Possible Marking Scheme

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Memorandum of Intent: Economics
I, ____________________________________, being a bona fide student in Grade ______ at Jeddah Knowledge International
School, do hereby solemnly undertake to:
 Conform to the norms and ethos of the IB Program at all times.

 Through my conduct / behaviour display a growing understanding of my responsibility as a senior and leader at school.
 Participate in and contribute to all efforts to make our school a centre of excellence.
 Be mindful of the educational needs of my fellow learners by being attentive in class, obey all reasonable instructions issued
by my teachers and actively contribute to creating an environment conducive to teaching and learning.
 Commit to:
 Coming to the Economics class well-prepared, ready to contribute effectively, bringing in all the relevant resources
including the main textbook, exercise books, student planner, workbook, laptop (when requested) plus any
additional tools needed for the Economics course e.g. calculators, rulers, graph paper notepads plus pencils & pens
 Autonomous learning; which encourages “independence and responsibility” towards assigned duties
 Being ready to use graphical representation as an integral tool of the course to interpret economic theories &
concepts
 Familiarizing yourself and practicing on how to use mathematical tools and theories to interpret economics (as
graphical interpretation and numeracy are important prerequisites for economics)
 Active Class Participation, probing and sharing ideas
 Constant application of economic theories to real world situations aiming at explaining the current status and
predicting future trends
 Participate meaningfully in all activities aimed at developing me holistically, whether educational, co-curricular or social.
 Take pride in my work and consistently and diligently complete all tasks assigned to me.
 Display behaviour that is above reproach and show respect to all members of staff at all times.
 Submit all work timeously and work studiously towards excelling in tests, quizzes and examinations.
 Adhere to the JKS Academic Honesty Policy by ensuring that all work submitted is my own and that all sources have been
carefully referenced.
Signed: _________________________ Date: _________________________
G11 – Economics – SL - Term 1- 2020/21 1

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Essential Subject Expectations
Homework
1. All homework in pen.

2. Homework must be students’ own work.
3. Homework must be submitted on time.
Class Assignments
1. Grades will be awarded for all class assignments.

2. Incomplete work to be completed during the second break.
3. All work must be original.
4. Use blue or black pen only.
5. Neat error – free handwriting.
6. Neat corrections without the use of white-out.
Check
Checklist the Box
1. Definitions of key terms

2. Clear understanding of the topic
3. Judgements made are supported by effective and balanced reasoning
4. Relevant, accurate and correctly labelled diagrams where required
5. Use of appropriate terminology

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IB ECONOMICS SYLLABUS – 2020-22

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TERM 1 SYLLABUS - MICROCONOMICS
1. Concepts based IB Economics syllabus…………………………………………………………14

2. Introduction to Economics - What is Economics? ………………………………………..15
3. The evolution of economic thinking …………………………………………………………….17
4. Microeconomics Demand
…………………………………………………………………………...22
5. Elasticity of demand
…………………………………………………………………………………….37
6. Microeconomics Supply
………………………………………………………………………………48
7. Elasticity of supply
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8. Market equilibrium, the price mechanism and market efficiency ………………..67
9. Methods of government intervention in markets ………………………………………..84
10. Market failure
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11. Past-papers directory
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12. Course Breakdown
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STRUCTURE OF IB- SL – 2020-22

The nine central concepts are referred to throughout the course
SYLLABUS STRUCTURE
1. Introduction to economics
2. Microeconomics
3. Macroeconomics
4. Global Economics
ASSESSMENT IN SL
INTERNAL ASSESSMENT
1. Internal Assessment consists of 45 marks
 A portfolio of 3 commentaries will be internally assessed and then sent for IB moderation.
 Each commentary should be written on a different section of the syllabus.
After being 5-6 months into the course, students must choose the article and present the investigation
(commentary) in the following structure:
EXTERNAL ASSESSMENTS
SL - External assessment
 Paper 1
 Paper 2
HL - External assessment
 Paper 1
 Paper 2
 Paper 3

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COMMAND TERMS

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OBJECTIVES
 To relate the economic concepts and theories learnt during the course to the real life local,
national and global issues (use of newspaper article at the beginning of each topic)
 To develop IB learner profile attributes
 To empower students with life-long skills
 Development of ATL skills

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INTRODUCTION TO ECONOMICS
CHAPTER 1 - WHAT IS ECONOMICS
CHPATER 2 – THE EVOLUTION OF ECONOMIC

THINKING
AND
THE NINE CONCEPTS THAT UNDERPIN THE

COURSE
Introduction to Economics – Fundamentals of Economics by Khan Academy

https://www.youtube.com/watch?v=8JYP_wU1JTU
Introduction to Economics – Fundamentals of Economics by Jason Welker

https://www.youtube.com/user/welkerjason

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THINKING AND COMMUNICATING

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Economics as a social science: It studies people’s behavior and how they interact with each other.
It is concerned with human beings and the social systems by which they organize their activities to satisfy basic
material needs (eg, education, knowledge, food, golf and shelter)
Economics is concerned with the production of goods and services, and the consumption of these goods and
services. Every country whether rich or poor has to make choices and is confronted with the key economic
problem of scarcity
Ceteris Paribus: All things being equal – one of the assumptions used in many economic models, where an
individual factor is changed while all others are held constant. (Use it!!
Positive Statement: A statement that can be verified by empirical observation i.e. Brazil has the largest
income gap in Latin America.
Normative Statement: a value judgment about what ought or should happen, i.e. more money should be spent
on teacher’s salaries and less on WMD’s.
Utility: Benefits or satisfaction gained from consuming goods and services – hard to measure but we assume
consumers make decisions based on maximizing utility.
Economic Good: Things people want that are scarce – there is an opportunity cost involved.
Free Good: Commodities that have no price and no opportunity cost, i.e fresh air and sunshine
Command Economy: An economy where all resources are allocated by the government (central authority).
This economic system/rationing system is associated with a socialist or communist economic system promoted
by Karl Marx.
Free Market Economy: An economy where all resources are allocated by individual households and firms, with
no government intervention. This economic system/rationing system is based on Adam Smith’s theory
promoting market forces od demand and supply and price mechanism.

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Mixed Economy: an economy where economic decisions are made partly by the government and partly
through the market. (nearly every economy in the world)
Economic Growth is the increase in a country’s output over time; that is an increase in national income.
Economic Development is a much broader concept that purely economic growth, involving non-economic and
often quite intangible improvements in the standard of living, for example freedom of speech, freedom from
oppression, health care, education and employment
Sustainable Development: Development that meets the needs of the present without compromising the ability
of future generations to meet their own needs.
Basic Economic Problem
The basic economic problem is that human wants and needs are unlimited whereas the resources (factors of production) to
produce them are limited in supply (scarce). Because of scarcity of resources, an economic system must make decisions
about WHAT, HOW and for WHOM to produce so as to maximize social welfare.
Factors of production (resources needed to produce)
There are 4 Factors of production (basic components) necessary to produce a product; a good or a service.
1. Land
Natural Resources, that include everything on the land, under the land or in the sea (e.g., oil, water). The economic reward
earned for land is called ‘Rent’. For example, if Mr. X owns a piece of land and allows Mr. Y to use it for his commercial
purpose, Mr. X will earn a certain amount of money ‘rent’ from Mr. Y
2. Labor
The mental and physical efforts of human beings that are required by a business in order to produce a product. For
example, a car manufacturing company may need designers for their mental skills and the mechanics for physical
skills/efforts. Both mental and physical efforts contribute towards the production hence both are important. The economic
reward for labour is called ‘Wages’
3. Capital
Man-made aid to production that helps a business to make use of the natural resources/raw material to produce the final
product. In economics, such man-made capital such as produce machinery/equipment and design and print money, is
called ‘Physical capital’, that is used to produce various other goods and services. The economic reward earned for
physical capital is called ‘Interest’.
4. Enterprise
Enterprise is the special skill/ability to take risks and make decisions, combining and allocating other resources (land,
labor and capital) to start a business. An entrepreneur is the person who avails an opportunity of an economic value. The
reward earned for enterprise is called ‘Profit’.

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Basic Economic Problem - Resources are scarce (limited in supply) but human wants are unlimited.
Scarcity: Scarcity refers to the limited supply of factors of production available to an economy at a given point
in time. All goods and services that have a price are relatively scarce relative to the demand for them. Scarcity
therefore is the core economic issue that forces the economic agents (consumers, firms and governments) to
make a choice when it comes to allocating the scarce resources between different options/uses.
Choice: Choice has to be made because the resources are scarce compared to human wants and needs. Choice
is the result of the economic problem of scarcity, and how you allocate resources to deal with the economic
problem.
Opportunity Cost is the next best alternative forgone when economic decisions are made. It’s a cost
measured in terms of the next best alternative/option that was sacrificed or given up in order to make a choice in
favour of the most desired option/product.Opportunity cost is not measured in terms of money but the option
that has been given up to choose something else instead.
Rationing Systems – The system that allocates the scarce resources by making the economic decisions about
WHAT, HOW and for WHO to produce.
Free market/capitalistic economy
Where households own resources and markets allocate resources through the workings of the price mechanism. An
increase in demand raises price and encourages businesses to switch additional resources into the production of that
good or service. In a free market economic system, Price mechanism describes the means by which millions
of decisions taken by consumers and businesses interact to determine the allocation of scarce resources between
competing uses. The price mechanism plays three important functions; Signaling function, Incentive
function and Rationing function
Advantages
 Free market responds quickly to the people’s wants: Thus, firms will produce what people want
because it is more profitable whereas anything which is not demanded will be taken out of production.
 Wide Variety of goods and services: There will be wide variety of goods and services available in the
market to suit everybody’s taste.
Disadvantages
 Unemployment: Businesses in the market economy will only employ those factors of production which
will be profitable and thus we may find a lot of unemployment as more machines and less labour will be
used to cut cost.
 Certain goods and services may not be provided: There may be certain goods which might not be
provided for by the Market economy for example, Public goods, such as, street lighting.

