2.

1: The nature of markets

● Market: where people willing and able to purchase a good, service or resource
carry out an exchange with those who are willing and able to pay to provide that
same good, service or resource. It is not always a physical place: it can be local,
national or international

Different markets:
● Product markets: where goods and services are sold
● Factor markets: where resources are sold
● Labour markets: where people offer their services in exchange for a salary
● Financial markets: where forgein currencies, company shares or other financial
contracts are traded

Competitive markets
● Competition occurs when there is a large number of buyers and sellers acting
independently. An individual seller has very little, or no, market power to
influence the price of the product
● An individual seller has little/no power to influence the price of the product
● Markets are free and competitive when private individuals and firms are free to
decide for themselves what they buy and sell and at what price
● Freely competitive markets encourage sellers to meet consumers needs and
wants through the quality and price of their goods
● Competition is opposite of market power (monopoly power)
● Market power is when a dominant firm has control over the price of the good it
sells
● The greater the market power the more power the firm has over the price

2.1.2: law of demand

● Consumers are people or organizations who buy goods and services in a market
● Demand is the quantity of a good or service that consumers are willing and able
to purchase at various prices during a specific time period, ceteris paribus
● The negative relationship between price of the good/service and the quantity
demanded of it is stated by the law of demand, and explains the downward
sloping demand curve
● The law of demand states that: as the price of a product decreases, the quantity
demanded of it increases, ceteris paribus
● Market demand is the sum of all individuals demands for a product at every price
 2.1.3: Assumptions of underlying the law of demand (HL)

Human nature and behaviour

● Humans beings are assumed to have clear preferences that are stable over time,
ceteris paribus
● Human beings are assumed to have highly analytical skills and perfect
knowledge to make rational choices
● Rational behaviour for human beings means maximising personal satisfaction
(utility)

Income effect
● When the price of a product decreases and the incomes have not changed, we
assume that consumers more of that good
● This means the real income in terms of this good has increased
● Real income: the income of individuals/countries after adjusting for inflation

substitution effect
● When the price of the product falls, consumers reevaluate their choices, leading
to choosing a substitute product
● This is the substitution effect

Law of diminishing marginal utility

● Marginal utility: the benefit gained from consuming one additional unit of a
product or service
● The law of diminishing marginal utility states that as people consume additional
units of a good or service, the marginal utility declines. Consumers get less and
less satisfaction from each additional unit
● Lower marginal utility should indicate a lower willingness to pay a particular price
for goods as more and more are consumed
● For social media, for instance, the marginal utility doesn’t decline as the quantity
demanded increases
 2.1.4: movements along the demand curve and shifts in the demand curve

Movement along the curve

● Caused by a change in price
● Extension:
● Contraction:

Shifts in the demand curve (non-price determinants)

 2.1.5: non-price determinants of demand: changes in income

Normal goods
● Normal goods are goods whose demand increases as people's income increase
● An increase in income leads to a rightward shift of the demand curve, while a fall
in income leads to a leftward shift in the demand curve
● Most goods and services are considered normal goods

Inferior goods
● Goods whose demand decreases as the income increases
● These goods tend to be lower quality goods/less expensive goods which people
use as substitutes for higher-priced goods
● More money to spend = decrease in demand for inferior goods
● Examples: second hand clothes

2.1.6: non price determinants of demand: changes in price of related goods

Substitutes
● Goods that have similar characteristics and uses for consumers
● Close substitutes: cola and pepsi
● Remote substitutes: coffee and orange
● When the goods are close substitutes, the shift of the demand curve will be
greater than remote substitutes

Complements
● Complementary goods are consumed together
● When the price of one good decreases, the demand of the other good increases
● Close complements: ink and printer
● Remote complements: sushi and soy sauce
Unrelated goods
● When goods are unrelated, the change in price will not affect the demand for the
other
● For example: t shirt and eggs

2.1.7: non-price determinants of demand: tastes and preferences, future

expectations, number of consumers, seasonal changes

Tastes and preferences

● Demand is also affected by how trendy/fashionable a good or service is

Future expectations
● If people expect the prices to rise of goods and services in the future, they may
decide to to purchase more of the good now
● High consumer and business confidence can lead to an increase in demand

Number of consumers
● Changes in the market size can affect the demand

Factors that affect the number of consumers

Demographic changes:
● Any change in the population such as age structure, gender ratio, life expectancy
etc
● For example: Japan’s population is aging, this increases the demand of
healthcare
● At the same time, there a low birth rate causing a lower demand in goods and
services associated with children

Government policy:
● Example: COVID-19 caused shutting down of many restaurants and stores
which caused declined the demand for goods and services
● Example: in some countries and cities, the government has banned the use of
plastic bags. Thus, increasing the demand for cotton bags

Seasonal changes
● People purchase some goods and services at certain times of the year
● Demand for jackets, for instance, increases in winter
● Demand for ice cream increases in summer, for example