Non-price
determinants of
demand
HL ONLY
Linear Demand
Functions
SUPPLY
The law of Supply
Non-price
determinants of supply
The non-price determinants of supply include resources (e.g. a change in the land
aspect of production), expectations (e.g. if producers expect there to be an increase
in demand for a bubble tea, they might supply more of it), number of sellers (e.g. as
the number of sellers of a product rises, the overall market supply also rises), taxes
and subsidies (if a product is subsidized, supply could increase, while if a product is
taxed, supply could decrease), technology (this may mean advancements in the
quality of land and capital) and the price of other products the supplier could make
instead (these might be substitute goods that are selling at a higher price to the once
charged for the good the supplier is currently selling).
AO2 Distinguish between movements along the supply curve and shifts of the
supply curve.
A change in price results in a movement along the supply curve. A change in nonprice determinants, a change in supply at every price, results in a shift of the supply
curve.
AO4 Draw diagrams to show the difference
HL ONLY
Linear supply function
MARKET EQUILIBRIUM
Equilibrium and
AO3 Analyze, using diagrams, how changes in the determinants of demand or
changes to equilibrium supply result in a new market equilibrium (Include references to excess demand
and excess supply)
This diagram shows an increase in the demand curve due to a change in one of the
non-price determinants of demand (e.g. taste). Since the supply of that product has
not changed, however, both equilibrium price and quantity increase.
This diagram shows an increase in the supply curve due to a change in one of the
non-price determinants of supply (e.g. technology). Since the demand of that product
has not changed, however, equilibrium price drops while equilibrium quantity
increases.
At this price, the quantity will fall to Qs and the quantity demanded will rise to Qd,
creating an excess demand of QdQs. More is being demanded than supplied at this
price, which causes upward pressure on the price. To eliminate the shortage,
suppliers will have to raise prices. This will cause the quantity supplied to increase
and the quantity demanded to decrease until equilibrium is reached.
HL ONLY
Calculating and
illustrating
equilibrium using
linear equations
At this price, the quantity demanded will fall to Qd and the quantity supplied will rise
to Qs, creating an excess supply of QsQd. More is being supplied than demanded at
this price, which causes downward pressure on the price. To eliminate the surplus,
suppliers will have to lower prices. This will cause quantity demanded to increase
and the quantity supplied to decrease until equilibrium is reached.
AO4 Calculate the equilibrium price and equilibrium quantity from linear
demand and supply functions.
Equilibrium price is $3.30. Equilibrium quantity is 43.
AO4 Plot demand and supply functions, and identify the equilibrium price and
quantity.
AO4 Calculate the quantity of excess demand or excess supply using linear
equations.
No excess demand or supply since no movement along either demand or supply
curve.
THE ROLE OF THE PRICE MECHANISM
Resource allocation
AO2 Explain how price acts as a signal and an incentive to consumers and
producers, which results in a reallocation of resources.
As consumers increase their demand for a good, (shift of demand curve to the right),
the price of the good and profits rise, acting as a green light signal to producers to
increase their output (movement along the supply curve).
As the supply of a commodity becomes more scarce, (supply shifts to the left), the rise
in price signals to consumers to reduce their demand (movement along the demand
curve).
An increase in demand for a product will raise its price and profitability and provide
the incentive for producers to supply more/new firms to enter the market.
Higher demand for a product will also lead to an increase in demand for labor to
produce the product, causing wages to rise, which will in turn provide an incentive
for workers to seek employment in that industry.
As a result, resource allocation will also change (see PPC diagram below).