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PLANNED/SOCIALIST/COMMAND ECONOMY
In a planned or command system typically associated with a socialist or communist system, scarce
resources are owned by the government. The state allocates resources, and sets production targets and
growth rates. In such a system, market prices play little or no part in informing resource allocation
decisions and queuing rations scarce goods.
Advantages
 Prices are kept under control and thus everybody can afford to consume goods and services.
 There is less inequality of wealth.
Disadvantages
 Consumers cannot choose and only those goods and services are produced which are decided by the
government
 Lack of profit motive may lead to firms being inefficient.
Point of Debate - Students to research the names of the countries that use more of planned versus
market economy and hold a 5-6 minutes’ debate

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MIXED ECONOMIC SYSTEM
Almost all economies use the mixed economic system to allocate the scarce resources. Its broadly
divided into a public sector (businesses owned by the government) and a private sector (buisnesses
owned by private individuals).
Public sector is responsible to provide public goods and merit goods for all citizens
Public goods are non-excludable and non rivulrous. The benefits are enjoyed by all equally without
affecting others hence the problem of free-riders exist with public goods. Those who would pay and
those who wouldn’t benefit equally, hence no one wants to pay for them. His is why the government
must provide them. Some examples of public goods are roads, national defense, street light, law and
order.
The two main criteria that distinguish a public good are that it must be non-rivalrous and non-
excludable. Non-rivalrous means that the goods do not dwindle in supply as more people
consume them; non-excludability means that the good is available to all citizens.
An important issue that is related to public goods is referred to as the free-rider problem. Since
public goods are made available to all people–regardless of whether each person individually
pays for them–it is possible for some members of society to use the good despite refusing to pay
for it. People who do not pay taxes, for example, are essentially taking a "free ride" on revenues
provided by those who do pay them.
In some cases, public goods are not fully non-rivalrous and non-excludable.
Quasi-public goods - A quasi-public good is a near-public good. It has some of the characteristics of a
public good especially when it becomes rival in consumption at times of peak demand.
Unlike the air we breathe, using the post office does require some nominal costs, such as paying
for postage. Similarly, some goods are described as “quasi-public” goods because, although they
are made available to all, their value can diminish as more people use them. For example, a
country’s road system may be available to all its citizens, but the value of those roads declines
when they become congested during rush hour.
Merit goods are excludable and rivulrous – the benefits are not enjoyed by all equally without affecting
others. Healthcare and education are examples of merit goods.
Merit goods are those goods and services that the government feels that people will under-consume,
and which ought to be subsidized or provided free at the point of use so that consumption does
not depend primarily on the ability to pay for the good or service.
Merit goods and services create positive externalities when consumed and these 3rd party spill over benefits can
have a significant effect on social welfare. Market failure occurs when merit goods and services are under-
consumed under free market conditions.

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THE KEY DIFFERENCES BETWEEN A MERIT GOOD AND A PUBLIC GOOD
Who provides merit goods?
 Both the state and private sector provide merit goods & services. We have an independent
education system and people can buy private health care insurance.
 Consumption of merit goods is believed often to generate positive externalities- where the social
benefit from consumption exceeds the private benefit.
 A merit good is a product that society values and judges that people should have regardless of their
ability to pay. In this sense, the government is acting paternally in providing merit goods and
services. Individuals may not act in their own interest because of imperfect information.
Education as a merit good - Education is a long-term investment decision. The private costs must
be paid now but the private benefits (including higher earnings potential over one's working life)
take time to happen. Education provides external benefits including rising
incomes and productivity for current and future generations and an increase in occupational
mobility to help to reduce unemployment.
Notice here that we are talking about the sorts of goods and services that society judges to be in our best
welfare. Judgements involve subjective opinions – and we cannot escape from making value
judgements when we are discussing merit goods
Why does the government provide merit goods and services?
1. To encourage consumption so that positive externalities of merit goods can be achieved for example
free inoculation against infectious diseases
2. To overcome the information failures linked to merit goods
3. On grounds of equity – because the government believes that consumption should not be based
solely on the grounds of ability to pay for a good or service

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Private sector: That part of the economy that is characterized by private ownership of the means of
production by profit seeking individuals. Completion leads to efficiency and innovation. However the
products are produced for those who can pay for it.
The opposite of a public good is a private good, which is both excludable and rivalrous. These
goods can only be used by one person at a time–for example, a wedding ring.
Opportunity Cost and production Possibility Curve
Production Possibility Curve/Frontier/boundary (PPC/PPF) is an illustration of the allocation of

resources between two competing uses when consumers, firms or governments make a choice due to the
scarcity of resources. When choices/decisions are made, in favour of a certain product, some of the other
product needs to be given up, if all resources are fully employed/used. Opportunity cost is not reflected
in terms of money. It is the benefit lost (next best alternative forgone). All points on the PPC show
different combinations of the two products when all resources are fully employed i.e the economy is
producing at the most efficient level.
Assumptions
 The only resource is considered at a time

 The country is producing only two products at a particular moment in time
 The country has employed all resources hence producing at most efficient level
 A movement from A to B - A decision to increase the production of cotton from 300 to 400 units results
in a loss of 40 units of wheat (from 200 to 160 units). The 40 units of wheat is the opportunity cost of
100 units of cotton.
 A movement along the PPC results in opportunity cost because increasing the production of any one
product is not possible without reducing/sacrificing/giving up some of the output of the other product.
 This concept is also called PARETO efficiency where no one can be made better off without making
someone else worse of
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GETTING TO KNOW THE PPC FURTHER
 Any point inside the PPC/PPF shows inefficient use of resources. Any point inside the PPC does
not show opportunity cost because the economy still has unused resources
 A movement towards PPC shows efficient use of resources. The economy experiences economic
growth.
 A point outside the PPC is unachievable with the current available resources
 A SHIFT of PPC inwards or outwards is possible due to the following reasons:

 A change on quantity of resources
 A change in quality of resources/state of technology
 Producing more of both goods would represent an improvement in society welfare

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Practice C.W

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ASSESSMENT CRITERION FOR IB SL PAPER 1 (part a)

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Past Paper Question - Classwork - 1
Q1. Using the production possibilities model, explain how scarcity, choice and opportunity cost are
related to each other. [10 marks]
Guidelines for answer

 Definitions of production possibility curve, scarcity and opportunity cost
 Real life example
 PPC diagram showing opportunity cost
 Explanation of the diagram in terms of how scarcity, choice and opportunity cost are related to
each other.
Definition of scarcity
Scarcity refers to the limited supply of factors of production available to an economy at a given point in
time. All goods and services that have a price are relatively scarce relative to the demand for them.
Scarcity therefore is the core economic issue that forces the economic agents (consumers, firms and
governments) to make a choice when it comes to allocating the scarce resources between different
options/uses
Definition of opportunity cost
Opportunity Cost is the next best alternative forgone when economic decisions are made. It’s a cost
measured in terms of the next best alternative/option that was sacrificed or given up in order to make a
choice in favour of the most desired option/product. Opportunity cost is not measured in terms of money
but the option that has been given up to choose something else instead.
Real life example of opportunity cost
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Definitions of production possibility curve
PPC/PPF shows the maximum potential of an economy to produce different combinations of two
competing products/options, if all resources are fully employed, considering no change in the state of
technology to increase the output at the moment.
PPC diagram showing opportunity cost
Title - ---------------------------
Explanation of the diagram in terms of how scarcity, choice and opportunity cost are related to each other.
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Conclude by clearly establishing the link between scarcity, choice and opportunity cost

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The circular flow of income is an economic model that shows the way an economy works.

