Business & Technology – Study Notes Chapter 04: External Environment - Microeconomics
CHAPTER 04
THE EXTERNAL ENVIROMENTAL:
MIRCOECONOMICS FACTORS
LO # LEARNING OBJECTIVE
PART A – MICROECONOMICS
LO 1 DEMAND AND ITS DETERMINANTS
LO 2 SUPPLY AND ITS DETERMINANTS
LO 3 “MOVEMENT” AND “SHIFT” IN DEMAND CURVE
LO 4 MARKET EQUILIBRIUM/LAW OF PRICE
LO 5 PRICE ELASTICITY OF DEMAND (PED)
LO 6 CROSS ELASTICITY OF DEMAND (XED)
LO 7 DETERMINANTS OF ELASTICITY OF DEMAND
LO 8 ECONOMIC RESOURCE (FACTORS OF PRODUCTION)
LO 9 TYPES OF COST AND COST CURVES
TY
LO 10 LAW OF DIMINISHING RETURN
LO 11 RETURN TO SCALE
LO 12 TYPES OF REVENUE AND REVENUE CURVES
LO 13 FIRM’S EQUILIBRIUM AND ITS TYPES
LO 14 PERFECT COMPETITION
LO 15 IMPERFECT COMPETITION
21
,Business & Technology – Study Notes Chapter 04: External Environment - Microeconomics
Introduction to Microeconomics
Microeconomics – Studies how individuals, firms, and industries make economic decisions. It
focuses on specific goods, services, markets, and prices.
Market – A place where goods and services are sold.
Industry – A group of firms that produce the same good or service.
Microeconomics explains how markets and industries work, and how prices and output levels are
decided. It also focuses on how individual firms set their prices and outputs.
LO 1: DEMAND AND ITS DETERMINANTS:
Demand:
Demand is the quantity of a good which buyers are willing and able to buy at different price levels.
Study Tips
1. Needs are basic requirements of a society i.e. food, cloth and shelter. Wants are desires of society.
Demand = Needs/Wants + Purchasing Power
2. Demand by a single individual is called “Individual Demand”. Sum of all the individuals’ demands for a
particular good or service is called “Market Demand”.
Determinants of Demand:
1. Price of the product:
❑ Price is a primary determinant of demand. If price of a product decreases, its quantity
demanded increases (and vice-versa).
2. Income levels:
❑ If income of consumers increases, demand for normal goods increases (and vice-versa).
❑ If income of consumer increases, demand for inferior goods decreases (and vice-versa).
3. Population or Number of Buyers:
❑ If number of buyers in a market increases, demand for the product will also increase
(and vice- versa).
4. Future expectation about Prices and Shortage
❑ If increase in price of product is expected, current demand for the product will increase
(called pre-emptive purchase).
❑ If a shortage of product is expected in future, current demand for the product will increase.
5. Tastes or Preferences:
❑ Our tastes and preferences change due to change in culture, fashion, special occasions,
weather or season. This will cause change in demand for a product.
6. Price of Related Goods:
❑ If price of complement good increases, demand for the main product (under examination)
decreases.
❑ If price of substitute good increases, demand for the main product (under examination) increase.
22
, Business & Technology – Study Notes Chapter 04: External Environment - Microeconomics
Independent and Related Goods: Independent (or Unrelated) Goods:
Independent Goods are those goods for which demand (or price) of one good does not affect demand of other good
e.g. Shoes and fan, Chair and watch, Pen and Coffee.
Related Goods:
Related goods are those goods for which demand (or price) of one good affects demand of other good. There are two
types of Related Goods i.e.
1. Complementary/Complement Goods: (or goods in ‘joint demand’)
These are goods which are consumed together. Increase in demand of one good will cause increase in demand for
other good. e.g. cricket bat and cricket ball, tea and sugar.
2. Substitute goods/Competitive Goods: (or goods in ‘competitive demand’)
These are goods which satisfy the same need. Increase in demand of one good will cause decrease in demand for
other good e.g. tea and coffee, Canon camera and Kodak camera, mutton and chicken.
LAW OF DEMAND (EFFECT OF PRICE ON DEMAND)
Description of the Law of Demand:
If price of a product increases, its quantity demanded decreases; and if price of a product decreases,
its quantity demanded increases (ceteris paribus).
Study Tips
“Ceteris Paribus” means assumption that other factors/determinants remaining same/equal/
constant/unchanged.
Tabulation of the Law (i.e. Demand Schedule):
The demand schedule is a table which shows demand at different price levels.
Price Quantity Demanded
1 5
2 4
3 3
4 2
5 1
Graphical presentation of the Law i.e. Demand Curve:
The demand curve is a graph which shows demand at different price levels.
Explanation:
1. At X-axis we show Quantity Demanded, and at Y-axis, we show Price.
2. The line D is called Demand Curve.
3. Slope of demand curve is negative/downward which shows inverse relationship between Price and
Quantity Demanded.
