AS - ECONOMICS (9708) MICRO : CHAPTER 2 Demand, Supply and Equilibrium Topics Topic 1: Demand Topic 2: Supply Topic 3: Market Equilibrium Topic 4: Consumer and Producer SurplusTOPIC L: DEMAND ee rarded as the syllingness and ability of consumers iy, abilitY” Definition | Demand: It is rega aervices at given prices over a certain period of time. The w gness and at fective demand and separate i fFom a wank OF desire high ded falls as PrIce> 1, Law of Demand Jationship with Definition: If other things do not change ¢. ceteris paribus, quantity deman rises and vice versa. This marks ‘that demand has an inverse (i.e. negative) rel price. pie par Quy PY QUt 2. Demand Curve ‘tion: It is a curve that shows relationship between price and quantity demanded of 2 product. It helps to highlight the inverse relationship between price and quantity demanded. Taking the price on y-axis and quantity demanded on x-axis, @ downward sloping (-Ve sloped) curve is known as a demand curve: 4) ens curve eran nds conser rie of chocolate brs (9) Geeuaeee paeiw quantity of chocolate bars per week) Demand Schedule Demand Curve 3. Market Demand Definition: It i the sum of all individual demand at a given price of a product. Itcan be obtained by adding all the individual demand curves. It is usually flatter than induvial demand curves, Pe |] () Demand of consumer A {b) Demand curve of consumer 3 {0 Market demand i 2 re Ps) i s s i os 7 4 => So yieson ors ax panty ecole any of chats ori tian ‘quantity of chocolate bars (thousands per week) en perme) us fper weeNOLAICHO ANON MS — CAVE YB 4, Determinants of Demand. _Other than price there are seve Wclorn that affect the level of quantity dermandeds Dexeription ae Higher the income, higher the demand, This is only valid Tor normal goods like ears, quality clothing, housing etc, However, i should be noted that yan income increases demand for inferive gods fall. These are goods whose demand decrease as the income increase. Example: Poor quality clothing, second hand po | phon oe 2. Price of substitutes stitutes are alternatively demanded goods. Example Pepsi and al ____| Coke. If price of Pepsi goes up, Qd for coke will go up. 3. Price of complements | Complements are jointly demanded goods like car and petrol. IF | price of petrol goes up, Qd for cars would fall. ng | If level of advertisement goes up, Qd in likely to increase since more consumers would be informed about the product and would be persuaded to buy the product. If sales tax increases on a product it would make it expensive, hence reducing the demand, on the other hand if govt. offers subsidy on a product like electric cars that would make them aper hence demand would increase. 6)State of the Feonomy | If the economy is booming it is likely to increase the demand for : goods since consumers would have money to spend on goods and services. However, if the economy is in a recession consumer’s incomes are falling and they lack confidence in the economy ___| hence reducing demand, thions and Taste | Ifthe product is in fashion the quantity demanded would go up. Examples include smact watches and smart phones are in fashion hence the demand goes up. However, if the product is out of fashion the demand would fall. Example: Old clothing designs. 4, Level of advei 5. Government poli 5. Movement and Shift in Demand fin A a ~A Change in Price | Expansion and Contraction A change in price causes a movement along the same demand curve. A price decrease gauses an expansion where as a price increase causes a contraction on the demand curve, eet X1804 AaAS/MICRO— [NOTES] — CHaPT = Changes in Non-price factor When the demand for a product i Ql ds Shift inwards and ontwar i : ee due to some non-price factors (c.g, fashion, income, Price of substitutes ete.) itis known as shift of demand curve. Ifthe demand increases the demand curve shifts rightwards and ifthe demand decreases the demand curve shifts leftwards, 6. Snob Effect Definition: For some goods, a concept known as the snob eff upward sloping. This is usuall consumption and where