Chapter 2 The Price SystemWord下载.docx

1、Individual Demand & Market demand The individual demand is the relationship between the quantity demanded by a single buyer and its prices The market demand is the relationship between the total quantity demanded by all consumers in the market and its price.The market demand curve is the horizontal

2、sum of the individual demand curves!Changes in Quantity Demanded & Changes in Demand Changes in quantity demanded result in movement along the demand curve due a change in price while other factors remain constant. （upward/downward movement） Ceteris Parabus! Change in demand is the shift of the dema

3、nd curve due a change in other factors while price remains constant. （leftward/ rightward shift） Other Factors that influence demand The financial ability to pay Effective demand Our attitudes to the product itself Psychological Speculative demand The price, availability and attractiveness of relate

4、d products Substitute goods, complementary goods, joint demand Shifts in The Demand Curve We have seen that a change in the price of a normal good will cause a change in the quantity demanded But there are things other than price that influence demand for a product What? Change in Demand A shift in

5、the demand curve either to the left or right caused by any changes that alters the quantity demanded at every price. Such as: Income Prices of related goods Tastes Expectations Number of buyersChanges in Consumer Income Goods can be classified into two broad categories: Normal goods: the demand incr

6、eases when income increases and decreases when income decreases Inferior goods: the demand decreases when income increases and increases when income decreases Think of some examples of normal goods and inferior goods Normal Smoothies/Fresh Juice Levis Jeans Taxis Business Class air fares? Inferior S

7、upermarket own brand goods Public Transport Instant Noodles Second Hand cars Economy class airfares? Pay as you go, Mobile phones? Tinned Food?Changes in Price of Related Good（i） Substitute Goods- A product that can be used in place of another product- A change in the price of substitute products af

8、fect the demand for the product in the same direction in which the price change.- E.g: tea vs coffee; a bus ride vs an LRT ride（ Pcoffee Qdd coffee DDtea） Changes in Price of Related Good（ii） Complementary Goods- A product that is used in conjunction with another product.- The change in the price of

9、 a complementary product affects the demand for the product in the opposite direction to the change price. a disk and computer, pen and ink.（ Ppen Qdd pen DDink ）Taste & Preference Tastes and preferences of consumers change significantly. If a product become more fashionable, the demand for it will

10、increase and if the same product becomes outdated, the demand for it will fall. E.g: Changes in music, apparel or recreation.Expectations The higher the expected future price of a product, the higher the current demand for that product and vice versa. When the government plans to increase the price

11、of sugar the following week, the demand for sugar will immediately increase. Population or Number of Buyers A larger population with a high rate of growth creates greater demand for goods and services. An increase in the population of UTAR would increase the demand for houses, F & B, and other goods

12、 and services.Exceptions to the Law of demand Veblin Goods Ostentatious Goods/ Snob affect Conspicuous consumption Ferrari Cars Rolex Watches Van Gogh Painting ! Diamonds If the price was low people would buy less? Are these goods much different from other goods? Giffen Goods Theoretical Model, base

13、d on Irish Potato famine During the famine the peoples staple （main） diet was potatoes! They could afford a little meat but mainly ate potatoes. As the famine hit, the price of potatoes went up, there were no substitutes! They stopped buying any meat and bought more potatoes, despite the price being

14、 higher than before!Goods Substitute Goods: Products that give possible alternatives for consumers Complementary goods: Two goods for which the quantity demanded of one is negatively related to the price of the other Normal good: A good where the quantity demanded increases as income increases Infer

15、ior good: A good whose demand falls as income increases Derived Demand Demand a product used to make another product i.e. Demand for labour Where the demand for one good is dependent on the demand for another related good Construction industry demand for new office construction demand for office spa

16、ce Demand for construction workers demand for construction work Factor markets derived demand Think of some derived demand for the following Wheat fertilizer, water Cars acetylene, paint, tyresJoint Demand （compliments） The demand for one will directly affect the demand for the other I.e. Shoes and

17、shoe laces, CDs and CD playersComposite Demand Applies to products which are used for more than one purpose I.e. Maize can be a food or bio-fuel. Increased harvesting for bio-fuel will lead to a price increase for foodstuff Where goods have more than one use an increase in the demand for one leads t

18、o a fall in supply of the other Milk used for cheese, yoghurts, cream, butter, gasoline, oil, plastic, nylon etc. Land, if you use more land for farming there is less land for factories etc. If more milk is used for cheese, ceteris paribus there is less available for butter Cows are REALLY useful. Y

19、ou can use them for milk, leather, art, riding or BEEF. You cant do this all at once DO NOT TRY TO MILK A MOVING COW By using cows for one purpose, we give up the other uses it has （opportunity cost）. Therefore, if we use a cow for art, we cannot use it for leather, so when the DEMAND for CowArt inc

20、reases, the SUPPLY of leather decreases.Supply Supply indicates how much of a good producers are willing and able to offer for sale per period at each possible price, other things constant Law of supply states that the quantity supplied is usually directly related to its price, other things constant

21、 The lower the price, the smaller the quantity supplied The higher the price, the greater the quantity suppliedSupply Schedule & Supply Curve The supply schedule is a table that showing how much of a product firms will set at different prices. The supply curve is a graph illustrating how much of a p

22、roduct a firm will set at different prices. Upward slopping & to the right due to the law of supply.Individual Supply & Market Supply The individual supply is the relationship between price of good and the quantity an individual producer is willing and able to sell per period, other things constant.

23、 The market supply is the sum of all that is supplied each period by all producers of a single product.Market Supply CurveChanges in Quantity Supplied & Changes in Supplied A changes in quantity supplied result in the movement along the supply curve due a change in price while other factors remain c

24、onstant. Change in supply is shift of supply curve resulting from a change in one of the determinants of supply other than price of the goods. Change in Quantity SuppliedChanged in SupplyA shift of the supply curve, either to the left or right.Determinants of supply other than the price of the good

25、Cost of production Technology Prices of related goods Expectation Number of sellersShifts in The Supply CurveThe Cost of Production Response to the factor of production （labor, land, capita, energy, and so on）. Supply of a goods are negatively related to the price of the inputs used to make the good

26、. Objective is to maximize profit. Example: to produce ice-cream, sellers use various inputs such as cream, sugar, flavoring, ice-cream machines. When price of one or more of these inputs rises, producing ice-cream is less profitable & firm supply less ice-cream. Technology Represents the economys k

27、nowledge about how to combine resources efficiently. If a better technology is discovered, production costs will fall. Thus, suppliers will be more willing & able to supply the good at each price. when new technology are introduced in the production of sushi, supply of sushi will increase and shift the supply curve. Price of Related Goods Substitutes Goods If there is an increase in the price of substitute goods in production, supply of a good will decrease. Example: Pepsi and Coke （ Ppepsi QSS pepsi SScoke ）