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Classical Economics (Since the industrial Revolution 18th Century) – Neoclassical Economist – Karll Marx (1818- Monetarism Behavioral
Supported by Adam Smith (1776) William Jevons, Leon 83) condemned Economics
Walras and Carl Menger Capitalism (free A challenge to
Supported Laissez-faire (1870) market economic Keynesianism in
Soppy-side of the economy that emphasizes of efficiency on system) and 1960s by Milton Richard Thaler is
productivity and production/specialization and international trade Alfred Marshall the believed in Friedman, a the pioneer of
founder of Neoclassical communism – Nobel Prize behavioral
economics, in his book Centrally Planned winner in 1976 economics and
Production/supply-side theory - Laour theory states that the value of ‘Principles of Economics’ Economic system won a Nobel Prize
a good is determined by the value of the factors of production that presented the visual in 2017
suppliers have to pay for when producing the product demand and supply
graphical model. Keynesian (1936), His book, Nudge;
Father of Improving
Macroeconomics decisions about
Demand-side theory- publish his book health, wealth and
The value of a good is ‘General Theory of happiness’
determined by the value Employment, consumers can be
that consumers place on Interest and nudged to make
it based on the amount Money’, promoted choices voluntarily
of utility the product Demand-side that are better for
provides them economics. them as well as
for society
He challenged the
assumption of
new classical
economists about
the rational
consumers and
claimed that such
humans do not
exist

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Assumptions built in to Keynes promoted The main

Adam Smith’s famous work in “The wealth of the Nations’ promotes neoclassical model is ‘counter-cyclical’ determinant of
the concept of ‘Invisible hand’ where the personal interest of private known as ‘Rational expansionary and economic
firms. maximizing their profits by being competitive. The invisible choice theory’ contractionary growth was the
hand of completion leads to efficiency and innovation so as to demand amount of
produce the best possible products to satisfy consumers in order to management money supply
maximize profits. Consumers have policies (fiscal and circulating in
complete information monetary policies) the economy.
The theory promotes the Market Economic System; a rationing and they are rational to avoid drastic
system where private firms and consumers make economic decisions decision makers rational fluctuations in the
regarding the allocation of resources. business cycles The main focus
of Monetarists
Government is to avoid
In a market system, price mechanism plays pivotal roles of signaling, should take an inflation, He
incentive and rationing to allocate resources. active role and use said it was too
demand side fiscal much money
The government certainly plays an important role when it comes to policy to avoid chasing too few
proving public goods that have a problem of free riders such as unemployment goods that
infrastructure and national security as well as some merit goods such and recession leads to rising
as education, research and healthcare. prices
Producers and consumers allocate resources in their own personal He advises

interest, which in turn create jobs, incomes, competition, innovation monetary policy
and efficiency thus contribute towards social welfare. to be the most
effective ways
The market forces of demand and supply determine the equilibrium; to achieve
a point of harmony in the market, determining a market price and stable rate of
market quantity. inflation
At equilibrium, both consumer and producer surplus are maximized,

resulting in highest community surplus; achieving socially efficient Also believe in
allocation of resources. rational
behavior and
‘rational
The self-correcting tendency (automatic stabilizer) of market expectations
system takes care of short term shortages or excess in the market as theory
the price mechanism brings the market back in to equilibrium.
Market economy supports liberalization of trade and discourages New Classical,

protectionism. like Monetarists
believe that the
economies will
automatically
move towards a
level of national
income where
resources are
fully employed

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Chapter 3. Microeconomics Demand

Law of Demand: https://www.youtube.com/watch?v=ShzPtU7IOXs

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Market, a means by which the exchange of goods and services takes place as a result of buyers and
sellers being in contact with one another, either directly or through mediating agents or institutions.
Demand is the quantity of a good or service that consumers are willing and able to buy at a given price
in a given time period
The Law of Demand
There is an inverse relationship between the price of a good and demand.
1. As prices fall, we see an expansion of demand.

2. If price rises, there will be a contraction of demand.
Ceteris paribus assumption
Many factors affect demand. When drawing a demand curve, economists assume all factors are held
constant except one – the price of the product itself. Ceteris paribus allows us to isolate the effect of one
variable on another variable
The Demand Curve
A demand curve shows the relationship between the price of an item and the quantity demanded over a
period of time. There are two reasons why more is demanded as price falls:
1. The Income Effect: There is an income effect when the price of a good falls because the consumer
can maintain the same consumption for less expenditure. Provided that the good is normal, some of the
resulting increase in real income is used to buy more of this product.
2. The Substitution Effect: There is a substitution effect when the price of a good falls because the
product is now relatively cheaper than an alternative item and some consumers switch their spending
from the alternative good or service.

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Movement along the demand curve: Ceteris Paribas, a change in the price of the product itself results
in movements along the same demand curve due to price mechanism where change in price plays the
role of signaling, incentive and rationing functions
 As price of a product falls, a person switches away from rival products towards the product,
hence quantity demanded for the product increases
 As price of a product falls, a person's willingness and ability to buy the product increases,
hence quantity demanded for the product increases
 As price of a product falls, a person's opportunity cost of purchasing the product falls, hence
quantity demanded for the product increases

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CHANGE IN NON-PRICE DETERMINANTS

Shift of the demand curve
When the price of the product itself stays constant, a change in other determinants of demand
cause a shift of the entire demand curve
Non-price determinants of demand

Price of the product remaining constant, a change in other determinants of demand leads to a shift of the
demand curve
1 (a) Changing prices of a substitute good
Substitutes are goods in competitive demand and act as replacements for another product. A rise in
price of the Apple iPhone will cause a rise in demand for Samsung phones. Higher electricity prices may
encourage use alternative sources of energy. Air travel and train services – cheaper flights between
London and Glasgow might cause a fall in demand for rail services between the two cities
(b) Changing price of a complement
Two complements are in joint demand – e.g. DVD players and DVDs, iron ore and steel. A rise in the
price of a complement to Good X should cause a fall in demand for X. An increase in the cost of flights
from London Heathrow to New York would cause a decrease in the demand for hotel rooms in New
York and also a fall in the demand for taxi services both in London and New York.
2. Changes in the income of consumers
Most of the things we buy are normal goods. When income goes up, our ability to purchase goods
and services increases, and this causes an outward shift in the demand curve. But when incomes fall
there will be a decrease in the demand, except for inferior goods

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3. The effects of advertising and marketing: Heavy spending on advertising and marketing can help
to bring about changes in consumer tastes and fashions. In 2009, online advertising spending
overtook television expenditure for the first time.
4. Interest rates and demand
Many products are bought on credit using borrowed money, thus the demand for them may be
sensitive to the rate of interest charged by the lender.
Real life situation – Fall in demand for oil
https://www.cnbc.com/2018/12/24/plunging-oil-prices-show-the-market-is-worried-about-
2019-recession.html
Plunging oil prices show the market is worried about a recession in 2019, says analyst
P U B L I S H E D M O N , D E C 2 4 2 0 1 8 9: 5 9 A M E S T U P D A T E D M O N , D E C 2 4 2 0 1 8 1 2: 2 8 P M E S T
“Oil is weak because many demand signals are blinking red, and supply cuts won’t matter if the bottom
falls out of demand,” Sankey wrote.
“Downward global GDP revisions keep coming, the risk of recession is rising, equity markets reflect it,
flight-to-safety pushes the dollar higher, and those factors lead oil lower on demand worry.”
The Paris-based International Energy Agency forecasts oil demand will grow by 1.4 million barrels per
day in 2019, while the U.S. Energy Information Agency believes the world will consume an additional
1.5 million bpd next year.
Sankey says OPEC’s forecast for 1.3 million bpd in demand growth next year is more realistic, but
perhaps still too optimistic.
For J.P. Morgan, the outlook is even darker. The investment bank sees the world’s appetite for oil
growing by just 1.1 million bpd next year.

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A CHANGE IN THE PRICE AND NON PRICE DETERMINANTS OF DEMAND
Movement along the Shift of a demand curve

demand curve Non-Price Factors
Price Factor
Other things remaining Price remaining constant, a change in one of the

constant, a change in the price non-price determinants leads to a change in
of the product itself leads to a demand.
change in quantity
demanded. When the initial cause is a change in non-price
When the initial cause is a determinants, there’s a shift of the demand curve
change in price of the itself.
product, there’s movement
along the same demand
curve. An increase in demand for a product results in a
new demand curve to the right, causing quantity
demanded to increase at the same original price.
A fall in price results in
extension along the demand A decrease in demand for a product results in a shift
curve (a movement along the of the demand curve to the left, leading to lower
curve towards the right) quantity demanded at the same original price.
An increase in price leads to a
contraction along the demand
curve (an upward movement
along the curve towards the
left)
1. Consumer income
a) Normal products
b) Inferior products
2. Price of the other products
a) Substitute products (competitors’
products)
b) Complementary products (in
joint demand)
3. Tastes/preferences/advertising
4. Size of population
5. Seasonal changes
6. Changes in age structure
7. Changes in income distribution
8. Government intervention such as
taxes

Date: ………………………………………………..
Graded Classwork – 1
M14/3/ECONO/SP1/ENG/TZ2/XX/M
Q. ‘Quantity demanded increases as price falls. Yet as demand falls, price falls.’ Using
Diagrams, explain whether these two statements contradict each other. [10 marks]
Guidelines for answer:
Definitions of demand, law of demand and draw the diagram explaining price being a determinant
to represent ‘Quantity demanded increases as price falls’
Distinguish between price and non-price determinants of demand and draw a diagram to represent the
statement ‘as demand falls, price falls’
Student’s answer:
Unlock the question
Explain that price being a determinant ‘Quantity demanded increases as price falls’
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Definitions of demand
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Law of demand
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Use a real life example and draw the diagram with only 1 demand curve, showing extension along the
curve.
Title -
Explain the diagram that a fall in PRICE of the product itself leads to an increase in QD for the product
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Draw a diagram to represent the statement ‘as demand falls, price falls’.
Use a real life example of a change in a NON-Price determinant of demand and draw a diagram with 2
demand curves, showing an inward shift of the demand curve, leading to a new equilibrium, setting a
lower price for the product.
Title -
Explain the diagram ‘as demand falls, price falls’
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Conclude by clearly distinguishing between price and non-price determinants of demand
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ELASTICITY OF DEMAND
Video lesson
https://www.youtube.com/watch?v=e_U4IFQNyLg

