Applied Economics PDF

APPLIED ECONOMICS The Law of Demand and Supply The law of demand states that: all other things remain constant (Ceteris Paribus) the higher the price of a good the lesser the demand for that good and the lesser the price the higher the demand. The Law of Supplies The law of supply state...

APPLIED ECONOMICS The Law of Demand and Supply The law of demand states that: all other things remain constant (Ceteris Paribus) the higher the price of a good the lesser the demand for that good and the lesser the price the higher the demand. The Law of Supplies The law of supply states that the quantity of products offered to be sold is directly related with the price. It means that when the price increases the quantity supplied increases too and if the price decreases the quantity supplied decreases too. The relationship between the price and demand is inversely related. It is because of the substitution effect and income effect. Substitution effect means that if the price of Product A increases the consumer will look for its substitute and will cause decrease in quantity demanded for Product A. On the other hand, having the same income, an increase in price of a product will cause a decrease in quantity demanded because the consumer may not afford to buy all the things just like before. Figure 1 shows the graphical representation of the demand schedule in Table 1. It is negative slope showing that the price and quantity demanded are inversely related. Table 1 and Figure 1 shows the change in quantity demanded because of the change in price. Figure 1 shows the graphical representation of the supply schedule in Table 3. It is positively slope showing that the price and quantity supplied are inversely related. Table 3 and Figure 3 shows the change in quantity supplied because of the change in price.  Factors that can Cause Changes in Factors that can Cause Changes in Demand Supply Taste and preferences Technology Income Cost of production Seasonal products Number of sellers Population change Government policies (Taxes and Prices of related good subsidies) (substitute/complementary State of nature (weather) goods) Prices of related goods produced Expected future prices, income Future expectations (possible and credit increase in price)  Changes in Demand Changes in Supply Curve Leftward shift of Demand Curve: Leftward Shift in Supply Curve: if the quantity demanded at each a higher cost of production will price level decreases, the demand shift the supply curve to the left curve will shift leftward. Rightward Shift in Supply: Rightward Shift of Demand Curve: A decrease in costs would cause If the quantity demanded at each the supply curve to shift to the price level increases, the demand right curve shifts rightward. MARKET A market is one of the numerous infrastructures, systems, institutions, social relations, and procedures, wherein buyers and sellers usually interact with each other to exchange goods and services. Various Market Structures Monopoly – There is a single merchant of a product for which there is no close alternative. Monopolistic Competition - in which differentiated product has many vendors. Perfect Competition -wherein, a similar product has many sellers. Oligopoly - there are few sellers of a standardized or a differentiated product.  Monopoly A monopoly pertains to a situation wherein there is only a single company that produces a certain product in the entire market. Because of that, they have the power or the authority to manipulate their products, such as minimizing their outputs to put higher prices in it and to gain more profit. In this situation, consumers have a lesser benefit, especially when the product is essential to them, making them buy it despite being expensive Monopolistic Competition When there is a numerous quantity of small firms competing against each other, it is called a Monopolistic Competition. However, in this type of market structure, several companies sell the same product but they have their differences. Those differences give them market power which lets them charge higher prices for a product, but is within a certain range. These key factors can include style, brand name, location, packaging, advertisement, and pricing strategies, which became every firm’s basis in marketing.  Perfect Competition Perfect competition is a type of market structure where many products are similar and may substitute each other since they have the same features, price and, quality. There are many sellers and consumers in this type of market with almost the same products. Moreover, a perfectly competitive market requires few barriers to enter and it is easy for producers to quit whenever they want. They also have uniform prices that depend on the demand and supply which means that the market has full control over implying prices.  DEMAND AND SUPPLY SCHEDULE PRICE DEMAND SCHEDULE SUPPLY SCHEDULE FOR GOOD X FOR GOOD X 0 80 5 2 75 15 4 70 25 6 65 35 8 60 45 10 55 55 12 50 65 14 45 75 16 40 85  DEMAND CURVE SUPPLY CURVE P P QD QS P ⬆ QD ⬇ P ⬆ QS ⬆ QD is inversely related to the price QD is directly related to the price Law of Demand Law of Supply INDIRECT RELATIONSHIP OF QD AND PRICE DIRECT RELATIONSHIP OF QD AND PRICE Downward sloping Upward sloping PRICE DEMAND SUPPLY SCHEDULE SCHEDULE FOR GOOD FOR GOOD X X 0 80 5 P 2 75 15 4 70 25 6 65 35 8 60 45 10 55 55 Q 12 50 65 MARKET EQUILIBRIUM 14 45 75 16 40 85  Rightward shift = increase in QD Leftward shift = decrease in QS P P Rightward shift = increase in QS Leftward shift = decrease in QD QD QS P ⬆ QD ⬇ P ⬆ QS ⬆ QD is inversely related to the price QD is directly related to the price Law of Demand Law of Supply PRICING – money charged for a product or service EQUILIBRIUM – state of balance when supply is equals to demand MARKET EQUILIBRIUM – Point where demand and supply come together at the same price and quantity DISEQUILIBRIUM – Quantity supplied is not equal to quantity demanded PHYSICAL MARKET-with physical location VIRTUAL MARKET-online setting and no actual meeting required PRODUCT DIFFERENTIATION- key feature of monopolistic competition BARRIERS TO ENTRY – One factor that affect business start up CHANGES IN SUPPLY AND DEMAND Change in Consumer’s Taste – Kathryn Bernardo wearing ripped jeans Change in Price of Substitute Goods – butter and margarine – Instead of buying cheese bread, you bought pandesal Change in Consumer’s Income – Employees receiving Christmas bonus Change in Price of Complementary Goods – Cars and Gas, Cars and Automotive services Changes in Consumer’s Price Expectation - if the price for desired item becomes expensive, you switch to the substitute goods with lesser price Rightward shift of Demand Curve e.g. if price of tea rises demand for coffee also rises Leftward shift of Demand Curve e.g. people are purchasing tablets, there has been a decrease in demand for laptops Rightward shift of Supply Curve e.g. A discovery of new oil will make oil more abundant decrease in manufacturing cost Leftward shift of Supply Curve e.g. increase in the manufacturing cost of leather fewer sellers in the market during pandemic