DD/SS elasticity

• The price mechanism is a way for producers and consumers to respond to price signals and make choices to achieve efficient resource allocation.
• In a free market, prices and quantities of goods and services are determined through the price mechanism and the law of demand and supply.
• The central economic problem is scarcity, which arises out of the conflict between unlimited wants and limited resources.
• Scarcity results in choices having to be made by economic agents to maximise their welfare.
• Different societies use different systems, such as a free market, mixed or command economy, to allocate their scarce resources.
• In a free market, prices are determined through the price mechanism and the law of demand and supply.
• A decrease in demand will lead to a decrease in equilibrium price and quantity, ceteris paribus.
• Consumers who could not get all they want at the price of $3 would be willing to pay more to compete with other consumers, exerting an upward pressure on the price.
• In response to the increase in price, producers would increase the quantity supplied and consumers would decrease the quantity demanded, according to the Laws of Supply and Demand.
• The equilibrium price and quantity will remain unchanged so long as the demand and supply conditions remain unchanged.
• Changes in demand and/or supply will lead to a new equilibrium being formed.
• An increase in demand will lead to an increase in equilibrium price and quantity, ceteris paribus.
• The price mechanism can allocate resources efficiently, addressing the three fundamental questions: what to produce, how to produce, and for whom to produce.
• The price mechanism is not the only way to allocate resources efficiently, and government intervention may be necessary in situations where free market outcomes are undesirable.
• Price controls are a type of government intervention where the government artificially sets a price different from the market clearing price, which is the equilibrium price.
• The government can use a variety of tools when it intervenes in the market, such as price controls and quantity controls.
• The government usually aims to reduce large fluctuations in prices and prevent extreme prices for certain essential goods, such as water and agricultural products, when it imposes price controls.
• There could be various reasons for government intervention in markets, such as encouraging, discouraging or even prohibiting the production or consumption of a good to maximise social welfare, raising tax revenue for government and/or producers revenue, making certain goods more affordable, stabilising income of producers, especially in primary product markets.
• The government intervenes in many markets, especially when there are unfavourable outcomes that need to be corrected.
• Price controls can take the form of stipulating a maximum price (price ceiling) or a minimum price (price floor).
• The rationing function of the price mechanism enables scarce resources to be rationed to the parties who are most willing to pay.
• Wage differentials can exist within a particular industry (intran industry) or among different industries (inter-industry).
• Workers differ in their skills while jobs differ in their requirements.
• Reasons for wage differentials include labour immobility, non-monetary factors, and imperfect information.
• The signaling function of the price mechanism provides information to producers and consumers about changes in market conditions.
• The price mechanism allocates scarce resources in the free market through signaling, incentive, and rationing functions.
• The incentive function of the price mechanism provides incentives for producers to reallocate their scarce resources.
• Scarcity is the reason why there is a need to allocate resources, and in this topic, we are going to learn about how scarce resources are allocated in competitive markets.
• The individual supply schedule gives us an individual supply curve.
• A change in quantity supplied is caused by changes in price and is represented by a movement along the supply curve.
• The market supply is the sum of the individual supply schedules of all the producers in the market, derived by horizontal summation.
• When a change in the quantity of a good or service sold by producers is due to a change in price of the good or service, economists say that there was a change in quantity supplied of the good or service.
• An increase in quantity supplied of coffee from 14 to 24 units of coffee (caused by a rise in the price from $4 to $6) is represented by a movement up the supply curve from Point A to C.
• In Figure 10, changes in price are assumed to be caused by changes in demand.
• A decrease in quantity supplied of coffee from 14 to 4 units of coffee (caused by a fall in the price from $4 to $2) is represented by a movement down the supply curve from Point A to B.
• A change in supply is due to changes in non-price determinants and is represented by a shift of the supply curve.
• Diagrammatically, such a change is illustrated by a movement along the supply curve of the good or service.
• The resulting fluctuations in equilibrium price will be larger if producers are not very responsive (i.e. demand and/or supply being price inelastic).
• The prices of agricultural products tend to fluctuate widely from year to year.
• Price elasticity of supply (PES) is the gradient of the supply curve along which the demand curve shifts.