Principle Of Economics Chapter 3 PDF

PRINCIPLE OF ECONOMICS NOOR SA'ADAH SABUDIN SEFB CHAPTER 3 Demand, Supply, and Market Equilibrium  Demand: Law of Demand, Demand Curve, INTHISLECTURE Change in Quantity Demanded, Changes in Demand, Individual and Market Demand. Supp...

PRINCIPLE OF ECONOMICS NOOR SA'ADAH SABUDIN SEFB CHAPTER 3 Demand, Supply, and Market Equilibrium  Demand: Law of Demand, Demand Curve, INTHISLECTURE Change in Quantity Demanded, Changes in Demand, Individual and Market Demand. Supply: Law of Supply, Supply Curve, Change in Quantity Supplied, Changes in Supply, Individual and Market Supply. Market Equilibrium: Changes in Market Equilibrium. Consumer and producer surplus After studying this chapter, you will be able: To explain the concept of demand and the law of demand. To differentiate the concept of change in quantity demanded and the change in demand. To identify factors that determine the demand. To differentiate individual and market demand After studying this chapter, you will be able: To explain the concept of supply and the law of supply. To differentiate the concept of change in quantity supplied and the change in supply. To identify factors that determine the supply. To differentiate individual and market supply. After studying this chapter, you will be able: To explain how equilibrium price and quantity are determined in the market To explain the effect of demand and supply curve shifts on price and quantity equilibrium. To explain the factors that cause changes in the market equilibrium. To identify the area of consumer and producer surplus In January 2024, the prices of mackerel in Changlun rose rapidly (from RM8 to RM14). Why do some prices rise? And why do some prices fall, and some fluctuate? This chapter answers these questions. The demand and supply model that you’re about to study is the main tool of economics. It explains how prices are determined and how they guide the use of resources to influence what, how, and for whom goods and services are produced.  A market is any arrangement that enables buyers and sellers to get information and do business with each other. In other words, market is any place people come MARKETS together to trade. Trade or exchange may take place at a physical or virtual location (online market). A competitive market is a market that has many buyers and many sellers so no single buyer or seller can influence the price.  Absolute Price vs Relative Price Absolute (Money) Price - The price of a good in money terms. For example: the price of a new car is RM30,000. PRICES Relative Price (opportunity cost) - The price of a good in terms of another good. For example: the price of a new car is 30 computers. Relative price is calculated by dividing the actual price of an item with the actual price of other goods (example: a car priced at RM30,000; a computer priced at RM1000. So the relative price of the car is 30 computers). The Concept of Demand The Definition of Demand The willingness and ability of buyers to purchase different quantities of a good at different prices during a specific time period. In conclusion, demand is the willingness and ability of buyers: to purchase different quantities of a good at different prices during a specific time period.  Quantity Demanded is the number of units (say The Concept of Demand 100 units of a good) that individuals are willing and able to buy at a particular price (say, $10 per unit) during a time period. This is different from demand which speaks to the willingness and ability of buyers to buy different quantities of a good at different prices.  The law of demand states: The Law of Demand As the price of a good rises, the quantity demanded of the good falls, and as the price of a good falls, the quantity demanded of the good rises, ceteris paribus (other things remaining the same). P  Qd  P  Qd  NEGATIVE RELATIONSHIP Notes: Ceteris paribus is an assumption used to examine the effect of one influence on an outcome while holding all other influences constant. DemandCurve & Demand Schedule Demand Schedule The numerical tabulation of the quantity demanded of a good at different prices. A demand schedule is the numerical representation of the law of demand. DemandCurve & Demand Schedule Demand Curve A demand curve shows the relationship between the quantity demanded of a good and its price when all other factors remain the same (ceteris paribus). The demand curve shows graphical representation of the demand schedule and law of demand. DemandCurve & Demand Schedule Figure 3.1 shows a demand schedule and demand curve for energy bars. DemandCurve & Demand Schedule A rise in the price, other things remaining the same, brings a decrease in the quantity demanded and a movement up along the demand curve. A fall in the price, other things remaining the same, brings an increase in the quantity demanded and a movement down along the demand curve. DemandCurve & Demand Schedule Willingness and Ability to Pay A demand curve is also a willingness- and-ability-to-pay curve. The smaller the quantity available, the higher is the price that someone is willing to pay for another unit. Willingness to pay measures marginal benefit (MB). Individual Demand & Market Demand Individual Demand and Market Demand Individual demand refers to the demand of an individual