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Real life examples – News article
https://www.agweb.com/article/why-dairy-demand-has-become-more-elastic-naa-catherine-merlo/
With the government no longer one of U.S. dairy’s best customers, prices are more reactive to consumer
demand.
You may have learned in your high-school or college economics class that dairy consumption is
relatively “inelastic,” meaning that demand for food staples like milk, butter and cheese varies little with
price.
But times have changed, and dairy demand is not inelastic as it once was, says Sara Dorland, managing
partner with Seattle-based Ceres Dairy Risk Management. Higher prices can have a direct effect on
consumption of dairy products.
“Historically a good amount of our product went to the U.S. government, which kept prices stable,
especially for skim products,” says Dorland, who holds an MBA in business and finance. “Therefore,
once every few years, butter or cheese would have a run-up and fall back down. As a result, milk and
dairy product prices played within a rather tight range, a factor that contributed to our belief that demand
was rather inelastic. Today, that is not the case as the government is no longer one of our best
customers.”
Additionally, when it comes to fluid milk, there are many beverage alternatives whose prices are far
more stable.
“With all of those factors, we do see that consumers are price sensitive, especially when comes to fluid
milk,” she adds. “Butter and cheese are far less so. People like cheese and have been paying a good
amount of money for it this year, which makes me very optimistic about domestic cheese demand this
year.”
The Food Network and the Food and Drug Administration have done a lot to help butter demand, notes
Dorland. “In the past, butter was vilified,” she says. “Now butter is best.”
With that stamp of approval and emerging health concerns about margarines and butter substitutes,
consumers are making the switch back to butter. Given lower margarine output and the studies on
transfats, people are unwilling to switch back. “Again, people are buying butter, but when it gets
expensive, they buy a little less,” says Dorland. “We saw that this fall with the lower commercial
disappearance figures.”

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DEFINITIONS
Elasticity: the measure of responsiveness in one variable when another changes.
PED: The responsiveness of the quantity demanded to a change in price.
PED formula: PED = % ∆ QD
% ∆ Price
PES: The responsiveness of a quantity supplied to a change in price.
PES formula: PES = % ∆Qs
% ∆ Price
Cross Price Elasticity Definition: the responsiveness of a demand in one good to a change in the price
of another
Formula: CEDab = % ∆ Qd a
% ∆ Price b
Income Elasticity of Demand Definition: the responsiveness of demand to a change in consumer

incomes
Formula: YED = %_∆ Qd
% ∆ Y
Perfectly Inelastic: Means that one variable is unresponsive to changes in another. Change in price
will have no effect on change in quantity demanded or quantity supplied
Perfectly elastic: Means that one variable is unresponsive to changes in another. Any change in price
results in supply or demand falling to zero.

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ELASTICITY OF DEMAND
https://www.youtube.com/watch?v=K-SfpW1LIrA
Price elasticity of demand
Price elasticity of demand measures the responsiveness of demand due to a change in price. The

formula for calculating the co-efficient of elasticity of demand is: Percentage change in quantity
demanded divided by the percentage change in price
PED=%ΔQd//%ΔP PED is always negative
Determinants of PED
But now, a crucial question: what determines PED?
 Number and closeness of substitutes - The more substitutes there are to a particular product,
and the more similar these are to the product you originally intended to buy, the more elastic the
PED will be. This is because you are able and willing to switch to another product if the price of
the original product is increased.
 The proportion of income spent on the good - The higher the proportion of income spent on
the good, the more elastic the PED will be.
 Time period between measurements – In short period of time there is a very small change in
quantity demanded following the large increase in price. In other words, PED is inelastic.
 Nature of the good - Demand for products that are addictive in some way (e.g. cigarettes or
alcohol) tends to beprice inelastic as consumers are unwilling to switch away from the product.

Date: ………………………………………………..
Applications of PED
Why are we so keen to measure PED anyway? Different people are interested in PED values for
different reasons:
Firms
Therefore the area under the demand curve will always represent the revenue at any given price.
Revenue is, in fact, given by the total quantity of a product sold times the price of each sale.
Revenue is defined as Price × Quantity. In other words, it is the amount of money that a company will
generate from selling a particular product or service.
Have a look at the diagram below.
The box Q1,P1 (green + orange) shows the revenue that will be made at price P1, while the box Q2,P2
(green + blue) shows the revenue that a firm will make if it sells at P2. At what price should the firm sell
then? If the options are between P1 and P2, any firm wishing to maximize its revenue should clearly sell
at P2. Why? Simply because "Revenue box B" is larger than "Revenue box A"!
If a product has an elastic demand curve, like the diagram below, this means that quantity changes more
than proportionally following a change in price. If there is a decrease in price of the product, total
revenue will increase as the loss of revenue per unit sold is more than compensated by the larger total
quantity sold.

Date: ………………………………………………..
On the other hand, if a product has an inelastic demand curve, the best way to increase total revenue is
to raise the price. Even though this means that the quantity sold will decrease, the change in quantity
demanded will be more than compensated for by the increase in price of each unit sold.
As you can see, the decrease in quantity demanded is relatively small despite the increase in price.
The incidence (i.e. who pays for the tax) falls mainly on consumers. For example, if the government
decides to tax cigarettes, a product with an inelastic demand, the revenue collected will be very large,
but the quantity demanded will not decrease by a large amount.
This means that consumers still buy cigarettes even when they are more expensive and keep paying
taxes to the government, whereas producers are not really damaged. Therefore, we say that the
incidence of taxation falls mainly on consumers.
The second diagram illustrates the effect on taxing a product where demand is elastic. For example,
when a tax is set on German cars, they will become more expensive, but you can easily switch to French
or Swedish cars instead.
As you can see, the quantity demanded decreases by a great deal (Q1 - Q2) because consumers can turn to other
alternatives. The tax has had a great behaviour-changing effect when demand is elastic and consumers can
avoid paying it. Producers, instead, have to pay a greater proportion of the tax when demand is elastic: this is
because their costs of production go up, the price rises and they sell less. Therefore, the incidence of the tax
falls primarily on producers in this case.

Date: ………………………………………………..
Primary products, such as agricultural goods and raw materials, have a rather inelastic demand. This is
because they tend to be necessities (for food, energy...) which cannot be given up. Moreover, they are not highly
differentiated: if your car only works with petrol, you need petrol and only that variety of petrol even if the
price goes up.
On the other hand, manufactured goods tend to have a higher elasticity. This is mainly because they have a
large amount of substitutes: you can buy a car from several producers and choose different varieties of models,
thus avoiding buying the car on which taxes are set.
What you should know
 Price elasticity of demand measures the responsiveness of the quantity demanded to a change in
price.
 PED is determined by the number and closeness of substitutes, time lags, the degree of necessity and
the percentage of income spent on the good.
 We use PED to see what happens to producers' revenues when prices change and to tax incidence of
consumers and producers. For products with more inelastic demand (e.g. addictive and primary
goods) consumers pay a greater proportion of the tax; for products with more elastic demand (e.g.
manufactured goods), producers pay a greater proportion of the tax.

Date: ………………………………………………..
Cross-price elasticity of demand (XED)

The type of elasticity measuring the relationship between two products is called cross-price elasticity. It
measures how the demand for one good will respond to a change in price of another good. Cross
elasticity of demand indicates whether any two products are substitute goods, complementary goods or
independent goods.
Formula
% increase in quantity demanded of A

Cross Elasticity of Demand EA, B =
% increase in price of product B
Substitute Goods
For example, if the price of Coke goes up by 5% (change in Py), the quantity demanded of Pepsi could
increase by 2% (change in Qx) since some people will switch to Pepsi.
Complementary Goods
On the other hand, think about the relationship between the price of a video game console and the games
that you can play on it. If the price of the console increases, i.e becomes more expensive, the demand for
games will fall and vice versa. Because there is an inverse relationship between Qx and Py (i.e. they
change in opposite directions), XED will always be negative. The types of goods with these
characteristics are known as complementary goods.
Application of XED
Mainly big producers and retailers – firms like Procter & Gamble, for example, produce a range of
complements (shampoo and conditioner) and substitutes (liquid and spray detergents). They will try to
raise prices so that total sales are not negatively affected and they continue to make profits, but they
need to know the XED values across their products in order to do so

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PAST PAPER QUESTIONS
Homework - 1
Q. Explain why the price elasticity of demand for primary commodities tends to be relatively low while
the price elasticity of demand for manufactured products tends to be relatively high. [10 marks]
Answers may include:
• Definitions of price elasticity of demand, primary commodities and manufactured products
 Application of theory of price elasticity of demand to primary commodities and manufactured

products, explaining high and low PED,
 Including reference to factors that determine the price elasticity of demand of primary products and
of manufactured goods
 Diagrams to show the different degrees of price elasticity of demand
 Explanation of the diagram with real life examples
 Examples of primary commodities and manufactured products to which this might be, or has been,
applied.
Student’s answer
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Homework - 2
Q.(b) “The income elasticity of demand for primary products tends to be lower than that for
manufactured products and services.” Examine the implications of this for producers and for the
economy as a whole. [15 marks]
N.B. It should be noted that definitions, theory and examples that have already been given in part (a),
and then referred to in part (b), should be rewarded.
Student’s answer
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Q.(b) To what extent might the concepts of YED and XED be of significance for business
organizations? [15 marks]
• Diagrams which may be relevant to the discussion
• An explanation of the relevance of YED for business organizations
An explanation of the relevance of XED for business organizations
• Examples of use of the concepts in practice
• Synthesis or evaluation (to what extent).
Command term “To what extent” requires candidates to consider the merits or otherwise of an argument
or concept.
Consideration of the merits of the concepts may include: the relative importance of the two concepts and
the difficulties of obtaining an accurate measure of each in reality.
Opinions or conclusions should be presented clearly and should be supported by appropriate examples.
Student’s answer
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MICROECONOMICS – SUPPLY

