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Section 1 : Microeconomics (SL)
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2.1 Markets
Exchange and Markets: Exchanges in markets are voluntary. Voluntary exchange is the act of trading between individuals on a voluntary basis, making both parties subjectively better off. The terms of exchange are usually the price paid and are determined by supply and demand.

Transaction Costs: The costs of negotiating and enforcing contracts and of acquiring and processing information about alternatives.

The Role of Middlemen: Middlemen specialize in lowering transactions costs by bringing buyers and sellers together.

The Rationing Function of Prices: The synchronization of decisions by buyers and sellers that creates equilibrium is called the rationing function of prices. Prices are indicators of relative scarcity and ration goods to those who are willing to pay the most.

__Demand__
• Definition of demand • Law of demand with diagrammatic analysis • Determinants of demand • Fundamental distinction between a movement along a demand curve and a shift of the demand curve

__Supply__
• Definition of supply • Law of supply with diagrammatic analysis • Determinants of supply • Effect of taxes and subsidies on supply • Fundamental distinction between a movement along a supply curve and a shift of the supply curve

__Interaction of demand and supply__
• Equilibrium market clearing price and quantity • Diagrammatic analysis of changes in demand and supply to show the adjustment to a new equilibrium

Market equilibrium can change when there is a shock caused by a change in the ceteris paribus conditions for demand or supply. A shock can be represented by a shift in the supply curve, the demand curve, or both curves.

Situations in Which Both Demand and Supply Shift: When both supply and demand curves shift, the outcome is indeterminate for either equilibrium price or equilibrium quantity. When there is an increase in supply and demand, equilibrium quantity will rise, and when there is a decrease in supply and demand, equilibrium quantity will fall. Price can increase, decrease, or remain the same depending on relative changes in supply and demand.

Price Flexibility and Adjustment Speed: When demand increases in a market, a shortage develops and price rises. The shortage can be eliminated quickly or slowly, depending on the characteristics of the market. There are markets where price flexibility may take the form of indirect adjustments, such as by way of hidden payments or quality changes.

• Maximum price: causes and consequences • Minimum price: causes and consequences • Price support/buffer stock schemes • Commodity agreements

2.2 Elasticities
Elasticity of demand (Ref: pg 500-504, Miller) Elasticity of demand is the responsiveness of demand to a change in price Calculation of price elasticity: %change in quantity demanded divided by % change in price of good or service Elasticity and Total revenue (Ref: pg 505-508, Miller) Positive relationship exists between price and total revenue when the market demand is inelastic.  Negative relationship between price and total revenue when the market demand is elastic

2.4 Market failure
chapter 5 Miller . Explain how market failures such as externalities might justify economic functions of government. • Distinguish between private goods and public goods and explain the nature of the free-rider problem. • Describe the political functions of government that entail its involvement in the economy. • Analyze how Medicare affects the incentives to consume medical services. • Explain why increases in government spending on public education have not been associated with improvements in measures of student performance. • Discuss the central elements of the theory of public choice.