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2. The price system and the microeconomy

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  1. 2.1 Demand and supply curves

    1. • Effective demand

    2. • Individual and market demand and supply

    3. • Determinants of demand

    4. • Determinants of supply

    5. • Causes of a shift in the demand curve (D)

    6. • Causes of a shift in the supply curve (S)

    7. • Distinction between the shift in the demand or supply curve and the movement along these curves

  2. 2.2 Price elasticity, income elasticity and cross elasticity of demand

    1. 2.2.1PED, YED and XED

      • Definition of price elasticity, income elasticity and cross elasticity of demand (PED, YED, XED)

    2. 2.2.2Elasticity formulae

      • Formulae for and calculation of price elasticity, income elasticity and cross elasticity of demand

    3. 2.2.3Elasticity coefficients

      • Significance of relative percentage changes, the size and sign of the coefficient of: - price elasticity of demand - income elasticity of demand - cross elasticity of demand

    4. 2.2.4Elasticity values

      • Descriptions of elasticity values: perfectly elastic, (highly) elastic, unitary elasticity, (highly) inelastic, perfectly inelastic

    5. 2.2.5PED on straight-line demand

      • Variation in price elasticity of demand along the length of a straight-line demand curve

    6. 2.2.6Elasticity determinants

      • Factors affecting: - price elasticity of demand - income elasticity of demand - cross elasticity of demand

    7. 2.2.7PED and total expenditure

      • Relationship between price elasticity of demand and total expenditure on a product

    8. 2.2.8Elasticity and decision-making

      • Implications for decision-making of price elasticity, income elasticity and cross elasticity of demand

  3. 2.3 Price elasticity of supply

    1. • Definition of price elasticity of supply (PES)

    2. • Formula for and calculation of price elasticity of supply

    3. • Significance of relative percentage changes, the size and sign of the coefficient of price elasticity of supply

    4. • Factors affecting price elasticity of supply

    5. • Implications for speed and ease with which firms react to changed market conditions

  4. 2.4 The interaction of demand and supply

    1. • Definition of market equilibrium and disequilibrium

    2. • Effects of shifts in demand and supply curves on equilibrium price and quantity

    3. • Relationships between different markets: - joint demand (complements) - alternative demand (substitutes) - derived demand - joint supply

    4. • Functions of price in resource allocation; rationing, signalling (transmission of preferences) and incentivising

  5. 2.5 Consumer and producer surplus

    1. • Meaning and significance of consumer surplus

    2. • Meaning and significance of producer surplus

    3. • Causes of changes in consumer and producer surplus

    4. • Significance of price elasticity of demand and of supply in determining the extent of these changes