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Law of Supply
There are three main reasons why supply curves are drawn as sloping upwards from left to right giving a
positive relationship between the market price and quantity supplied:
1. The profit motive: When the market price rises following an increase in demand, it becomes
more profitable for businesses to increase their output
2. Production and costs: When output expands, a firm's production costs tend to rise, therefore a
higher price is needed to cover these extra costs of production. This may be due to the effects of
diminishing returns as more factor inputs are added to production.
3. New entrants coming into the market: Higher prices may create an incentive for other businesses
to enter the market leading to an increase in total supply
Movements along the supply curve

Date: ………………………………………………..
A change in the price of a product results in a movement along the supply curve.
When the price of the product itself changes, there’s movement along the same (one) curve.
An increase in price is an incentive for firms and makes it more profitable to supply more therefore it
results in an extension along the supply curve
A decrease in price discourages the firms therefore it results in a contraction along the supply curve
Real Life Situation – Shortage of food (fall in supply)

Date: ………………………………………………..
https://www.reuters.com/article/us-northkorea-food-un/north-korea-faces-food-crisis-after-poor-
harvest-u-n-says-idUSKCN1S90LC
North Korea faces food crisis after poor harvest, U.N. says

GENEVA (Reuters) - Four in ten North Koreans are chronically short of food and further cuts to already
minimal rations are expected after the worst harvest in a decade, the United Nations said on Friday.
FILE PHOTO: A North Korean farmer walks through a village in an area damaged by summer floods and
typhoons in South Hwanghae province September 30, 2011. REUTERS/Damir Sagolj/File Photo
Official rations are down to 300 grammes - under 11 ounces - per person per day, the lowest ever for this
time of year, the U.N. said following a food security assessment it carried out at Pyongyang’s request from
March 29 to April 12.
It found that 10.1 million people were suffering from severe food insecurity, “meaning they do not have
enough food till the next harvest,” U.N. World Food Program spokesman Herve Verhoosel said.
North Korea’s population is around 25.2 million, according to its Central Bureau of Statistics, the report
said.
Verhoosel said the word “famine” was not being used in the current crisis, but it might come to that in a few
months or years. “The situation is very serious today - that’s a fact.”
The country suffered a famine in the mid-1990s believed to have killed as many as 3 million people
For its assessment the WFP, one of only a few aid agencies with access to the country, gained widespread
entry to farms, households, nurseries and food distribution centers.
Shift of supply curve

Date: ………………………………………………..
Change in non-price determinants of supply lead to a shift in the supply curve
If the supply curve shifts to the right, this is an increase in supply; more is provided for sale at each
price
If the supply curve moves inwards, there is a decrease in supply meaning that less will be supplied at
each price
Non-price determinants of supply that can bring about a shift in the supply curve

Date: ………………………………………………..
Changes in the costs of production
 Lower costs of production mean that a business can supply more at each price. For example a magazine
publisher might see a reduction in the cost of its imported paper and inks. These cost savings can then be
passed through the supply chain to wholesalers and retailers and may result in lower market prices for
consumers.
 If the costs of production increase, for example following a rise in the price of raw materials or a firm
having to pay higher wages to its workers, then businesses cannot supply as much at the same price and
this will cause an inward shift of the supply curve.
 A fall in the exchange rate causes an increase in the prices of imported components and raw materials
and will lead to a decrease in supply. For example if the pounds falls 10% against the Euro, it becomes
more expensive for British car manufacturers to import their rubber and glass from Western European
suppliers, and higher prices for paints imported from Eastern Europe
2. Changes in technology
Production technologies can change quickly and in industries where change is rapid we see increases in
supply and lower prices for the consumer
3. Government taxes and subsidies and regulations
 Indirect taxes cause an increase in production costs - an inward shift of supply
 Subsidies bring about a fall in supply costs – an outward shift of supply
 Regulations increase production costs – an inward shift of supply

Date: ………………………………………………..
4. Changes in climate in agricultural industries
 For commodities such as coffee, oranges and wheat, the effect of climatic conditions can exert a great
influence on market supply.
 Favourable weather will produce a bumper harvest and will increase supply. (An outward shift)
 Unfavourable weather conditions including the effects of drought will lead to a poorer harvest, lower
yields and therefore a decrease in supply (inward shift)
 Because commodities are often used as ingredients in the production of other products, a change in the
supply of one can affect the supply and price of another product. Higher coffee prices for example can
lead to an increase in the price of coffee-flavoured cakes.
5. Change in the prices of a substitute in production
 A substitute in production is a product that could have been supplied using the same resources. If
cocoa prices rise for example this may cause some farmers to switch from other crops and invest money
in establishing new cocoa plantations.
6. The number of producers in the market and their objectives
 The number of sellers in an industry affects market supply. When new businesses enter a market,
supply increases causing downward pressure on price. If the existing businesses decide to move away
from maximizing their profits towards seeking a higher share

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Summary of price and non-price Determinants of Supply
Supply is the willingness and ability of a producer to sell a certain product at a certain price over a
specific period of time.
Law of supply: ‘Ceteris paribus’ (other things remaining constant), an increase in the price of a product
increases quantity supplied and vice versa i.e price is directly proportional to quantity supplied.
Relationship between price and quantity demanded = P is directly proportional to QD
Ceteris paribus, a change in the price of the Price remaining constant, a change in one of
product itself, results in movement along the the non-price determinants leads to a shift of
supply curve the supply curve
1. Cost of production
Extension along the supply curve: A 2. Price of the other products
movement towards the right
3. Technology
Contraction along the supply curve: An 4. Suppliers expectations
upward movement towards the left
5. Government intervention such
as subsidies
Classwork - 2
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Q3. Explain the contradiction that increase in price increases quantity supplied yet increase in supply
decreases the price. [10 marks]
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PRICE ELASTICITY OF SUPPLY

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PES is a measure of a % change in quantity supplied due to a % change in price of a product
1. Perfectly Elastic Supply
It must be noted that perfectly elastic supply is an imaginary situation.
2. Perfectly Inelastic Supply
When supply does not change with change in price. In such a case, Es = 0
3. Highly Elastic Supply:
When percentage change in quantity supplied is more than the percentage change in price. In such a
case, Es > 1 The value of elasticity of supply is more than 1
4. Relatively inelastic/Less Elastic Supply:
When percentage change in quantity supplied is less than the percentage change in price. In such a case,
Es < 1 The elasticity of supply is less than 1
5. Unitary Elastic Supply:
When percentage change in quantity supplied is equal to percentage change in price, then supply for
such a commodity is said to the unitary elastic. In such a case, Es = 1
Relevance of elasticities for Governments

Government officials want to forecast the impact of tax increase/decrease on the revenue they collect. In
order to do so, they will collect information about elasticity of different products to tax the more
inelastic ones. Moreover, officials are worried about the incidence of taxation – who pays more? This
depends, again on the PED. The lower the PED, the higher the incident of tax on consumers and lower
the incident of tax on supplier

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MARKET EQUILIBRIUM
Changes in market equilibrium by Khan Academy:
https://www.youtube.com/watch?v=NgPqyM3I_8o

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Market equilibrium is a market state where the supply in the market is equal to the demand in
the market. The equilibrium price is the price of a good or service when the supply of it is equal to the
demand for it in the market. It’s the point with no tendency to change.
Equilibrium Price: The price at which the quantity buyers demand of a product equals the quantity
suppliers are willing to supply so the market is cleared.
The equilibrium price and output can also be shown in a supply and demand diagram
Price Mechanism
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Price mechanism describes the means by which millions of decisions taken by consumers and
businesses interact to determine the allocation of scarce resources between competing uses
The price mechanism plays three important functions in a market:
1/ Signaling function
 Prices perform a signaling function – they adjust to demonstrate where resources are required,
and where they are not
 Prices rise and fall to reflect scarcities and surpluses
 If prices are rising because of high demand from consumers, this is a signal to suppliers to
expand production to meet the higher demand
 If there is excess supply in the market the price mechanism will help to eliminate a surplus of a
good by allowing the market price to fall.
2/ Incentive/transmission of preferences
 Through their choices consumers send information to producers about the changing nature of

needs and wants
 Higher prices act as an incentive to raise output because the supplier stands to make a better
profit.
 When demand is weaker in a recession then supply contracts as producers cut back on output.
3/ Rationing function
 Prices serve to ration scarce resources when demand in a market outstrips supply.
 When there is a shortage, the price is bid up – leaving only those with the willingness and
ability to pay to purchase the product. Be it the demand for tickets among England supporters
for an Ashes cricket series or the demand for a rare antique, the market price acts a rationing
device to equate demand with supply.

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Changes in equilibrium - The shifts are shown the analysis diagrams below

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Classwork 4
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MARKET EFFICIENCY
https://www.youtube.com/watch?v=jxE2i_i9Pw0

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MARKET EFFICIENCY
Economic efficiency indicates an economic state in which all resources are allocated to serve each
person in the best way possible, minimizing waste and inefficiency. In such an economy, any changes
made to help one person would harm another.
Economic efficiency addresses concern such as:
 Are markets working well in allocating resource optimally?