his luxury houses etc, may lead to in the case of luxury brands that are used to conspicuous igh price leads to more status symbol. Example: Rolex watch, yand curye (9 03041122845 VEL: ECONOMICS (9708) | SNEEM | AS/ LE) AATIK TAS /LEN4 AICRO— NOTES} — CHAFTER2 bility of sellers to sell goods arded as the willingness and the Mes over 4 period of time, “NY of Supply ion: If otha Supplied at hig Wings do not change i. paribus, higher would be the quantity ther prices and view versa, ‘This mars that supply has a positive relationship with price, po yu PY Qs / Ph Ooh 2. Supply Curve Bees | A Defation Its a curve that shows relationship between price and quantity supplied of a Product. Taking the price on the y-axis and quantity supplied on the x-azcis, an upward sloping (‘ve sloped) curve is known as supply curve. es ee 5 100 ‘ / 4 100 4 3 409 » 7 2 309 y D 200 On ta a tea cap hacherveie) able? Supply sce fum 3. Market Supply Definition: It is regarded as the sum of all producer’ can be derived from adding all the sellers supply curve. supply at a given price of a product. It Supply offi. (0) Supply offen (Mace ope Ps 54 supplies ofether Sor scomercnOn 0 00) Oe oe rue quantity of chocolate quantity of chocolate sine bars per week) bars (per week) price of chocolate bars (3) =4. Determ nts of Suppl AS / MICRO — [NOTES] — CHA} bor! Description Factor, 1” Fy, Cost of Production sere price ses, production cowts increase, prodvetion becomes Tess prada ot of prodetion fl, rocion becomes more ta dhe fm produces more: the noply curve sis (othe ht 7 Technology abe ved technology lowers costs of production, thus making the right. In the (less likely) event that firm uses a less productive technology, the supply curve shifts leftward. costs of production increase and 3. Competitive supply Competitive supply of two oF more products refers to production of on® or the other by a firm; the goods compete for the use of the same resources, and ‘producing more of one moans producing Tess atthe other: For example, a farmer, who can grow wheat of cor, chooses to grow wheat. Ifthe price of com increases, the farmer may switch t0.€om) prodlction as this is now more profitable, resulting in a fall in wheat supply | Snd'a Feftward shift of the supply curve. A fallin the price of corn results 4, Joint supply Toint supply of two or more products refers to production of goods that are derived from a single product, so that it is not possible to produce more of cone without producing more of the other. For example, butter and skimmed milk are both produced from whole milk; petrol (gasoline), diesel oil and heating oil ae all produced from crude oil "This means that an incrense inthe price of one leads to an increase in its quar c Ay ofthe of product(s) 5. Producer (Firm) expectations If firms expoot the price of thelr product to His their curent supply from the market (not offer it for sale), with the expectation that they will be able to sell it at the higher price in the futures in this case, a fall in supply in the present results, and hence a leftward shift in the supply curve. Ifthe expectation is thatthe price of their product will fall, they inerease their supply in the present to take advantage of the cunet higher pie, and ence there ghar shit in the supply taxes on profits) Firms jet ties asi they were oats of prodicion, Therefore, the etme ee increase in production costs, so supply will fall and the su i to the left. The elimination of a tax : oa ora decrease in an existing tnx represents a fallin product increases and the supply curve shifts tothe right" S088 Supply 7. Subsidies ‘existing subsidy is equivalent toa fallin production costs, anes a rightward shift in the supply curve, while the eliminat and ives rise to decrease in.a subsidy leads to a leftward shift in the supa ne esidY oF a 8. The number of firms “An increase in the number of firms produci supply curve i : lucing the good and gives rise to a rightward shift in the su nereases suppl e supply curve; ipply a decrease in the numberof firms decreases supply