Conceptual understandings
- 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.
| Topics | SL/HL Content |
| 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 and producers | >> 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 (HL only) | >> Asymmetric information • Adverse selection • Moral hazard; >> Responses to asymmetric information |
| Market failure—market power (HL only) | >> Perfect competition; >> Monopoly; >> Imperfect competition; >> Rational producer behaviour—profit maximization; >> Degrees of market power; >> Oligopoly; >> 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 equity (HL only) | >> 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?