 Are businesses producing close to the lowest possible unit cost and with minimum waste?
 In a given industry, is there sufficient dynamic efficiency driven by research and innovation?
 Does a market take into account external costs and benefits to reach a position of social
efficiency?
Key Definitions
1. Allocative efficiency: Occurs when the price is equal to the marginal cost (AR=MC or P=MC)
2. Productive efficiency: Occurs when output is supplied at minimum unit (average) cost either in
the short or the long run
Consumer Surplus
When there is a difference between the price that you pay in the market and the value that you place on
the product, then the concept of consumer surplus becomes a useful one to look at.
Consumer surplus is a measure of the welfare that people gain from consuming goods and services
Consumer surplus is the difference between the total amount that consumers are willing and able to
pay for a good or service (indicated by the demand curve) and the total amount that they actually do pay
(i.e. the market price).
Market Failure: When a market fails to produce efficient outcomes, and in particular does not achieve
allocative efficiency.
Externalities: Costs or benefits of economic activity which are met by others rather then the party
which causes them.
Positive externalities (also called social benefits): Benefits of economic activity that are not
accounted for in production costs or price. i.e. Vaccination for flu will benefit all.

Date: ………………………………………………..
Negative externalities (also called social costs): Costs of economic activity that are not accounted for
in production costs or price, i.e pollution from nearby chemical factory is imposed on others outside the
economic activity.
Public goods: Goods and services that everyone can consume at the same time, and are non-rivalrous
and non-excludable (see below) and therefore would not be normally provided by the private market, i.e
parks, street lighting, defence.
Publicly provided goods: Goods and services that would be provided by the market but because of
their positive externalities are wholly or partly provided by the government, i.e education, health care.
Private goods: Goods and services that are excludable and rivalrous and are therefore provided by the
market.
Rivalry: A good is rivalrous if the use of it by one person prevents the use of another, i.e pen,
computer.
Excludable: People are excluded from using the good unless they pay a price for it.
Merit good: A good with positive externalities that benefit other people, i.e education – the market will
only provide at a private optimum level and hence under produce (provide) the socially optimum level.
So an under-provision of merit goods!
Demerit good: A good with negative externalities that has costs for society, i.e over consumption of
alcohol impairs judgement, can cause violence and is a cause of many road accidents – market price of
alcohol does not reflect social costs. So an overprovision of demerit goods.
Free riders: Those who benefit from a good or service without paying a share or its cost – this is why
the market will not provide public goods.
Internalize the externality: Making the user pay or be responsible.
Tradable Permits (carbon credits): A process whereby each country is allocated certain levels of
pollution (or carbon emissions). Countries that do not use their quota can then trade their permits to
countries that have

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The area under the demand curve and above the price shows consumer surplus

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1. When the demand for a good or service is perfectly elastic, consumer surplus is zero because the
price that people pay matches what they are willing to pay.
2. In contrast, when demand is perfectly inelastic, consumer surplus is infinite. Demand does not
respond to a price change. Whatever the price, the quantity demanded remains the same. Are
there any examples of products that have such zero price elasticity of demand?
3. The majority of demand curves are downward sloping. When demand is inelastic, there is a
greater potential consumer surplus because there are some buyers willing to pay a high price to
continue consuming the product.

Date: ………………………………………………..
Effect of market changes on consumer surplus
When there is a shift in the demand curve leading to a change in the equilibrium market price and
quantity, then the level of consumer surplus will change too

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Producer surplus is the area above the supply curve and below the price

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Total economic welfare = consumer surplus + producer surplus
Producer surplus and changes in market prices

Date: ………………………………………………..
Graded Classwork
2. (a) Explain that when producer surplus and consumer surplus are maximized, allocative efficiency is
achieved. [10 marks]
Guidelines for the answer:
 Definitions of consumer surplus, producer surplus, community surplus and allocative efficiency
 Diagram (demand and supply) to show producer and consumer surplus and allocative efficiency
 Explanation of the diagram
 Example(s) of where maximized consumer and producer surplus leads to allocative efficiency
Student’s answer
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METHODS OF GOVERNMENT INTERVENTION IN
MARKETS
Video lesson
https://www.youtube.com/watch?v=6mdSmVJi_2s&list=PLAD42514E3391CDA7
Government intervention by Khan Academy
https://www.youtube.com/watch?v=8DuWQVDi9bQ
Government intervention by Tutor2u
http://www.tutor2u.net/economics/reference/government-intervention-in-markets

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DEFINITIONS
Subsidy: Financial assistance made by governments to enterprises which will lower the price and
increase production, effectively a negative tax – i.e. payments to producers to assist with expansion
Direct tax: is a tax upon income – it directly taxes wages, rent, interest and profit
Indirect tax: is an expenditure and sales tax upon goods and services – collected by sellers and passed
onto governments
Flat rate or specific tax: when a specific amount is imposed on a good. i.e. $3 on every bottle of
alcohol
Ad Valorem tax: is a tax expressed as a percentage – most common form of indirect tax – when the
price of a good changes the tax going to the government automatically changes as well
Incidence: who actually pays the tax, what percentage is paid by the sellers/producers and what
percentage is paid by the buyers/consumers
Government revenue: The amount of government revenue that will be achieved through the tax.
Resource allocation: How will resource allocation change with the imposition of the tax
Price Ceiling or Maximum pricing: Prices are imposed below the equilibrium price and are designed
to help consumers by making prices cheaper than they would otherwise be.
Price floor or Minimum pricing: Prices are imposed above the market equilibrium, designed to help
producers by making prices higher than they would otherwise be.
Parallel Market (black or informal): Is unrecorded activity where no tax is paid and regulations can
be avoided – difficult to measure but is can vary from 5% to 20% in various economies. One possible
way of measurement is the difference between National Income and National Expenditure.

Date: ………………………………………………..
ELASTICITY AND GOVERNMENT INTERVENTION
Subsidy – A certain amount provided by the government to the firm with the intention of reducing the cost of production so
that the consumer pays a lower price and firms can earn higher revenue
https://www.nytimes.com/2019/05/23/us/politics/farm-aid-package.html
https://www.bbc.com/news/world-latin-america-45179671
Venezuela crisis: Maduro to curb fuel subsidies
Indirect tax – Government takes a certain amount of indirect tax per unit of output

Date: ………………………………………………..
PRICE FLOOR – Farmers’ income and minimum wage rate
https://www.youtube.com/watch?
v=j0c2vmFGbtk&list=PLF12F094191608982&index=30#t=11.475641389
PRICE FLOORs/MINIMUM ORICE SET ABOVE THE EQUILIBRIUM
Minimum prices are price floors and are most commonly associated with minimum wages in the labour
market or guaranteed price support schemes for farmers or other producers.
Our basic analysis in this section focuses on this. But please be aware that there is also a debate over
introducing some form of minimum pricing for consumers of de-merits goods – this will impact more
directly on the demand side of a market.
Real life situation - Top Cocoa Growers Consider Minimum Price for Bean Sales
https://www.bloomberg.com/news/articles/2019-02-26/top-cocoa-growers-are-said-to-mull-floor-price-for-
bean-sales
February 27, 2019, 2:54 AM GMT+3 Updated on February 27, 2019, 8:00 AM GMT+3
The world’s two biggest cocoa producers are considering setting a minimum price for their beans in a bid to
derive more value from growing the chocolate ingredient, according to two people familiar with the matter.
The industry regulators of Ivory Coast and neighboring Ghana are in talks to study a price that will fall in a
range of 1,700 pounds ($2,255) to 2,000 pounds per metric ton on a free-on-board basis, said the people,
who asked not to be identified because they’re not authorized to speak publicly about the matter. The issue
was discussed at meetings between Ghana Cocoa Board and Ivory Coast’s Le Conseil du Cafe-Cacao in
Accra last week, said the people.
The strategy is at an early stage and both regulators are reviewing the implications of such a proposal for
their industries, said the people. A final plan will be submitted for approval to the two governments and then
presented to cocoa buyers, said the people. Ivory Coast wants to implement the plan before the October start
of the next main harvest and will set aside a portion of the season’s future sales at the set price, said one of
the people

Date: ………………………………………………..
PRICE CEILING
The government or an industry regulator can set a maximum price to prevent the market price from rising
above a certain level.
 One aim of this might be to prevent the monopolistic exploitation of consumers

 To be effective, a maximum price has to be set below the free market price.
 A maximum price seeks to control the price – but also involves a normative judgement on behalf of
the government about what that price should be.
A price ceiling set above the free market equilibrium price would have no effect whatsoever on the market –
because for a price floor to be effective, it must be set below the normal market-clearing price.
 Lottery: One way to distribute a product for which there is a shortage is to draw names out of a hat.
 Black Market: A black market (or shadow market) is an illegal market in which the market price is
higher than a legally imposed price ceiling. Black markets develop where there is excess demand.
 Queue/First Come First Serve: Had they raised the price of tickets to $100 the opening night of Star
Wars: Episode I, I wouldn't have been willing to camp out two nights to get a ticket.
 Historical Use: Sometimes the government will allow the consumers that were already consuming
to continue consuming