23
CHAPTER 04
THE EXTERNAL ENVIROMENTAL:
MIRCOECONOMICS FACTORS
LO # LEARNING OBJECTIVE
PART A – MICROECONOMICS
LO 1 DEMAND AND ITS DETERMINANTS
LO 2 SUPPLY AND ITS DETERMINANTS
LO 3 “MOVEMENT” AND “SHIFT” IN DEMAND CURVE
LO 4 MARKET EQUILIBRIUM/LAW OF PRICE
LO 5 PRICE ELASTICITY OF DEMAND (PED)
LO 6 CROSS ELASTICITY OF DEMAND (XED)
LO 7 DETERMINANTS OF ELASTICITY OF DEMAND
LO 8 ECONOMIC RESOURCE (FACTORS OF PRODUCTION)
LO 9 TYPES OF COST AND COST CURVES
TY
LO 10 LAW OF DIMINISHING RETURN
LO 11 RETURN TO SCALE
LO 12 TYPES OF REVENUE AND REVENUE CURVES
LO 13 FIRM’S EQUILIBRIUM AND ITS TYPES
LO 14 PERFECT COMPETITION
LO 15 IMPERFECT COMPETITION
21
,Business & Technology – Study Notes Chapter 04: External Environment - Microeconomics
Introduction to Microeconomics
Microeconomics – Studies how individuals, firms, and industries make economic decisions. It
focuses on specific goods, services, markets, and prices.
Market – A place where goods and services are sold.
Industry – A group of firms that produce the same good or service.
Microeconomics explains how markets and industries work, and how prices and output levels are
decided. It also focuses on how individual firms set their prices and outputs.
LO 1: DEMAND AND ITS DETERMINANTS:
Demand:
Demand is the quantity of a good which buyers are willing and able to buy at different price levels.
Study Tips
1. Needs are basic requirements of a society i.e. food, cloth and shelter. Wants are desires of society.
Demand = Needs/Wants + Purchasing Power
2. Demand by a single individual is called “Individual Demand”. Sum of all the individuals’ demands for a
particular good or service is called “Market Demand”.
Determinants of Demand:
1. Price of the product:
❑ Price is a primary determinant of demand. If price of a product decreases, its quantity
demanded increases (and vice-versa).
2. Income levels:
❑ If income of consumers increases, demand for normal goods increases (and vice-versa).
❑ If income of consumer increases, demand for inferior goods decreases (and vice-versa).
3. Population or Number of Buyers:
❑ If number of buyers in a market increases, demand for the product will also increase
(and vice- versa).
4. Future expectation about Prices and Shortage
❑ If increase in price of product is expected, current demand for the product will increase
(called pre-emptive purchase).
❑ If a shortage of product is expected in future, current demand for the product will increase.
5. Tastes or Preferences:
❑ Our tastes and preferences change due to change in culture, fashion, special occasions,
weather or season. This will cause change in demand for a product.
6. Price of Related Goods:
❑ If price of complement good increases, demand for the main product (under examination)
decreases.
❑ If price of substitute good increases, demand for the main product (under examination) increase.
22
, Business & Technology – Study Notes Chapter 04: External Environment - Microeconomics
Independent and Related Goods: Independent (or Unrelated) Goods:
Independent Goods are those goods for which demand (or price) of one good does not affect demand of other good
e.g. Shoes and fan, Chair and watch, Pen and Coffee.
Related Goods:
Related goods are those goods for which demand (or price) of one good affects demand of other good. There are two
types of Related Goods i.e.
1. Complementary/Complement Goods: (or goods in ‘joint demand’)
These are goods which are consumed together. Increase in demand of one good will cause increase in demand for
other good. e.g. cricket bat and cricket ball, tea and sugar.
2. Substitute goods/Competitive Goods: (or goods in ‘competitive demand’)
These are goods which satisfy the same need. Increase in demand of one good will cause decrease in demand for
other good e.g. tea and coffee, Canon camera and Kodak camera, mutton and chicken.
LAW OF DEMAND (EFFECT OF PRICE ON DEMAND)
Description of the Law of Demand:
If price of a product increases, its quantity demanded decreases; and if price of a product decreases,
its quantity demanded increases (ceteris paribus).
Study Tips
“Ceteris Paribus” means assumption that other factors/determinants remaining same/equal/
constant/unchanged.
Tabulation of the Law (i.e. Demand Schedule):
The demand schedule is a table which shows demand at different price levels.
Price Quantity Demanded
1 5
2 4
3 3
4 2
5 1
Graphical presentation of the Law i.e. Demand Curve:
The demand curve is a graph which shows demand at different price levels.
Explanation:
1. At X-axis we show Quantity Demanded, and at Y-axis, we show Price.
2. The line D is called Demand Curve.
3. Slope of demand curve is negative/downward which shows inverse relationship between Price and
Quantity Demanded.
23
