand and sketch a demand curve that reflects the law.
Explain how marginal utility could explain the shape of the demand curve. What else could explain
the shape?
Describe the relationship between an individual consumer’s demand curve and market demand.
Distinguish between the effects on demand of changes in price versus changes in non-price
determinants of demand.
With reference to a diagram, outline how the following changes in non-price determinants of
demand will affect the demand curve.
o Increase in income
o Decrease in income
o Preferences and tastes
o Prices of substitutes
o Prices of complements
o Demographic changes.
Supply
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State the law of supply and sketch a supply curve that reflects the law.
Explain why the market supply curve slopes upward.
Describe the relationship between an individual firm’s supply curve and market supply.
Identify the circumstances under which the market supply curve would be vertical.
Distinguish between the effects on supply of changes in price versus changes in non-price
determinants of supply.
With reference to a diagram, outline how the following changes in non-price determinants of supply
will affect the supply curve.
o Increase in the cost of factors of production
o New Technology
o Increase in the prices of related goods – competitive supply
o Increase in the prices of related goods – joint supply
o Firm expectations that prices will rise in the future
o New or increased tax on profits
o New or increased government subsidy
o Increase in the number of firms
o “Shocks”, or sudden, unpredictable events
Market Equilibrium
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Explain, using a diagram, how demand and supply interact to produce market equilibrium.
Explain, using diagrams, how changes in the determinants of demand will result in a new market
equilibrium.
Explain, using diagrams, how changes in the determinants of supply will result in a new market
equilibrium.
(HL) Linear Demand and Supply Functions
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Explain the parameters of the linear demand function, Qd = a – bP.
Plot a given linear demand function. (Assume Qd = 14 – 2P.)
Explain the implications of changes in parameters a and b and how such changes would be
reflected on a graph.
Explain the parameters of the linear supply function, Qs = c – dP.
Plot a given linear supply function. (Assume Qs = 2 + 2P)
Explain the implications of changes in parameters c and d and how such changes would be
reflected on a graph.
Given linear demand and supply functions, calculate equilibrium price and quantity.
(Assume Qd = 14 – 2P and Qs = 2 + 2P)
Given linear demand and supply functions, identify equilibrium price and quantity by plotting the
curves on a graph. (Assume Qd = 14 – 2P and Qs = 2 + 2P)
Given linear demand and supply functions and a market price, calculate excess supply (surplus) or
excess demand (shortage) and show it on a graph.
o (Assume Qd = 14 – 2P and Qs = 2 + 2P and P = 2)
o (Assume P = 4)