consumer. Market demand is the sum of the individual demands of all consumers in the market. Important: Unless otherwise noted, we will be referring to market demand. Individual Demand & Market Demand Individual Demand and Market Demand Individual Demand & Market Demand Individual Demand and Market Demand  A Change in Demand A Change In Demand When some influence on buying plans other than the price of the good changes (other factors), there is a change in demand for that good. The quantity of the good that people plan to buy changes at each and every price, so there is a new demand curve. When demand increases, the demand curve shifts rightward. When demand decreases, the demand curve shifts leftward. A Change In Demand A Change in Demand (Increased in Demand) A Change In Demand A Change in Demand (Decreased in Demand)  The main factors that change demand are: A Change In Demand The prices of related goods Expected future prices Income Expected future income and credit Preferences Population  Prices of Related Goods (Substitute) A Change In Demand A substitute is a good that can be used in place of another good. If two goods are substitutes, the demand for one rises as the price of the other rises (or the demand for one falls as the price of the other falls) – positive relationship between Px and Qy (Px ↑, Qy↑ and Px↓, Qy↓). For example: Coca Cola & Pepsi Cola. If the price of Coca Cola increased, the demand for Coca Cola will fall. Users will switch to substitute products, ie Pepsi Cola. Thus, demand for Pepsi Cola will increase. A Change In Demand Prices of Related Goods (Substitutes)  Prices of Related Goods (Complement) A complement is a good that is used in conjunction A Change In Demand with another good. Goods that cannot be used without one another - a set of consumables where an incomplete set is redundant. If two goods are complements, the demand for one rises as the price of the other falls (or the demand for one falls as the price of the other rises) – negative relationship between Px and Qy (Px ↑, Qy ↓ and Px↓, Qy ↑). For example, the demand for one good (printers) generates demand for the other (ink cartridges). If the price of one good falls and people buy more of it, they will usually buy more of the complementary good also, whether or not its price also falls.  Prices of Related Goods (Complement) A Change In Demand  Expected Future Prices If the price of a good is expected to rise in the future, A Change In Demand current demand for the good increases and the demand curve shifts rightward. If the price of a good is expected to fall in the future, current demand for the good decreases and the demand curve shifts leftward. For example, buyers who expect the price of a good to be higher next month may buy it now, thus increasing the current (or present) demand for the good. Buyers who expect the price of a good to be lower next month may wait until the next month to buy it, thus decreasing the current (or present) demand for the good.  Income When income increases, consumers buy more of most A Change In Demand goods and the demand curve shifts rightward, vice versa. A normal good is one for which demand increases as income increases. An inferior good is a good for which demand decreases as income increases. A neutral Good is a good for which demand does not change as income rises or falls.  Expected Future Income and Credit When income is expected to increase in the future or when credit is easy to obtain, the demand might A Change In Demand increase now, vice versa. Population The larger the population (number of buyers), the greater is the demand for all goods. The demand for a good in a particular market area is related to the number of buyers in the area; the more buyers, higher demand; fewer buyers, lower demand. The number of buyers may increase owing to a heightened birthrate, increased immigration, the migration of people from one region of the country to another, and so on. The number of buyers may decrease owing to an increased death rate, war the migration of people from one region of the country to another, and so on.  Preferences People with the same income have different demands A Change In Demand if they have different preferences. People’s preferences affect the amount of a good they are willing to buy at a particular price. A change in preferences in favor of a good shifts the demand curve rightward. A change in preferences away from the good shifts the demand curve leftward. For example, if people to favor Elmore Leonard novels to a greater degree than previously, the demand for his novels increases, and the demand curve shifts rightward. A Change In Demand vs A Change In Quantity Demanded A Shift of the Demand Curve/Change in Demand A Change In Demand vs A Change In Quantity Demanded Conclusion  The Definition of Supply The willingness and ability of sellers to produce and The Concept of Supply offer to sell different quantities of a good at different prices during a specific time period. In conclusion, supply is the willingness and ability of sellers: to produce and offer different quantities of a good at different prices during a specific time period. The quantity supplied of a good or service is the amount that producers plan to sell during a given time period at a particular price.  