NJC SH1 H1 H2 Econs Chap 2A

CHAPTER 2A Markets: Price Mechanism and its Applications (Demand and Supply) OVERVIEW OF CHAPTER ........................................................................................................................................ 1 1. INTRODUCTION ..................................................................................................................................................... 2 1.1 THE PRICE MECHANISM AND ITS ESSENTIAL ROLE OF RATIONING ............................................ 2 1.1.1 THE PRICE MECHANISM AND HOW IT ANSWERS THE THREE ECONOMIC QUESTIONS 2 1.2 KEY FEATURES OF THE FREE MARKET ECONOMY ........................................................................... 5 1.2.1 THE PRICE MECHANISM ...................................................................................................................... 6 2. THEORY OF DEMAND .......................................................................................................................................... 7 2.1 LAW OF DIMINISHING MARGINAL UTILITY ......................................................................................... 9 2.2 INDIVIDUAL DEMAND VERSUS MARKET DEMAND ........................................................................ 11 2.3 THE LAW OF DEMAND .............................................................................................................................. 12 2.4 CHANGE IN QUANTITY DEMANDED VERSUS CHANGE IN DEMAND .......................................... 12 2.5 NON-PRICE DETERMINANTS OF DEMAND ......................................................................................... 13 2.6 DERIVED DEMAND ..................................................................................................................................... 19 3. THEORY OF SUPPLY .......................................................................................................................................... 20 3.1 THE LAW OF INCREASING OPPORTUNITY COST ………………………………………………………….. 22 3.2 INDIVIDUAL FIRM SUPPLY VERSUS MARKET SUPPLY .................................................................. 23 3.3 THE LAW OF SUPPLY ................................................................................................................................. 24 3.4 CHANGE IN QUANTITY SUPPLIED VERSUS CHANGE IN SUPPLY ................................................. 24 3.5 NON-PRICE DETERMINANTS OF SUPPLY ........................................................................................... 25 4. MARKET EQUILIBRIUM ................................................................................................................................... 30 4.1 THE PRICE MECHANISM REVISITED .................................................................................................... 31 4.2 THE CONCEPT OF CONSUMER SUR