ECONOMICS

1. ECONOMICS CHAPTER 2: DEMAND AND SUPPLY THEORIES http://interactiveeconomicslearning.weebly.com/

2. INTRODUCTION • A market is a place where buyers and sellers meet to purchase and sell goods and services • The transaction that occurs at a market will determine the price and the quantity exchanged • Demand represents the choice-making behavior of buyers or consumers • Supply represents the choice making behavior of sellers or producers • Demand and supply shows how prices and quantities are determined in the market

3. DEMAND • DEFINITION OF DEMAND “The ability and willingness to buy specific quantities of goods in a given period of time at particular price, ceteris paribus” • LAW OF DEMAND The law of demand states that, other things being equal (ceteris paribus), the higher the price of a good, the lower is the quantity demanded

4. INDIVIDUAL AND MARKET DEMAND a) Individual demand The individual demand refers to the quantity demanded by an individual at varying prices for a certain product.

5. The Demand Schedule of Individual A (Shafiq) for Good X (Cake) • A demand schedule lists the quantities demanded at each different price.

6. A demand curve graphs the relationship between the quantities demanded of a good and its price, ceteris paribus.

7. The quantity demanded is always measured on the horizontal axis and the price is measured on the vertical axis. • The demand curve is downward sloping to show the negative relationship between the price and the quantity demanded. b) Market demand • The market demand refers to the quantity demanded by all the consumers in the market at varying prices for a certain product. • Assumption: there are only 2 consumers in the market, individual A and individual B.

8. The market demand curve can be arrived at by adding all the quantities demanded by all the consumers in the market for the good at each possible price.

10. The Differences Between Changes in Quantity Demanded and Changes in Demand a) Changes in quantity demanded Refers to a movement along the demand curve. This is caused by a change in the good’s own price alone, ceteris paribus.

11. Expansion of demand - an increase in the amount demanded • Contraction of demand - a fall in the quantity demanded • An upward movement along the curve would mean a fall in the quantity demanded. • A downward movement along the curve means a rise in the quantity demanded. b) Changes in demand • Refers to a shift of the demand curve. This is caused by other factors and not by price of the good.

12. The demand curve shifts when any of the factors that affect quantity demanded (other than the price of the good) change.

13. Determinants of Demand The factors that determine the demand for a good into 2 main factors: • Price of it’s own good • Other non-price factors

14. Price of it’s own good • The relationship between the price of a good and the quantity demanded that buyers are willing to purchase, cateris paribus • Assume other factors or variables apart from price of the good itself are held constant • When the price of good increases, the quantity demanded for that good will decrease and when its price decrease the quantity demanded will increase instead • So, the changes of price is shown by the movement of points on the same curve

15. 2. Other non-price factors • There are the non-price determinants that may effect demands for goods

16. a) Income When the income is increase, so the demand for certain goods and services will increase. • Normal goods - Any good for which there is a direct relationship (positive relationship) between changes in income and its demand curve. - e.g : foods and clothes

17. b) Prices of related goods • Complementary goods A good that is jointly consumed with another good. There is an inverse (negative) relationship between a price change for one good and the demand for the “go together good”.

18. P A ↑ QdA ↓ D B ↓ P car↑ Qdcar ↓ D petrol ↓

19. Substitute goods A good that competes with another good for consumer purchases. There is a direct (positive) relationship between a price change for one good and the demand for its “competitor” good.

20. c) Number of buyers The number of buyers can be specified to include both foreign and domestic buyers. If the number of buyers increases, the demand curve shifts rightward. Conversely, when the number of buyers decreases, the demand curve shifts leftward.

21. d) Tastes and preferences Taste refers to the general preference of a population or a particular individual. Fads, fashions, advertising and new products can influence consumer preferences to buy particular good or service. e) Expectations of buyers This is regarding the effect on demand in the present when consumers anticipate future changes in prices of goods.

22. f) Government policies An increase in taxes may also have an effect on the demand for some goods. A subsidy given by the government in production of a good is mostly likely to affect the demand for the product. g) Seasonal factor Different products will be demanded at different festive seasons. h) Innovation and technological progress With the intensive an extensive research and development done in the business world, new products and innovative products keep entering the market.

23. Inter-related Demand • A demand for a particular good may be related to the demands for other goods. This is called inter-related demand. a) Joint demand - A demand for one good will increase the demand for another good. - Complementary goods are goods that are demanded together to satisfy oneself. b) Competitive demand - The increase in demand for one good will reduce the demand for another goods. -Competitive goods are goods that can be substituted for one another.

24. c) Derived demand - These goods are demanded not for what they are but to help in the production process (production of other goods). - As the demand for a good increases, the demand for its factors of production increase too. - e.g: when demand for houses increases, the demand for labor also increase. Labor is derived demand (demand in production process)

25. SUPPLY • Definition of Supply The quantity of a good or service that will be offered for sale at a given price over a period of time in a given market, assuming other things remain the same (ceteris paribus) • The Law of Supply As price increases, the quantity supplied will also increase, and conversely, when price falls, the quantity supplied will fall, ceteris paribus.

