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Unit 2 Microeconomics

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  1. 2.1 Demand

    1. 2.1.1Law of demand

      • Demand shows the relationship between price and quantity demanded • Quantity demanded usually falls as price rises, ceteris paribus

    2. 2.1.3Demand curve

      • Demand can be represented by a downward-sloping demand curve • Diagram: downward-sloping demand curve

    3. 2.1.4Individual and market demand

      • Market demand is derived from individual consumers' demand • Demand analysis distinguishes individual behaviour from total market behaviour

    4. 2.1.5Non-price determinants of demand

      • Demand shifts with income, tastes and preferences, future price expectations, and number of consumers • Demand also shifts with prices of related goods, including substitutes and complements

    5. 2.1.6Movements and shifts in demand

      • A price change causes movement along a demand curve • Non-price determinants shift the demand curve • Diagram: movements along and shifts of the demand curve

  2. 2.2 Supply

    1. • Supply shows the relationship between price and quantity supplied • Quantity supplied usually rises as price rises, ceteris paribus

    2. • Supply can be represented by an upward-sloping supply curve • Diagram: upward-sloping supply curve

    3. • Market supply is derived from individual producers' supply • Supply analysis distinguishes firm behaviour from total market behaviour

    4. • Supply shifts with factor costs, related goods prices, indirect taxes, subsidies, future price expectations, technology, and number of firms • Related goods include joint and competitive supply cases

    5. • A price change causes movement along a supply curve • Non-price determinants shift the supply curve • Diagram: movements along and shifts of the supply curve

  3. 2.3 Competitive market equilibrium

    1. • Demand and supply curves form market equilibrium • Equilibrium price and quantity coordinate buyers and sellers • Diagram: market equilibrium

    2. • Shifts in demand or supply create new market equilibrium • Excess demand causes shortages; excess supply causes surpluses • Diagram: changes in equilibrium and the role of the price mechanism

    3. • The price mechanism allocates resources through signalling and incentives • Rationing is another function of the price mechanism for scarce goods and services

    4. • Consumer surplus and producer surplus measure welfare gains in a market • Social or community surplus combines consumer and producer surplus • Diagram: consumer surplus and producer surplus as social or community surplus

    5. • Allocative efficiency occurs at competitive market equilibrium when social surplus is maximized • Marginal benefit equals marginal cost at the allocatively efficient output • Diagram: social or community surplus maximized at competitive market equilibrium

  4. 2.5 Elasticities of demand

    1. • Elasticity measures responsiveness between economic variables • Diagram: relatively elastic and relatively inelastic demand

    2. • PED equals percentage change in quantity demanded divided by percentage change in price • PED has a theoretical range of values and indicates responsiveness of demand to price • Calculation: PED, change in price, quantity demanded, or total revenue from data

    3. • PED can be perfectly elastic, perfectly inelastic, unitary, elastic, or inelastic • PED affects total revenue when price changes • Diagram: constant PED cases and unitary PED along a demand curve • Diagram: revenue changes when demand is price elastic or price inelastic

    4. • PED depends on number and closeness of substitutes, necessity, income proportion, and time • PED matters for firm pricing and government decision-making

    5. • YED equals percentage change in quantity demanded divided by percentage change in income • Positive YED identifies normal goods; negative YED identifies inferior goods • YED below one is typical of necessities; YED above one is typical of services and luxury goods • Diagram: income elastic, income inelastic, and inferior goods on an Engel curve • Calculation: YED, change in income, or quantity demanded from data

  5. 2.6 Elasticity of supply

    1. • PES equals percentage change in quantity supplied divided by percentage change in price • PES has a theoretical range of values and indicates responsiveness of supply to price • Calculation: PES, change in price, or quantity supplied from data

    2. • PES depends on time, factor mobility, unused capacity, ability to store, and rate of cost increases • Diagram: relatively elastic and relatively inelastic supply • Diagram: perfectly elastic, perfectly inelastic, and unitary PES along a supply curve

  6. 2.7 Role of government in microeconomics

    1. • Governments intervene to raise revenue, support firms, support low-income households, and influence production or consumption • Intervention can aim to correct market failure and promote equity

    2. • Main tools include price ceilings, price floors, indirect taxes, subsidies, direct provision, command and control regulation, and legislation • Diagram: price ceiling, price floor, indirect tax, and subsidy with effects on markets and stakeholders

    3. • Government intervention affects market outcomes and stakeholders • Consequences should be analysed and evaluated using efficiency, equity, and welfare criteria

  7. 2.8 Market failure - externalities and common pool or common access resources

    1. • Social optimum occurs where marginal social benefit equals marginal social cost • Allocative efficiency maximizes social or community surplus • Diagram: allocative efficiency

    2. • Positive externalities of production or consumption create under-allocation without intervention • Negative externalities of production or consumption create over-allocation without intervention • Merit goods and demerit goods are linked to positive and negative externality cases • Diagram: market failure from negative production, negative consumption, positive production, and positive consumption externalities

    3. • Common pool resources are rivalrous but non-excludable • The tragedy of the commons can cause unsustainable production and negative externalities

    4. • Responses include Pigouvian taxes, carbon taxes, regulation, education, tradable permits, international agreements, collective self-governance, subsidies, and government provision • Diagram: government responses to externalities using Pigouvian taxes, carbon taxes, subsidies, legislation, regulation, and education • Diagram: carbon tax effects on a particular polluting industry

    5. • Evaluation considers measurement challenges, policy effectiveness, and stakeholder consequences • International cooperation matters because sustainability issues are global • Monitoring and enforcement are major challenges in international cooperation

  8. 2.9 Market failure - public goods

    1. • Public goods are non-rivalrous and non-excludable • Free rider problems can prevent efficient market provision

    2. • Governments may directly provide public goods • Governments may contract provision out to the private sector