DDSS Summary Notes 2023

Price Mechanism & Applications – Summary Important: This set of summary notes does NOT replace the importance of the main set of notes in providing a clear understanding of the topic that is required in the A Levels. Check list – Key requirements. Part (1) Explain how the price mechanism allocates resources in a free market Identify the determinants of demand and supply, and explain how they influence demand and supply Explain and analyse how prices are determined by free market forces of demand and supply. Ability to explain simultaneous shifts of both demand and supply. Part (2) Define the concepts of price elasticity of demand/supply (PED/PES), cross elasticity of demand (CED) and income elasticity of demand (YED). Explain the determinants of PED, PES, CED and YED. Analyse the extent of changes in price and quantity in response to shifts in demand or supply, using PES or PED respectively. Analyse the change in revenue in response to changes in price using PED. Analyse the direction and extent of shift in demand in response to changes in price of related goods or income, using CED or YED respectively. Explain the relevance of PED, CED and YED to a firm’s decision-making. Define the types of government intervention such as taxes (direct vs indirect), subsidies (direct vs indirect), price controls and quantity controls. Distinguish between price floor/ceiling, explain the resultant surplus/shortage, and analyse the size of the surplus/shortage using PED and PES. Explain the mechanism of the different government interventions in the market, and the effects on price, quantity, welfare and government revenue/expenditure. Explain the determinants of labour demand and labour supply, and how they interact to determine wage and employment. Key information Part (1) • The price mechanism is the invisible hand that allocates resources, based on the self - interest of consumers and producers, to result in the right mix of goods and services for society. • Market Adjustment Process / Price Adjustment Mechanism: (fall in price when dd falls) – At the initial price, there is a surplus in the market since quantity supplied exceeds the quantity demanded resulting in a downward pressure on the price. To sell their surplus, producers will begin to lower prices. As pri ce falls, consumers are willing and able to buy more causing quantity demanded to increase. As price falls, producers will also be less incentivised to produce due to a fall in profitability, causing quantity supplied to decrease. • The Law of Demand states that the quantity demanded of a good/service is inversely related to its price, ceteris paribus. This can be explained by the Law of Diminishing Marginal Utility which states that beyond a certain point of consumption, each extra unit consumed gives less additional utility than previous units. In maximising utility with a given budget, the rational consumer will increase the quantity deman