Chapter 2: Microeconomics

Links to individual units in chapter 2

This chapter includes the remaining units in microeconomics. Demand and supply make up the market equilibrium section, while the units (1.3-1.5) covered under the old syllabus, are now covered by units 2.7-2.13. Under the new syllabus a separate HL only unit, 2.13 - the market’s inability to achieve equity is included.

The pages have full student access to give maximum flexibility to the teacher and the student. This is a link page to sub-pages, containing each of the units for unit 2 of the new curriculum. The pages have full student access to give maximum flexibility to the teacher and the student.

Unit 2.1: Demand theory

Unit 2.1 is the first section in microeconomics. In our introduction to Economics we considered the question of how resources are allocated in society and the first step to answering this question is...

Unit 2.2: Supply theory

In this chapter we examine the way supply determines the allocation of resources in the economy. Supply is the resource element of the central economic problem of scarcity and the allocation of factors...

Unit 2.3: Competitive market equilibrium

Equilibrium in markets occurs where demand equals supply and the market clearing price and output are established. The equilibrium price is known as the market clearing price because at that moment in...

Unit 2.4(1): Behavioural economics (HL)

Behavioural economics considers consumer behaviour in a more complex way than classical economic theory. It introduces human psychology into the buyer decision making process and considers how factors...

Unit 2.4(2): Business objectives (HL only)

The following different objectives of businesses:An important influence over the allocation of resources in markets is the supply decisions firms make. Those supply decisions are based on the objective’s...

Unit 2.5(1): Price elasticity of demand (PED)

Elasticity is an economic concept based on change. It measures how consumers and producers respond to changes in variables that affect demand and supply. Elasticity is an important because it allows us...

Unit 2.5(2): Income elasticity of demand (YED) (HL)

Income elasticity of demand is the responsiveness of quantity demanded to a change in household income. It is measured by the equation:% change in Qd / % change income = YEDFor example, if a 5 percent...

Unit 2.6: Price elasticity of supply (PES)

Price elasticity of supply is the responsiveness of quantity supplied of a good to a change in its price. It is measured by the equation:% change in Qs / % change P = PESFor example, if the price of strawberries...

Unit 2.7(1): Governments in markets - tax and subsidy

Think about the markets represented by the pictures above and why the government might be involved in them.Governments play an important role in all economies. The table sets out government expenditure...

Unit 2.7(2): Governments in markets - price controls

In free markets where there is no government intervention the price and output in a market are determined by demand and supply. Government seeks to intervene in markets when market price and output does...

Unit 2.8(1): Market Failure – Externalities

Can you think of how the market might fail in each of the four pictures?Markets fail when the free market forces of demand and supply lead to an allocation of resources that does not maximise the welfare...

Unit 2.8(2): Market failure - merit goods and demerit goods

Merit goods, demerit goods and public goods are all associated with significant market failure. When this happens there is an important role for state intervention to correct these market failures. The...

Unit 2.8(3): Government intervention to manage externalities, merit and demerit goods

Policies to deal with external costs and demerit goods: Policies to deal with external benefits and merit goods:We know from the previous chapters that cover externalities, merit and demerit good that...

Unit 2.8(4): Common access resources

Common access resourcesTragedy of commonsManaging common access resources through:If economics is the study of how society allocates scarce resources to satisfy human wants, then environmental economics...

Unit 2.9: Public goods

Public goods or pure public goods are goods that bring significant social benefits to society but cannot be provided by the free market. They are market failure, which means the government needs to intervene...

Unit 2.10: Asymmetric information (HL)

Asymmetric information is an imbalance of information that exists between buyers and sellers in a market that gives one side an unfair advantage in a transaction. For example, when someone goes to buy...

Unit 2.11(1) Market power - Theory of production and costs (HL)

An implicit cost is the opportunity cost that exists in every business decision-making situation. For example, if Coca Cola open a new factory in Vietnam, they might have to give up a plan to open a new...

Unit 2.11(2) Market power - Perfect competition(HL)

Perfect competition is a theoretical model of how a market behaves under the conditions of the purest form of competition. There are no examples of pure perfect competition but the characteristics of...

Unit 2.11(3) Market power - Monopoly(HL)

In theory a monopoly exists when a one firm's output accounts for the total market supply of an industry. In reality there are very few examples of pure monopolies because it is nearly always possible...

Unit 2.11(4) Market power - Monopolistic competition(HL)

Monopolistic competition is a form of imperfect competition. It is a model of competitive markets developed to give a more realistic model of competition than the one provided by perfect competition....

Unit 2.11(5) Market power - Oligopoly(HL)

An oligopoly is a model of a market where a small number of large firms dominate the market. This can be expressed as a situation where the total revenue of a small number of large firms accounts for...