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Transcript of Microeconomics
Supply and Demand, Elasticity
A quantity that consumers are willing and able to afford to buy at a given price, in a given period of time.
Consumer's desire and willingness to pay a price for a specific good or service.
Holding all other factors constant, the price of a good or service increases as its demand increases and vice versa.
- Define as the quantity of goods that firms are able and willing to produce and offer for sale at a given price, in a given period of time.
Elasticity of Demand & Supply
-Price elasticity of demand (PED) measures the responsiveness of quantity demanded to a change in the price of the good. Assume ceteris paribus.
A Supply equation / function
Qs = a + bP
Law of Supply
- supply varies directly with the product, assuming ceteris paribus
when Price rises
when Price falls
1. Price of the product
P = Qs
- When the price of a product increase, supplier may want to increase production in order to get more profit
Factors that may influence Supply
2. State of technology
Tech = Supply
- more technical support
- can produce effectively
3. Numbers of sellers in market
- More sellers, less supply
- Less sellers, more supply
- Demand in the market still remain the same, cannot ensure the market only buy your product.
4. Nature / Climate
5. Availability of resources
6. Producer expectation
- If producer expect high demand for the product ; supply increase
7. Cost of production
Cost of production
- prices of factors of production
High price of factor of product
high cost of product
Movement along supply curve
Current market situation
Step 1 : Shift supply to the right = Supply +
- Supply +
- Qs from Q*0 to Qs1
- price, demand still remain
Price - decrease
Qs decrease from Qs1 to Q*1
Qd increase from Q*0 to Q*1
New market equilibrium
- Supply increase leads to fall of price
LAW OF DEMAND
Qd= a - bP
THE DEMAND CURVE
HIGHER PRICE LEADS TO CONTRACTION OF QUANTITY DEMAND
LOWER PRICE LEADS TO EXPANSION OF QUANTITY DEMAND
SHIFTS IN DEMAND CURVE
D1 - D3 would be an example of an outward shift -which means there is an increase of demand
D1 -–D2 would be termed an inward shift - known as decrease in the demand curve
inverse relationship between the price of a good and demand
MOVEMENT ALONG DEMAND CURVE
a movement denotes a change in both price and quantity demanded from one point to another on the curve. (Vice versa)
a change in price leads to a movement along the curve not a shift.
The Income Effect
price of a good falls because the consumer can maintain the same consumption for less expenditure.
The Substitution Effect:
price of a good falls because the product is now relatively cheaper than an alternative item.
consumers switch their spending from the alternative good or service.
As price falls, a person switches away from rival products towards the product.
As price falls, a person’s willingness and ability to buy the product increases
As price falls, a person’s opportunity cost of purchasing the product falls
CONDITIONS OF DEMAND
Changing prices of a substitute good
Substitutes are goods in competitive demand and act as replacements for another product.
Cars: Toyota and Honda
Changing price of a complement
A rise in the price of a complement to Good X should cause a fall in demand for X.
joint demand = related.
Changes in the income of consumers
income goes up, our ability to purchase goods and services increases, and this causes an outward shift in the demand curve.
incomes fall there will be a decrease in the demand, except for inferior goods
Effects of advertising and marketing:
Heavy spending on advertising and marketing can help to bring about changes in consumer tastes and fashions.
The numbers of buyers affects the demand.
more buyers enters the market, the demand will also increase
Coefficient of PeD
expecting price increase next month, cause the demand of current will increase.
Normal & Inferior Goods
substitute & competition
Mid Point Method
Degrees of PEd
Relatively Elastic =
( E > 1 )
Relatively Inelastic =
( 0 < E < 1 )
Unit Elastic =
( E =1 )
Perfectly Elastic =
( E = 0
Perfectly inelastic =
( E = 0 )
Perfectly elastic & Perfectly inelastic
Determinants of PEd (Factors influencing PEd)
-Necessity and Luxuries goods.
-Availablity of Substitute goods
-Hard Habit to a person
the market is in equilibrium when Qd=Qe at a point
this is where the equilibrium Price, Pe is equal to equilibrium Quantity
In equilibrium seller can buy any quantity they want and the buyer can buy any quantity they want
Market disequilibrium happens when Qs>Qd or Qd>Qs.
When Qs > Qd, it will have excess of supply
- Which is also called
P ( Price) will fall
As P fall, the Qd (Quantity demanded) rises, while Qs (Quantity Supply) falls.
Until Qd=Qs at a new equilibrium
When Qd > Qs, it will have excess of demand
- Which is also called
P will rise
As P rises, Qd falls
Qs is then rises until Qd=Qs agian at a new equilibrium
In this graph, demand is constant, and supply increases. As the new supply curve (SUPPLY 2) has shown, the new curve is located on the right side of the original supply curve.
The new curve intersects the original demand curve at a new point. At this point, the equilibrium price (market price) is lower, and the equilibrium quantity is higher.
The chart below illustrates the shift in demand and how that results in shortage conditions on the basic market model. Before the shift in demand, the market price (P1) results in quantity demanded and quantity supplied of Q1. When the shift in demand (D1 to D2 ) occurs, the quantity supplied at the market price P1 remains at Qs but the quantity demanded shifts out to Qd2.
The price increases as the quantity supply rises until it reaches at a new equilibrium. In the same time, the quantity demanded will also falls as the price increases until reaches a new equilibrium. The market is then become equilibrium again.
SECTION: MAK 1
Sim Jing Yuan J15018589
Ng Jhen Yew J15018231
Jacob Lim J15018643
Chiang Yik Chun J15018918
Qs = a + bP
20 = a + 10b
40 = a + 20b
Given when P=10, Qs=20
a = 40 - 20b
a = 20 - 10b
40 - 20b
20 - 10b
b = 2
20 = a + 10(2)
a = 0
Shift in Supply Curve