- Interaction between consumers and producers in a market is the main mechanism through which
- resources are directed to meet the needs and wants in an economy.
- Consumer and producer choices are the outcome of complex decision-making.
- Welfare is maximized if allocative efficiency is achieved.
- Constant change produces dynamic markets.
- The market mechanism may result in socially undesirable outcomes that do not achieve efficiency,
- environmental sustainability and/or equity.
- Market failure, resulting in allocative inefficiency and welfare loss.
- Resource overuse, resulting in challenges to environmental sustainability.
- Inequity, resulting in inequalities.
- Governments have policy tools which can affect market outcomes, and government intervention is
- effective, to varying degrees, in different real-world markets.
Key concepts: scarcity, choice, efficiency, equity, economic well-being, sustainability, change, interdependence, intervention.
|Demand||>> The law of demand—relationship between price and quantity demanded;|
>> Demand curve;
>> Relationship between an individual consumer’s demand and market demand;
>> Non-price determinants of demand;
>> Movements along the demand curve and shifts of the demand curve.
|Supply||>> The law of supply—relationship between price and quantity supplied;|
>> Supply curve;
>> Relationship between an individual consumer’s supply and market supply;
>> Non-price determinants of supply;
>> Movements along the supply curve and shifts of the supply curve.
|Competitive Market Equilibrium||>> Demand and supply curves forming a market equilibrium;|
>> Shifting the demand and supply curves to produce a new market equilibrium;
>> Functions of the price mechanism;
>> Consumer and producer surplus;
>> Social/community surplus;
>> Allocative efficiency at the competitive market equilibrium
|Critique of the maximizing behaviour of consumers|
|>> Rational consumer choice (HL only)|
>> Behavioural economics in action (HL only)
>> Business objectives (HL only)
|Elasticities of Demand||>> Concept of elasticity;|
>> Price elasticity of demand (PED);
>> Determinants of PED;
>> Importance of PED for firms and government decision making
>> Reasons why the PED for primary commodities is
generally lower than the PED for manufactured
products (HL only);
>> Income elasticity of demand (YED);
>> Importance of YED (HL only).
|Elasticity of Supply||>> Price elasticity of supply (PES);|
>> Reasons why the PES for primary commodities is
generally lower than the PES for manufactured
products (HL only);
|Role of Government in Economics||>> Reasons for government intervention in markets;|
>> Main forms of government intervention in markets; (Price controls, Indirect taxes and subsidies, Direct provision of services, Command and control regulation and legislation)
|Market failure – Externalities and common pool or|
common access resources
|>> Socially optimum output: marginal social benefit (MSB) equals marginal social cost (MSC);|
>> Government intervention in response to externalities and common pool resources;
>> Strengths and limitations of government policies to correct externalities and approaches to managing common pool resources;
>> Importance of international cooperation.
|Market failure—public goods||>> Public goods;|
>> Government intervention in response to public goods.
|Market failure—asymmetric information |
|>> Asymmetric information|
• Adverse selection
• Moral hazard;
>> Responses to asymmetric information
|Market failure—market power |
|>> Perfect competition;|
>> Imperfect competition;
>> Rational producer behaviour—profit
>> Degrees of market power;
>> Monopolistic competition;
>> Advantages of large firms having significant market power;
>> Risks in markets dominated by one or a few very large firms;
>> Government intervention in response to
abuse of significant market power.
|The market’s inability to achieve|
|>> Workings of free market economy may result in an unequal distribution of income and wealth.|
Inquiry—possible areas to explore
- An investigation into the problems associated with volatile prices of commodity-dependent countries.
- An investigation into how choice architecture influences decision-making in different contexts (for example, its role in a supermarket, or how it may influence the rate of organ donation in different countries).
- A critical investigation into the CSR practices of different companies.
- An investigation into the extent to which firms actually use knowledge of elasticity to inform pricing decisions.
- The impact of a price floor or price ceiling in a chosen market.
- The impact of a government policy to correct market failure resulting from externalities.
- How different communities approach the managing of a common access resource.
- The impact of a price war or of price fixing on stakeholders of a selected industry.
- The risks of increasing monopoly power and abuse in a selected industry (for example, technology).
- Examples of government intervention in response to abuse of market power.
- How government intervention to correct a market failure (other than externalities) affects different stakeholders.
- How a country’s economy could thrive without depending on the overuse of finite resources and still meet people’s needs.
Theory of knowledge questions
- Is the assumption of rational consumer choice realistic?
- Can laws in economics, such as the law of demand and the law of supply, have the same status as laws in the natural sciences?
- Can the use of empirical evidence ever allow us to arrive at the truth about the real world?
- What practical problems does economics try to solve?
- What knowledge criteria should government policy makers use to make choices between alternative policies?
- The idea of environmental sustainability suggests that people should avoid destroying resources today so as not to penalize future generations. Is it possible to have knowledge of the future?
- Microeconomic theory is based on the assumption of rational consumer choice and rational self interest. Yet the principle of collective self-governance suggests that people also behave cooperatively. What assumptions do economists make about the roles of reason and emotion? Are these assumptions justified?
- How can we know when a problem is sufficiently large to justify government intervention?