26. Individual and Market Supply • Individual supply • The supply schedule shows the quantity supplied at different prices.

27. A supply curve graphs the relationship between the quantities supplied of a good and its price, ceteris paribus. • The supply curve is upward sloping to shows direct (positive) relationship between the quantity supplied and the price of the good.

28. Market Supply • The market supply schedule shows the total quantity which sellers are willing to offer for sale at different prices. • A market supply schedule is obtained by summing up the quantity supplied by all sellers in the market at various prices. • The market supply curve can be derived by adding up the individual supply curve in a given market through a process called horizontal summation.

29. The combination of 2 persons (assume) will show the market supply in the market

30. Changes in Quantity Supplied vs. Changes in Supply

31. Non price Determinants of Supply • Number of sellers • When the number of seller increases, the quantity supplied of a good increases. • Conversely, when the number of sellers decreases, the quantity supplied of a good decreases. b) Prices of related products • Substitute  An increase in the price of substitutes, lower the supply of the other goods • Complementary  An increase in the price of complementary products will increase the supply of the goods

32. Cost of production • If raw materials (factors of production) are expensive, production cost will increase and thus supply will decrease. • Technological advancement • Technological advancement reduces the use of inputs and cost of producing the product. • When high technology is machines such as computers and lasers are used, supply will increase. e) Time period • The time period therefore affects supply.

33. Producer’s/seller’s objectives • Sales maximization becomes the main objective if the seller fails to maximize profits. • Here quantity supplied is greater than the quantity offered under profit maximization g) Government policies • Taxes  Government taxes will lead to higher production cost, thus reducing supply • Subsidies  Subsidies will lead to lower production cost and increase profitability. This provides an incentive for producers to supply more

34. Inter-related Supply • A supply for a particular good may be related to the supply for other goods. • Joint supply • The products are produced together from the same source simultaneously. Examples are meat and leather, wool and mutton, petrol and gas. The supply of one good will automatically leads to the increase of the supply of another good. • Competitive supply • These products require the same factors of production in their production. For example, rubber and oil palm. An increase in the price of one will lead to an increase in its supply but reduces the supply of other product.

35. ELASTICITY OF DEMAND Elasticity of demand measures responsiveness of demand to changes in its determinants. There are 3 types of elasticity of demand: Price elasticity of demand Income elasticity of demand Cross elasticity of demand

36. PRICE ELASTICITY OF DEMAND Price elasticity of demand measures the responsiveness of the quantity demanded of a product to a change in its price The price elasticity of demand formula is:

38. Degrees / Types of Elasticity The degree of elasticity measures the responsiveness of quantity demanded to price changes. Elastic demand (Ep > 1) A condition in which the percentage changes in quantity demanded is greater than the percentage changes in price. The drop in price causes total revenue to rise.

39. Inelastic demand (Ep < 1) A condition in which the percentage changes in quantity demanded is less than the percentage changes in price. The drop in price causes total revenue to fall.

40. Unitary elasticity of demand (Ep = 1) A condition in which the percentage changes in quantity demanded is equal to the percentage changes in price. Total revenue does not change regardless of changes in price.

41. Perfectly elastic demand (Ed = ) A condition in which a small percentage changes in price brings about an infinite percentage changes in quantity demanded.

42. Perfectly inelastic demand (Ed = 0) A condition in which the quantity demanded does not change as the price changes.

43. Factors Affecting The Price Elasticity of Demand Availability of substitutes The more substitute there are, especially close substitute, the more elastic the demand for a good will be. Proportion of income spent on the product The larger the proportion of income spent on a good, the more elastic the demand will be. Necessities or luxuries Luxuries tend to have elastic demand and necessities, inelastic demand.

44. Time period The longer the time period, the more elastic the demand becomes for the good. For a short period, demand tends to be inelastic. Price of goods Cheap goods tend to have inelastic demand in comparison with the more expensive goods. Habits Habitual smokers tend to have inelastic demand for cigarettes.

45. ELASTICITY OF SUPPLY Price elasticity of supply measure the degree of responsiveness of quantity supplied to a change in price of a good. The price elasticity of supply formula is:

46. The coefficient of elasticity determines the type of elasticity (5 responses). Elastic (ES > 1) The percentage change in quantity supplied is greater than the percentage change in price. Inelastic (ES < 1) The percentage change in quantity supplied is less than the percentage change in price.

47. Unit elastic (ES = 1) The percentage change in quantity supplied is equal than the percentage change in price. Perfectly elastic (ES = ) The percentage change in quantity supplied is infinitely large compared to the percentage change in price. Perfectly inelastic (ES = 0) The percentage change in quantity supplied is zero despite the change in the price.

50. Factors Affecting Elasticity of Supply Time period In a very short period of time, supply of any product is perfectly inelastic, as it is not possible to increase supply immediately in response to changes in price. In the short-run supply is inelastic depending on how much stock is available. The less stock available the less elastic is the supply of the product.