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REAL LIFE SITUATION - Global Supply, Demand To Put A Ceiling On Milk Prices In 2019
HTTPS://WWW.MILKBUSINESS.COM/ARTICLE/GLOBAL-SUPPLY-DEMAND-TO-PUT-A-
CEILING-ON-MILK-PRICES-2019
MARKETS
Despite slow milk production growth around the world, supply will likely outpace demand in 2019
leaving prices pretty similar to 2018, according to Nate Donnay director of dairy marketing for INTL
FCStone.
Fat might be a little bit lower, protein might be a little bit higher, cheese is in the middle and cheese
average probably looks a lot like last year. At this point it doesn't look like we're going to see enough of
a drop in production anywhere in the world to really drive things higher,” he told MILK editor Mike
Opperman.
On the supply side, the short-term is relatively constraining, according to Donnay.
“We have milk production below year ago levels in Europe, we have milk production growth in the U.S.
running the less than 1%, New Zealand is doing okay, but Australia is down and Argentina is slowing
down, so in total, the supply side isn’t growing all that much,” he explained. “What we've seen recently
is a bump higher on the demand side. It looks like total global milk equivalent imports were up over 8%
from a year in November and our forecast is December was probably up over 8% as well. We have a
relatively constraining supply side and improvement on the demand side is currently helping to lift dairy
prices.”
Still trade issues and the strength of the U.S. dollar are inhibiting export growth for American milk.
“We've seen a significant drop in U.S. shipments to China of the tariff effected products,” he said. “In
fact, the drop off has been a little bit more than what I was expecting based on historical analysis. I
thought that the 20% tariffs would reduce our shipments to China by about 20% and we're actually
seeing the drop off be more like 30% to 40%. But it's almost perfectly offset by shipments out of
Europe.”
The most recent November European export data shows European shipments of dry whey to China are
up significantly, Donnay explained.
“Total Chinese imports still doing okay, they are just shifting who they're buying from,” he said.
Still as long as macro-economic risks are avoided, like a deepening trade war or a hard Brexit, Donnay
said the average price for 2019 to should be similar to 2018.

Date: ………………………………………………..
DIAGRAMS SHOWING EFFECTS OF PRICE FLOORS AND PRICE CEINING
PRICE FLOOR AND PRICE CEILING SHOWN TOGETHER

Date: ………………………………………………..
A complete list of government instruments to address market failure includes
 Taxes – these are used to tackle goods with negative externalities. When a tax is imposed on plastic
producers, the supply shifts to the left and the quantity produced decreases from Q1 to QO. The tax
realigns the MPC with the MSC, reaching an efficient equilibrium. Contrary to most taxes, when
taxes are set to internalize negative externalities, there is not welfare loss, but rather a welfare
gain! Politicians in some countries are now talking about carbon taxes as a way to internalize the
costs of carbon dioxide (CO2) emissions. However, this is a politically hot topic, as the French
experience shows.
 Quotas: alternatively, the government could place a quota on the amount of pollution that is socially
acceptable, equal to Q*. While quotas place a physical limit to production, they are not ideal from an
efficiency point of view as they constrain production processes for all firms. This is why tradable
permits schemes are devised, so that those producers who find it easy to abate emissions can sell the
permits they don’t need to more inefficient producers. The EU ETS is an example of a trading
scheme for CO2 permits.
 Regulation – laws can also be used to tackle negative externalities. The ban for smoking in public
places represents an attempt to reduce smoking overall. Many factories are also subject to
environmental regulation, which imposes standards for both inputs and outputs.
 Advertising – national campaigns are run on different media to influence people’s behaviour in
different areas of public life. On the one hand, negative advertising is used to dissuade people from
smoking by showing images of cancer on cigarette packets. On the other hand, positive advertising
can induce more students to attend university.
 Subsidies – in order to tackle under-provision of merit goods, direct subsidies can be given to
producers. This way, they are paid by the state (out of general taxation) for the external benefit they
create, while the market otherwise wouldn’t reward them.
 Direct provision of public goods – the state may also decide to directly provide certain public
goods (the consumption of which is non-rival and non-excludable) such as defence and street
lighting.

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Classwork
Student’s answer
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Classwork
(b) Discuss possible consequences of a government imposing a price floor on an agricultural

product.
[15 marks]
N.B. It should be noted that definitions, theory, and examples that have already been given in part (a),
and then referred to in part (b) should be rewarded.
 Definition of price floor

 Diagram showing a price floor
 An explanation of the impact of the price floor on market outcomes including: surpluses,
government measures to dispose of surpluses, inefficient allocation of resources and welfare
impacts on various stakeholders
 Examples of a price floor or of its consequences
 Synthesis or evaluation (discuss).
 Command term “Discuss” requires candidates to offer a considered and balanced review that
includes a range of arguments, factors or hypotheses.
 Discussion may include: the advantages and disadvantages to different stakeholders of price
floors.
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Homework
N14/3/ECONO/SP1/ENG/TZ1/XX/M
(b) Examine the possible consequences of governments imposing a price ceiling in the market for rented
housing. [15 marks]
N.B. It should be noted that definitions, theory, and examples that have already been given in part (a),
and then referred to in part (b) should be rewarded.
 Definition of a maximum price (price ceiling)

 Diagram (supply and demand) to show the impact of the maximum price in rented housing
 An explanation that governments impose maximum prices to protect low income consumers; an
explanation of the possible consequences of a price ceiling in terms of keeping price below the
equilibrium level, excess demand, inefficient resource allocation, underground market for
housing, non-price rationing and welfare impacts
 Example(s) to show the impact of a maximum price on rented housing
 Synthesis or evaluation (examine). Examination may include: consideration of the various effects
on markets including establishing a parallel market, the cost to the government of implementing
the policy and impact on landlords.
 Opinions or conclusions should be presented clearly and should be supported by appropriate
examples.
Student’s answer
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MARKET FAILURE
Video lesson
https://www.youtube.com/watch?v=K_vi_10NVHI

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DEFINITIONS
Market Failure: When a market fails to produce efficient outcomes, and in particular does not achieve
allocative efficiency. Market failure occurs When social costs and benefits are not reflected in the
market price, and the market mechanism does not these cost and benefits.
Externalities: Costs or benefits of economic activity which are met by others rather then the party
which causes them.
Positive externalities (also called social benefits): Benefits of economic activity that are not
accounted for in production costs or price. i.e. Vaccination for flu will benefit all.
Negative externalities (also called social costs): Costs of economic activity that are not accounted for
in production costs or price, i.e pollution from nearby chemical factory is imposed on others outside the
economic activity.
Public goods: Goods and services that everyone can consume at the same time, and are non-rivalrous
and non-excludable (see below) and therefore would not be normally provided by the private market, i.e
parks, street lighting, defence.
Free riders: Those who benefit from a good or service without paying a share or its cost – this is why
the market will not provide public goods.
Publicly provided goods: Goods and services that would be provided by the market but because of
their positive externalities are wholly or partly provided by the government, i.e education, health care.
Private goods: Goods and services that are excludable and rivalrous and are therefore provided by the
market.
Rivalry: A good is rivalrous if the use of it by one person prevents the use of another, i.e pen,
computer.
Excludable: People are excluded from using the good unless they pay a price for it.
Merit good: A good with positive externalities that benefit other people, i.e education – the market will
only provide at a private optimum level and hence under produce (provide) the socially optimum level.
So an under provision of merit goods!
Demerit good: A good with negative externalities that has costs for society, i.e over consumption of
alcohol impairs judgement, can cause violence and is a cause of many road accidents – market price of
alcohol does not reflect social costs. So an overprovision of demerit goods.
Internalize the externality: Making the user pay or be responsible.
Tradable Permits (carbon credits): A process whereby each country is allocated certain levels of
pollution (or carbon emissions). Countries that do not use their quota can then trade their permits to
countries that have used more than their quota. Creates a market and therefore an incentive system to
reduce pollution and give possible funds to some LDC’s.
Asymmetric information: When one party to a transaction has access to relevant information that the
other party doesn’t, i.e. doctor.

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Market mechanism: The process by which prices rise or fall as a result of changes in demand and
supply. Signals and incentives are given to producers and consumers to produce more or less or
consume more or less.
Allocatively efficient output: This occurs where marginal social cost equals marginal social benefit
(MSC = MSB) – this is called the socially optimum level or output.
Crash Course in Microeconomics – Public and Merit goods and Market failure – externalities
https://www.youtube.com/watch?
v=13JOGWzY8kE&ebc=ANyPxKrP_XqBoItz7zCblyhSVvmdZT_ytukSmMw7HnruSWhnO_m-
LNfMHewXyeHY9N0YqZpdPo-vyFn30Lf0-GingYnjLSYMzQ
Labeling and concept of market failure diagrams
https://www.youtube.com/watch?v=7pyB-sTCB8U
Allocative efficiency diagram – Initial claim of market system

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Negative Externality and Government intervention by Khan Academy
https://www.khanacademy.org/economics-finance-domain/microeconomics/consumer-producer-
surplus/externalities-topic/v/taxes-for-factoring-in-negative-externalities
Correction of positive externalities by Govt intervention:
. Subsidies
. Tax reduction
. Awareness campaigns
Market failure happens when the price mechanism fails to allocate scarce resources efficiently or
when the operation of market forces lead to a net social welfare loss.
Market failure occurs when there is an inefficient allocation of resources in a free market. Market

failure can occur due to a variety of reasons, such as monopoly (higher prices and less output),
negative externalities (over-consumed) and public goods (usually not provided in a free market)