The law of supply states: As the price of a good rises, the quantity The Law of Supply supplied of the good rises, and as the price of a good falls, the quantity supplied of the good falls, ceteris paribus. P  Qs  P  Qs  POSITIVE RELATIONSHIP SupplyCurve & Supply Schedule The term supply refers to the relationship between the quantity supplied and the price of a good. Supply curve refer to the graphical representation of the law of supply, which states that price and quantity supplied are directly related, ceteris paribus. Supply schedule refer to the numerical tabulation of the quantity supplied of a good at different prices.  Figure 3.4 shows a supply schedule and supply SupplyCurve & Supply Schedule curve of energy bars. A rise in the price, other things remaining the same, brings an increase in the quantity supplied. Individual Supply & Market Supply Individual supply refers to the supply of an individual producer. Market supply is the sum of individual supplies of all producers in the market. Unless otherwise noted, we will be referring to market supply Individual Supply & Market Supply Individual Supply and Market Supply Individual Supply & Market Supply Individual Supply and Market Supply  When some factors other than the price of the good changes (other factors), there is a change in supply of A Change In Supply that good. The quantity of the good that producers plan to sell changes at each and every price, so there is a new supply curve. When supply increases, the supply curve shifts rightward. When supply decreases, the supply curve shifts leftward. A Change In Supply A Change in any of these (shift) factors can cause a change in supply 1. Prices of Relevant Resources 2. Technology 3. Prices of other goods 4. Number of sellers 5. Expectations of Future Price 6. Taxes and Subsidies 7. Government Restrictions  The main factors that change supply of a good are: A Change In Supply The prices of factors of production The prices of related goods produced Expected future prices The number of suppliers Technology Government policy and restriction State of nature (supply shock)  Prices of Factors of Production/Relevant Resources A Change In Supply If the price of a factor of production used to produce a good rises, the minimum price that a supplier is willing to accept for producing each quantity of that good rises. So a rise in the price of a factor of production decreases supply and shifts the supply curve leftward. A fall in the price of a factor of production increases supply and shifts the supply curve rightward.  Prices of Related Goods Produced A Change In Supply A substitute in production for a good is another good that can be produced using the same resources. The supply of a good increases if the price of a substitute in production falls. Goods are complements in production if they must be produced together. The supply of a good increases if the price of a complement in production rises.  Expected Future Prices If the price of a good is expected to rise in the A Change In Supply future, supply of the good today decreases and the supply curve shifts leftward. When a good can be easily stored, expecting future prices to be higher may reduce current supply. More generally, any change expected to affect future profitability could shift the supply curve.  The Number of Suppliers Since market supply sums the amounts supplied at A Change In Supply each price by all producers, the market supply depends on the number of producers in the market. If that number increases, supply increases. If the number of producers decreases, supply decreases.  Government Policy and Restriction A Change In Supply Government policy on taxes and subsidies will affect the production/supply of goods. If the corporate tax rate is lowered, the supply will increase and vice versa. Subsidies are a monetary payment by government to a producer of a good or service The removal of the subsidy shifts the supply curve of corn leftward and vice versa.  Technology Advances in technology create new products and A Change In Supply lower the cost of producing existing products. So advances in technology increase supply and shift the supply curve rightward. The State of Nature The state of nature includes all the natural forces that influence production—for example, the weather. A natural disaster decreases supply and shifts the supply curve leftward. It also called supply shock.  Figure 3.5 shows an increase in supply. An advance in the technology increases the supply of A Change In Supply energy bars and shifts the supply curve rightward.  A Movement Along A Change In Quantity Supplied the Supply Curve A change in quantity supplied refers to a movement along a supply curve. The only factor that can directly cause a change in the quantity supplied of a good is a change in the price of the good, or own price. A Change In Supply vs A Change A Movement Along the Supply Curve When the price of the good changes and other influences In Quantity Supplied on sellers’ plans remain the same, the quantity supplied changes and there is a movement along the supply curve. A Change In Supply vs A Change A Shift of the Supply Curve If the price remains the same but some other influence In Quantity Supplied on sellers’ plans changes, supply changes and the supply curve shifts. A Change In Supply vs A Change In Quantity Supplied A Shift of the Supply Curve A Change In Supply vs A Change A Change in the Quantity Supplied Versus a Change in Supply - Conclusion In Quantity Supplied  Equilibrium in a market is the price quantity combination from which there is no tendency for MARKET EQUILIBRIUM buyers or sellers to move away. Graphically, equilibrium is the intersection point of the supply and demand curves. The equilibrium price is the price at which the quantity demanded equals the quantity supplied. The equilibrium quantity is the quantity bought and sold at the equilibrium price.  