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Economics summary year 1 IBMS / IB 2018
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I made an improved version of the economics summary I made a couple of years ago to help students understand the subject with more examples and more information.
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Economics Summary ‘18Made by Maurijn van Helvoirt
Supply and demand 2
Market structures 8
Labour market 18
Financial market 25
Aggregate goods market 28
Exchange rate market 36
,Supply and Demand
Market: is any agreement that enables buyers and sellers to get information and to do
business with each other.
- A market has two sides: buyers and sellers
- A competitive market has many buyers and sellers. So no single buyer or seller can
influence the price.
The money price of a good or service is the amount of dollars you have to exchange in order
to get the good or service.
The ratio of one price to another is called a relative price.
- And a relative price is an opportunity cost
Opportunity cost is the ratio of one price to another. The ratio of one price to another is
called a relative price.
The demand and supply curve uses the relative price, so when a price will fall we mean the
relative price. That is, its price will fall relative to the average price of other goods and
services.
Demand
If you demand something, you:
1. want it
2. can afford it
3. plan to buy it
Quantity demanded of a good or service is the amount that consumers plan to buy during a
given time period at a particular price.
The law of demand states: other things remaining the same, the higher the price of a food,
the smaller the quantity demanded; the lower the price of a good, the greater is the quantity
demanded.
- Why does a higher price reduce the quantity demanded?
o Substitution effect
o Income effect
Substitution effect: as the relative price of a good rises, the incentive to economize on its
use and switch to a substitute becomes stronger.
Income effect: when a price rises, the price rises relative to income. Faced with a higher
price and an unchanged income, people cannot afford to buy all the things they previously
bought.
Change in demand: when any factor that influences buying plans changes, other than the
price of a good, there is a change in demand.
, - When demand increases, the demand curve shifts to the right and the quantity
demanded at each price is greater.
Six main factors that bring change in demand:
Price of related goods
- The quantity demanded can change with a change of prices for substitute goods
- F.e. a substitute for energy bars, energy drinks, increases its price. The demand for
energy drinks will decrease while the demand for energy bars increases.
- The quantity demanded of energy bars also depends on the prices of complements
with energy bars.
- A complement good is a good that is used in conjunction with another good
- F.e. if the price of an hour at the gym falls, people buy more gym time and more
energy bars.
Expected future prices
- If the future price of a good rises and if the good can be stored, the opportunity cost
of obtaining the good for future use is lower than it will be in the future when people
expect the price to be higher.
- So people retime their purchases and substitute over time. They buy more now and
less after the expected future price. So the demand for the good today increases.
Income
- When income increases, consumers buy more of most goods. When income
deceases consumers will buy less of most goods.
- Normal good: a normal good is one for which demand increases as income increases
- Inferior good: an inferior good is one for which demand decreases as income
increases.
Expected future income
- When expected future income increases or credit becomes easier to get, demand for
a good or service might increase now.
Population
- The demand also depends on the size of the population. The larger the population,
the greater is the demand for all goods and services.
Preference
- Preferences determine the value that people place on each good or service.
, A movement along the demand curve shows a change in the quantity demanded.
- If the price changes but no other influence on buying plans changes you get a change
in the quantity demanded and a movement along the demand curve. (à #1 / à#2)
A shift of the demand curve shows a change in demand.
- If the price of a good remains constant but some other influence on buying plans,
there is a change in demand. Making a shift in the demand curve as a change of
demand. (D0 à D1/D2) (image 1.1)
Image 1.1: Change in the demand curve
Supply
If a firm supplies a good or service, the firm:
1. has the resources and technology to produce it.
2. can profit from producing it.
3. plans to produce it and sell it.
Resources and technology: are the constraints that limit what is possible.
The quantity supplied of a good or service is the amount the producers plan to sell during a
given time period at a particular price.
The law of supply states: other things remaining the same, the higher the price of a good,
the greater is the quantity supplied; and the lower the price, the smaller is the quantity
supplied.
- When the price increases, the quantity supplied increases because its marginal cost
increases.
- When the price of a good increases, other things remaining the same, producers are
willing to incur a higher marginal cost, so they increase production.
Supply relates to the entire relationship between the price of a good and the quantity
supplied of it.
The term quantity supplied refers to a point on the supply curve
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