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Classwork
2. (a) Analyze the consumption externalities which might arise from the provision of education
and health care for the citizens of a country. [15 Marks]
Answers may include
• Definition of positive externalities
• Theory of positive externalities in relation to MSB>MSC and/or MSB>MPB, applied to health care
and education
• Diagrams to show the impact of positive externalities of consumption
• Examples of positive externalities arising from education and health care in terms of better educated
and healthier labour force leading to increased productivity.
Student’s answer
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Graded Classwork
(b) Evaluate the use of government policies to increase the consumption of health care. [15 Marks]
N.B. It should be noted that definitions, theory and examples that have already been given in part (a), and then
referred to in part (b), should be rewarded.
 Explanation of health care as a merit good/service which is likely to be underprovided by the free
market (market failure)
 Diagrams to show under-provision of merit goods through the price mechanism
 Identification and explanation of different government responses, eg direct provision, subsidies,

legislation and advertising to influence consumer behaviour
 Diagrams to show the use of subsidies and advertising
 Synthesis or evaluation. Evaluation may include: an assessment of the effectiveness of each of the
relevant policies. Examiners should be aware that candidates may take a different approach which, if
appropriate, should be rewarded. opinions or conclusions should be presented clearly and supported by
appropriate examples.
Student’s answer
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Homework
N13/3/ECONO/SP1/ENG/TZ0/XX/M as well as N12/3/ECONO/SP1/ENG/TZ0/XX/M
1. (a) Using a diagram, explain why demerit goods are considered to be an example of market
failure. [10 marks]
 Definitions of a demerit good, market failure and negative externality of consumption

 Explanation that a demerit good is a good that has negative externalities of consumption
 Explanation of why demerit goods would be over-provided in a free market
 Diagram of a negative consumption externality showing that a demerit good would be over-
provided in a free market
 Examples of demerit goods.
Student’s answer
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REFLECTION
• To what extent has the learning process helped students develop

the ATL skills required by the course?
• To what extent have students demonstrated IB learner profiles

during and after the course?
• How well have the students related their understanding and knowledge
to the real world situations?
• How well did the ‘statement of inquiry’ guide them during the learning process?
• What suggestions came from the students regarding the contribution they could make
towards the betterment of their local community?
• What improvement can be made to make the lesson achieve its objectives in terms of
differentiation and achieving the desired outcomes?

Date: ………………………………………………..
IB Past Papers Topics Directory

Session Time Pape Questions
Zone r
P1 Q3 Scarcity, resource allocation
May 2001 TZ1
Date: ………………………………………………..
P2
Nov 2001 TZ1 P1
Q1 R1 Extract “Buses are free for Everyone” A1,
P2
B1, C1, E1
P1
May 2002 TZ1 & 2
P2
P1
Nov 2002 TZ0
P2
P1
May 2003 TZ1 R1, B1, C1 Demand & Supply Theory, Extract
P2
“Coffee Prices”
P1
May 2003 TZ2 P2 A1, R1, B1, C1, D1 Positive externalities, Demand
& Supply theory, merit goods
P1
Nov 2003 TZ0
P2
P1
May 2004 TZ1 Q1 Extract “the Health Care Debate” R1, D1
P2
Resource allocation, free market and demand
P1
May 2004 TZ2
P2
P1
Nov 2004 TZ0
P2
P1
May 2005 TZ1
P2
P1
May 2005 TZ2
P2
P1 Q1 Resource allocation and equilibrium price
Nov 2005 TZ0
P2
P1
May 2005 TZ1
P2
P1 Q1 a & B; Scarcity of productive resources as the
May 2006 TZ0 basic economic problem & Justification for
Government intervention
P2 Q1 a (i) market economy, Q2 a (i), b, c & d, Q3 a
(i) & (ii) , b, c, d
P1
May 2006 TZ2
P2
Q1 a & B; Under provision of merit goods as a
P1 market failure & Government possible measures to
correct that failure.
Q1 Tax rise reduces smoking and boasts revenue; a
(i) negative externalities , (ii) demand, b -how
Nov 2006 TZ0
cigarette smoking is considered a market failure, c -
P2 PED for cigarettes for young & adults, d - methods
of reducing external costs of smoking
Q5 c- How Governments can protect farmers
against fluctuating prices.
Q1 a & b Signalling & incentive function of price
P1 in market economies & evaluation of gov
May 2007 TZ0 intervention in tobacco market
Q1 b, Q2 a (i) resource allocation, (ii) negative
P2
externalities, B, C, D. Q4 C.
Date: ………………………………………………..
Course Breakdown DP 1 SL/AM
Quarter Lessons Covered* Resources Used*

Topic 1 - Introduction to Economics –
Textbook, power points, newspaper
What is Economics
articles, personal class notes,
Topic 2 - The evolution of Economics
academic videos
thinking
Topic 3 - Demand
Q1 academic videos
Topic 4 - A closer look at demand –
elasticity of demand
academic videos
Topic 5 - Supply Textbook, power points, newspaper
Topic 6 - A closer look at supply – price articles, personal class notes,
elasticity of supply academic videos
Term 1

Topic 7 - Market Equilibrium, the price
mechanism and market efficiency
academic videos
Topic 8 - Methods of government
intervention in markets
academic videos
Q2 Topic 9 - Market failure articles, personal class notes,
academic videos
Topic 13 - The level of oversell
economic activity
academic videos
Topic 14 – Aggregate Demand articles, personal class notes,
academic videos
Term 2
Q3 Textbook, power points, newspaper

Topic 15 – Aggregate Supply articles, personal class notes,
academic videos
Topic 16 – Macroeconomic Equilibrium Textbook, power points, newspaper

Date: ………………………………………………..
academic videos
Topic 17- Demand management Textbook, power points, newspaper
(policies) articles, personal class notes,
Topic 18- Supply-side policies academic videos
Topic 14 – Aggregate Demand articles, personal class notes,
academic videos

Topic 19 -Macroeconomic Objectives –
Low unemployment
academic videos
Topic 20 - Macroeconomic Objectives –
Low and stable inflation
academic videos
Q4 Textbook, power points, newspaper
Economic Growth
academic videos
Inequality and poverty
academic videos
This booklet has been compiled by combining resources from IB Economics subject guide, personal
notes, tutor2u, OECD repots, World Bank reports, IMF reports, compressed textbook.

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Date: ………………………………………………..

Memorandum of Intent: Economics

 Conform to the norms and ethos of the IB Program at all times.

Signed: _________________________ Date: _________________________

G11 – Economics – SL - Term 1- 2020/21 1

Essential Subject Expectations

1. All homework in pen.

1. Grades will be awarded for all class assignments.

1. Definitions of key terms

G11 – Economics – SL - Term 1- 2020/21 2

IB ECONOMICS SYLLABUS – 2020-22

G11 – Economics – SL - Term 1- 2020/21 3

TERM 1 SYLLABUS - MICROCONOMICS

1. Concepts based IB Economics syllabus…………………………………………………………14

G11 – Economics – SL - Term 1- 2020/21 4

G11 – Economics – SL - Term 1- 2020/21 5

G11 – Economics – SL - Term 1- 2020/21 6

STRUCTURE OF IB- SL – 2020-22

1. Internal Assessment consists of 45 marks

G11 – Economics – SL - Term 1- 2020/21 7

G11 – Economics – SL - Term 1- 2020/21 8

G11 – Economics – SL - Term 1- 2020/21 9

G11 – Economics – SL - Term 1- 2020/21 10

G11 – Economics – SL - Term 1- 2020/21 11

 To develop IB learner profile attributes

 To empower students with life-long skills

 Development of ATL skills

G11 – Economics – SL - Term 1- 2020/21 12

CHAPTER 1 - WHAT IS ECONOMICS

CHPATER 2 – THE EVOLUTION OF ECONOMIC

THE NINE CONCEPTS THAT UNDERPIN THE

Introduction to Economics – Fundamentals of Economics by Khan Academy

Introduction to Economics – Fundamentals of Economics by Jason Welker

G11 – Economics – SL - Term 1- 2020/21 13

G11 – Economics – SL - Term 1- 2020/21 14

THINKING AND COMMUNICATING

G11 – Economics – SL - Term 1- 2020/21 15

G11 – Economics – SL - Term 1- 2020/21 16

Basic Economic Problem

Factors of production (resources needed to produce)

G11 – Economics – SL - Term 1- 2020/21 17

Free market/capitalistic economy

G11 – Economics – SL - Term 1- 2020/21 18

G11 – Economics – SL - Term 1- 2020/21 19

MIXED ECONOMIC SYSTEM

G11 – Economics – SL - Term 1- 2020/21 20

THE KEY DIFFERENCES BETWEEN A MERIT GOOD AND A PUBLIC GOOD

Who provides merit goods?

Why does the government provide merit goods and services?

G11 – Economics – SL - Term 1- 2020/21 21

Opportunity Cost and production Possibility Curve

Production Possibility Curve/Frontier/boundary (PPC/PPF) is an illustration of the allocation of

 The only resource is considered at a time

GETTING TO KNOW THE PPC FURTHER

 A SHIFT of PPC inwards or outwards is possible due to the following reasons:

G11 – Economics – SL - Term 1- 2020/21 23

G11 – Economics – SL - Term 1- 2020/21 24

ASSESSMENT CRITERION FOR IB SL PAPER 1 (part a)

G11 – Economics – SL - Term 1- 2020/21 25

Past Paper Question - Classwork - 1

Guidelines for answer

Definition of opportunity cost

Signed: _ Date: _