The Market

• The demand curve is a graph showing the relationship between the price of a good and the quantity consumers are willing to buy, with a downward slope indicating that as the price increases, the quantity demanded decreases

  
• The demand curve is crucial for economists as it helps predict how consumers will respond to price changes
• Demand is the amount of a product that customers are willing and able to purchase at any given price

  
• Factors that shift the demand curve include:

  • Price of substitute goods
  • Price of complementary goods
  • Change in customer incomes
  • Fashions, tastes, and preferences
  • Marketing, advertising, and branding
  • Demographics
  • External shocks like government policies affecting income
• Supply is the amount of product that suppliers are willing and able to produce at any given price
• Supply Curve is upward sloping, indicating that price and quantity have the same direction

  
• Factors that shift the supply curve to the right include:

  • Decreases in cost of production
  • Introduction of new technology increasing productivity and lowering average cost
  • Lower indirect taxes like VAT
  • Government subsidies leading to lower cost of production
  • External shocks such as world events, weather, or government actions
• Equilibrium price is where demand and supply are equal

  
• At market equilibrium, demand equals supply at a price of $5 per unit
• Disequilibrium occurs when demand does not equal supply, leading to either a shortage or surplus
• The equilibrium price is where the supply and demand curves intersect, with no shortage or surplus of rice at this price

  
• At a price of $5 per unit, the quantity of rice supplied is 100 units and the quantity demanded is also 100 units

  
• A shift in the demand curve from D1 to D2 indicates increased demand for rice due to factors like population increase, higher incomes, or changes in consumer preferences

  
• This shift causes the equilibrium price to rise from P1 to P2 and the equilibrium quantity to increase from Q1 to Q2

  
• This shift causes the equilibrium price to fall from P1 to P2 and the equilibrium quantity to increase from Q1 to Q2

  
• The demand curve is downward sloping, indicating that as the price of rice increases, the quantity of rice demanded decreases

  
• The supply curve is upward sloping, indicating that as the price of rice increases, the quantity of rice supplied increases

  
• At the equilibrium price, the quantity of rice demanded is equal to the quantity of rice supplied

  
• Moving from market disequilibrium to market equilibrium:

  • At a price of $8, there is excess supply: supply > demand, causing price to fall until it reaches equilibrium
  • At a price of $2, there is excess demand: demand > supply, causing price to rise until it reaches equilibrium
• Causes of changes in equilibrium price and quantity due to shifts in demand and supply curves:

  • Consumers having higher income leads to increased demand, shifting the curve to the right, resulting in a new equilibrium with higher price and quantity
  • Producers facing higher production costs lead to decreased supply, shifting the curve to the left, resulting in a new equilibrium with higher price and lower quantity
• A demand curve shows the relationship between the price of a good and the quantity consumers are willing to buy, with a downward slope indicating that as the price increases, the quantity demanded decreases due to consumers having less money to spend on other goods

  
• Price elasticity of demand (PED) measures the responsiveness of quantity demanded to changes in price
• Determinants of price elasticity of demand:

  • The number of substitute products: more substitutes lead to elastic PED, while fewer substitutes lead to inelastic PED
  • The period of time: short run and peak time result in inelastic PED, long run and off-peak time result in elastic PED
  • The proportion of income spent on the product: a large proportion leads to elastic PED, a small proportion leads to inelastic PED
• Types of products affect PED:

  • Luxury goods have elastic PED
  • Necessities, brand loyalty, and addictive products have inelastic PED
• Durability of products:

  • Durable products have inelastic PED
• Limitations of PED:

  • Difficult to calculate
  • Time-consuming
  • The value of PED changes over time
• Relationship between PED and total revenue:

  • Elastic PED: as price increases, demand decreases by a larger proportion, leading to decreased total revenue
  • Inelastic PED: as price increases, demand decreases by a smaller proportion, leading to increased total revenue
• Income elasticity of demand (YED) measures the responsiveness of quantity demand to changes in income

  
• Income elastic demand: YED > 1
• YED > 1: Luxury goods - demand for luxury goods increases by a larger proportion when income rises
• 0 < YED < 1 or YED = 0: Necessity goods - essential for living, e.g., food and medicine
• YED > 0: Normal goods - demand for normal goods rises when income rises, e.g., cloth and shoes
• YED < 0: Inferior goods - demand for inferior goods rises when income falls, e.g., instant noodles
• Businesses can use knowledge of YED to predict sales and adjust production scale, for example, during a recession, firms selling inferior goods are likely to have higher sales and should increase production scale to meet higher demand
• During a boom economy, people are likely to have higher income, so firms should switch to selling normal/luxury goods to gain higher sales