economics

• DP 1


  The assumptions of a perfectly competitive market system
• DP 2


  The law of demand and the demand curve
• DP 3


  The effect on demand and the position of the demand curve by non-price factors, including changes in disposable income, the prices of substitutes and complements, tastes and preferences, interest rates, population and demographics, and consumer confidence
• DP 4


  The distinction between a movement along the demand curve and a shift of the demand curve
• DP 5


  The law of supply and the supply curve
• DP 6


  The effect on supply and the position of the supply curve by non-price factors, including changes in the costs of production, technology, productivity, and climatic conditions and other disruptions
• DP 7


  The distinction between a movement along the supply curve and a shift of the supply curve
• DP 8


  The effects of changes in demand and supply on equilibrium prices and quantities
• DP 9


  The role of the market mechanism and relative prices in the allocation of resources in a market-based economy
• DP 10


  The degree of market power in different markets, such as perfect competition, monopolistic competition, oligopoly and monopoly, and the effect on prices, resource allocation and living standards
• DP 11


  The strategies businesses may use to increase profit, including price discrimination, multiple branding or anti-competitive behaviour as outlined in the Competition and Consumer Act 2010
• Define what a market is (DP 1)

  A place where buyers (who create a demand for products) and sellers (who organise the production or supply of products) come together to negotiate an agreeable or equilibrium price for a particular good or service
• Explain the assumptions of a perfectly competitive market (DP 1)

  • No product differentiation (homogeneous product)
  • Strong competition and the absence of market power
  • Low barriers or ease of entry into the market
  • Consumer sovereignty exists
  • Absence of government controls and restrictions
  • Good or perfect knowledge of the market
  • Firms use resources to try and maximise their profits
  • Consumers behave rationally
• Explain the connection between relative prices and resource allocation (DP 9)


  • Firms use resources to try and maximise their profits
  • In maximising profits, businesses chase higher relative prices which results in reallocation of resources to the product with the highest relative price
  • Relative price: Price of a good or service measured in comparison to the price of another good or service
• Perfectly Competitive Market
• In a perfectly competitive market there is strong rivalry between perhaps hundreds or thousands of businesses selling the exact same product
• As a result, individual producers are unable to set their own prices and have little to no market power
• Therefore, they are called price takers
• Relative price: Price of a good or service measured in comparison to the price of another good or service
• If it is assumed that all other prices increased by the same amount, then the price of kites has indeed risen, but the relative price of kites (i.e. the price of kites relative to other products) has remained the same
• This is the importance of distinguishing between price and relative price
• Law of demand


  The quantity of a particular good or service that buyers are prepared to purchase varies inversely with the change in price
• Demand curve


  • Downward sloping
  • Depicts the relationship between price and quantity demanded
• Expansion


  1. As the price decreases, there is an expansion in the quantity demanded

  2. This causes a movement downwards along the demand curve
• Contraction


  1. As the price increases, there is a contraction in the quantity demanded

  2. This causes a movement upwards along the demand curve
• Price change


  • As price falls, demand rises
  • As price rises, demand falls
• Movement along the demand curve

  Caused by increases or decreases in the prices of the good or service
• Shift of the demand curve

  Caused by a factor other than price that may increase or decrease demand for a good or service
• Non-price factors that can cause a shift in the demand curve

  • Disposable income
  • Population and demographics
  • Tastes and preferences
  • Interest rate
  • Change in the price of a substitute product
  • Change in the price of a complementary product
  • Consumer/business confidence
• Disposable income


  Gross income - income tax
• Disposable income increases


  Demand increases
• Disposable income decreases


  Demand decreases
• Tastes and preferences


  Changes in personal choices and opinions that impact the popularity of a product
• Product is more popular

  Demand increases
• Substitute product


  Alternative goods or services that have the same function or are valued equally as the product
• Substitute product becomes cheaper

  Demand for the original product decreases
• Complementary product

  Goods or services that are often purchased to be used in conjunction with the product
• Price of complementary product increases


  Demand for the original product decreases
• Consumer/business confidence

  Optimism or pessimism regarding the health of the economy
• Consumer/business confidence increases


  Demand increases