MARKET EQUILIBRIUM Figure 3.7 illustrates the market equilibrium—the price at which quantity demanded equals quantity supplied.  MARKET EQUILIBRIUM Price as a Regulator There is a surplus of 6 million energy bars. If the price is $2.00 a bar, the quantity supplied exceeds the quantity demanded. A surplus of 6 million bars. Surplus (Excess Supply) - A condition in which quantity supplied is greater than quantity demanded. Surpluses occur only at prices above equilibrium price.  MARKET EQUILIBRIUM There is a surplus of 6 million energy bars. If the price is $1.00 a bar, the quantity demanded exceeds the quantity supplied. A shortage of 9 million bars. Shortage (Excess Demand) - A condition in which quantity demanded is greater than quantity supplied. Shortages occur only at prices below equilibrium price.  MARKET EQUILIBRIUM There is a surplus of 6 million energy bars. If the price is $1.50 a bar, the quantity supplied equals the quantity demanded. No shortage or surplus of bars. Its also called equilibrium price or market- clearing price  Price Adjustments At prices above the equilibrium price, a MARKET EQUILIBRIUM surplus forces the price down. At prices below the equilibrium price, a shortage forces the price up. At the equilibrium price, buyers’ plans and sellers’ plans agree and the price doesn’t change until some event changes either demand or supply.  Changes in Equilibrium MARKET EQUILIBRIUM Once a market reaches equilibrium, that price and quantity will prevail until one of the determinants of demand or supply changes. A change in any one of these determinants will usually change equilibrium price and quantity in a predictable way.  Changes in Equilibrium MARKET EQUILIBRIUM Effects of an Increase in Demand Figure 3.8 shows that when demand increases the demand curve shifts rightward. At the original price, there is now a shortage. The price rises, and the quantity supplied increases along the supply curve.  Changes in Equilibrium Effects of an Increase in Supply MARKET EQUILIBRIUM Figure 3.9 shows that when supply increases the supply curve shifts rightward. At the original price, there is now a surplus. The price falls, and the quantity supplied decreases along the supply curve.  Changes in Equilibrium MARKET EQUILIBRIUM All Possible Changes in Demand and Supply A change in demand or supply or both demand and supply changes the equilibrium price and the equilibrium quantity.  Changes in Equilibrium MARKET EQUILIBRIUM Change in Demand with No Change in Supply When demand increases, equilibrium price rises and the equilibrium quantity increases.  Changes in Equilibrium MARKET EQUILIBRIUM When demand decreases, the equilibrium price falls and the equilibrium quantity decreases.  Changes in Equilibrium MARKET EQUILIBRIUM Change in Supply with No Change in Demand When supply increases, the equilibrium price falls and the equilibrium quantity increases.  Changes in Equilibrium MARKET EQUILIBRIUM When supply decreases, the equilibrium price rises and the equilibrium quantity decreases.  Changes in Equilibrium Increase in Both Demand MARKET EQUILIBRIUM and Supply An increase in demand and an increase in supply increase the equilibrium quantity. The change in equilibrium price is uncertain because the increase in demand raises the equilibrium price and the increase in supply lowers it.  Changes in Equilibrium Decrease in Both Demand and Supply MARKET EQUILIBRIUM A decrease in both demand and supply decreases the equilibrium quantity. The change in equilibrium price is uncertain because the decrease in demand lowers the equilibrium price and the decrease in supply raises it.  Changes in Equilibrium Decrease in Demand and Increase in Supply MARKET EQUILIBRIUM A decrease in demand and an increase in supply lowers the equilibrium price. The change in equilibrium quantity is uncertain because the decrease in demand decreases the equilibrium quantity and the increase in supply increases it.  Changes in Equilibrium Increase in Demand and Decrease in Supply MARKET EQUILIBRIUM An increase in demand and a decrease in supply raises the equilibrium price. The change in equilibrium quantity is uncertain because the increase in demand increases the equilibrium quantity and the decrease in supply decreases it.  If we miss an opportunity don't fill the eyes with tears. It will hide another better opportunity in front of us.  Mistakes are painful when they happen. But year's later, collection of mistakes is called experience, which leads to success. Be bold when we loose and be calm when we win. Heated gold becomes ornament. Beaten copper becomes wires. Depleted stone becomes statue. So the more pain we get in life our become more valuable in personality towering.