Economics
Competitive markets
Markets
A market is where local buyers and sellers interact to carry out economic transactions.
- Product markets: goods & services
- Factor markets: resources
A free market is characterized by a large number of buyers and sellers who are free to own
land and capital.
Demand
Quantities of a product that consumers are willing and able to buy at various prices in a
given time period, ceteris paribus.
The demand curve is downward
sloping to reflect the law of
demand which states that:
There is an inverse relationship
between the price and the quantity
demanded of the good itself.
Determinants of demand
Price of the product
According to the law of demand, the price of the product will inversely influence the quantity
demanded for the product. This is reflected as a movement along the demand curve.
(change in quantity demanded)
Reasons for movement along curve:
1. Income effect
An increase in price of a good will cause the real income of consumers to fall, and
hence people will purchase fewer units of a normal good.
2. Substitution effect
An increase in price of a good will cause consumers to switch to cheaper substitutes,
and hence buying fewer units of the good.
Non-price factors
,A change in non-price factors will cause a shift in the demand curve, which suggests that
the quantity demanded changes at each possible price. (change in demand)
Non-price factors include:
1. Changes in income
2. Changes in prices of related goods
a. Complements - goods that are used jointly together to satisfy some particular
want or need
b. Substitutes - alternative products that satisfy similar wants or needs
3. Changes in taste and preference
4. Changes in consumer expectations
5. Government legislation
6. Changes in population size / demographics
7. Changes in weather / season
8. Other factors - eg: exchange rate
Supply
Quantities of a product that suppliers are willing and able to sell at various prices per period
of time, ceteris paribus.
The supply curve is
upward sloping to reflect
the law of supply which
states that:
There is a positive
relationship bewtweem the
price and the quantity
supplied of the good itself.
Determinants of supply
Price of the product
According to the law of supply, the price of the product will positively influence the quantity
supplied of the product. This is reflected by a movement along the supply curve. (change
in quantity supplied)
Non-price factors
A change in non-price factors will cause a shift in the supply curve. (change in supply)
,Non-price factors include:
1. Changes in cost of production
2. Changes in the state of technology
3. Changes in the number of sellers
4. Changes resulting from nature or abnormal circumstances (supply shocks)
5. Changes in the price of related goods
a. Goods in competitive supply - goods that are produced with the same
resources such that resources used in one good cannot be used to produce
the other
b. Goods in joint supply - goods that are produced jointly with the same
resources
6. Changes in producer expectations
7. Changes in government policies - eg: taxation and subsidy
<TAXES>
Indirect taxes are taxes imposed on spending of goods and services. An indirect tax has the
effect of increasing the marginal cost of production. There are 2 types of indirect tax:
1. Specific tax - tax that is levied as a fixed amount per unit sold, irrespective of the
price (upward and parallel shift)
2. Ad valorem tax - tax that is levied as a percentage of the selling price of the goods
(upward but pivotal shift)
, <SUBSIDIES>
A subsidy is a payment made by the government to producers to encourage the production
of certain goods, but not in exchange for any goods and services. A subsidy has the effect of
decreasing the marginal cost of production.
Market equilibrium
A state of balance between forces such that there is no tendency to change.
Price mechanism
The price mechanism is defined as the forces of demand and supply that determines the
allocation of resources between competing and alternative users.
Prices play dual roles; they serve as signals and incentives.
- As signals, prices communicate information to decision-makers. As incentives, prices
motivate decision-makers to respond to the information.
Eg:
- To producers: higher prices signal to consumers that there is a shortage of
smartphones in the market. The higher prices also acts as an incentive for producers
to increase the quantity of smartphones supplied.
- To consumers: higher prices signal to consumers that smartphones are expensive in
the market. The higher prices also acts as a disincentive for consumers to increase
the quantity of smartphones demanded.
This ensures that the right amount of resources is allocated to the production of this good.
Competitive markets
Markets
A market is where local buyers and sellers interact to carry out economic transactions.
- Product markets: goods & services
- Factor markets: resources
A free market is characterized by a large number of buyers and sellers who are free to own
land and capital.
Demand
Quantities of a product that consumers are willing and able to buy at various prices in a
given time period, ceteris paribus.
The demand curve is downward
sloping to reflect the law of
demand which states that:
There is an inverse relationship
between the price and the quantity
demanded of the good itself.
Determinants of demand
Price of the product
According to the law of demand, the price of the product will inversely influence the quantity
demanded for the product. This is reflected as a movement along the demand curve.
(change in quantity demanded)
Reasons for movement along curve:
1. Income effect
An increase in price of a good will cause the real income of consumers to fall, and
hence people will purchase fewer units of a normal good.
2. Substitution effect
An increase in price of a good will cause consumers to switch to cheaper substitutes,
and hence buying fewer units of the good.
Non-price factors
,A change in non-price factors will cause a shift in the demand curve, which suggests that
the quantity demanded changes at each possible price. (change in demand)
Non-price factors include:
1. Changes in income
2. Changes in prices of related goods
a. Complements - goods that are used jointly together to satisfy some particular
want or need
b. Substitutes - alternative products that satisfy similar wants or needs
3. Changes in taste and preference
4. Changes in consumer expectations
5. Government legislation
6. Changes in population size / demographics
7. Changes in weather / season
8. Other factors - eg: exchange rate
Supply
Quantities of a product that suppliers are willing and able to sell at various prices per period
of time, ceteris paribus.
The supply curve is
upward sloping to reflect
the law of supply which
states that:
There is a positive
relationship bewtweem the
price and the quantity
supplied of the good itself.
Determinants of supply
Price of the product
According to the law of supply, the price of the product will positively influence the quantity
supplied of the product. This is reflected by a movement along the supply curve. (change
in quantity supplied)
Non-price factors
A change in non-price factors will cause a shift in the supply curve. (change in supply)
,Non-price factors include:
1. Changes in cost of production
2. Changes in the state of technology
3. Changes in the number of sellers
4. Changes resulting from nature or abnormal circumstances (supply shocks)
5. Changes in the price of related goods
a. Goods in competitive supply - goods that are produced with the same
resources such that resources used in one good cannot be used to produce
the other
b. Goods in joint supply - goods that are produced jointly with the same
resources
6. Changes in producer expectations
7. Changes in government policies - eg: taxation and subsidy
<TAXES>
Indirect taxes are taxes imposed on spending of goods and services. An indirect tax has the
effect of increasing the marginal cost of production. There are 2 types of indirect tax:
1. Specific tax - tax that is levied as a fixed amount per unit sold, irrespective of the
price (upward and parallel shift)
2. Ad valorem tax - tax that is levied as a percentage of the selling price of the goods
(upward but pivotal shift)
, <SUBSIDIES>
A subsidy is a payment made by the government to producers to encourage the production
of certain goods, but not in exchange for any goods and services. A subsidy has the effect of
decreasing the marginal cost of production.
Market equilibrium
A state of balance between forces such that there is no tendency to change.
Price mechanism
The price mechanism is defined as the forces of demand and supply that determines the
allocation of resources between competing and alternative users.
Prices play dual roles; they serve as signals and incentives.
- As signals, prices communicate information to decision-makers. As incentives, prices
motivate decision-makers to respond to the information.
Eg:
- To producers: higher prices signal to consumers that there is a shortage of
smartphones in the market. The higher prices also acts as an incentive for producers
to increase the quantity of smartphones supplied.
- To consumers: higher prices signal to consumers that smartphones are expensive in
the market. The higher prices also acts as a disincentive for consumers to increase
the quantity of smartphones demanded.
This ensures that the right amount of resources is allocated to the production of this good.