sng shift. This follows from the fact that market s Produces a leftward 9, Shocks", or sudden unpredictable events individual supplies. upPly is the sum of all ‘Sudden, unpredictable events, called "shocks" ‘weather conditions in the ease of agriculrursl poo Tee 8 PPLY, Sue made catastrophes. Products, war PY Such as AATIK TASNEEM | AS /LEVEI + OF natural pe, svelte oN, ral/man. 4, Eck inode 0° Ain drop Rha nr, IL: ECONOMICS (9708) | 03041 3999 ig 5 Si =© Movement and shi i ft in Supp} 1. A Change in Price) py Pee” A change in price set Expansion ang Contraction . eS A Movemen . . contraction, where as a price increane along the same supply curve. A price decrease causes a © causes an expansion in the demanal curve. “sarc, Suppl “change qui upped see 2. Changes in Non-price factors | Shift inwards and outwards When the demand for a product changes due to some non-priee factors (cg. cost of production, weather, taxes, subsidies etc.) it s known as shift of supply curve. If the supply increases the supply curve shifts Tightwards and if the supply decreases the demand curve shifts leftwards. D1_Ashft of the supply curve, caused by a change ina determina: of wpply is called a ‘charge in supply" FR Fae PPE ia hnAS/ MICRO — [NOTES] — oy oT LQUSLIBRIUM : lace, In ordet TOPICS MARKE t se ea that allows transactions 1 usd Piss no = iti ee ribet commodities are traded, or the buyers words, it is an arrang e different forces, such that Definition | Equilibrium: It is defined as a state of ‘balance between ° there is no tendency to change. i: e not equal. Definition [Disequilibrium A situation where demand and supply ar nates 7 Refi is equal to quantity supplied, are in ba ‘€1s no there is market equilibrium; the forces of supply and demand are in balance, and ther tendeney for the price to change. | Market Equilibrium: When quantit Qa=Qs Graphically it is a position where demand curve intersects supply curve. price of chocolate bars (S) —eauiiteiim quantity 46 8.10 2 W quantity of chocolate bars (thousands per week) on 1. CHANGES IN EQUILIBRIUM ‘The equilibrium can ‘chitigé dué'to only THREE changes. 1, Demand shifts 2. Supply Shifts 3. Simultaneously demand and supply shifts (6) more (u,) pall (Meas)1, Demand Shifts Rises (Demand Shifts Outwards) —_| (2). Increase in demand =e - : Decrease in demand finat . - equilibrium - Pr ~ NS final +8 inital "equilibrium + equilibrium A b Dz 0 i a Q In diagram 1 suppose consumer income increased. This caused! the demand curve to shift ¢ needed to be increase. This from D1 to D2. This caused a shortage at price P1, hence pr establishes the new equilibrium at point C at Price P2. ged the demand curve to shift from DI nti] demand fashion. This ca 1, hence price needed to be decreased 1 brium at C, at Price P3. In diagram 2 suppose a good is out o! to D3. This cause a surplus at price P equaled to supply. This establishes the new equ 2. Supply Shifts i Rises (Supply Shifts Outwards) Falls Supply Shifts Inward: fp} Increase nsupply Decrease in supply Stn 751 Spat P . Z P < S nee le ve 4 oe rat A oe word enn " AN Z o a & @ 2 Qa a mo Indiagram 1 suppose govt. increased subsidies. This use! the supply curve to shif from So teS1_ This caused a surplus at price Po, hence price needed to be decreased, This establi the new equilibrium at El at Price Pl. In diagram 2 suppose fuel costs increased. This caused the supply curve to shift from So to ‘$2. This cause a shortage at price Po, hence price needed to be increases until demand equaled to supply. This establishes the new equilibrium at E2, at Price P2, i 3, Simultaneously demand and supply shifts : AATIK TASNEEM | AS / LEVEL: ECONOMICS (9708) | 03041122845, alAS / MICRO — [NOTES] — Chap Prce ° eo vanity Sometimes in an economy both the demand and supply shift simultaneously. Example: The od in pply to government gave a subsidy on the production of electric cars, which rest shift from So to S2. Furthermore, the advertisement of electric cars and the consumer awareness increased about environmental friendly cars resulted in the demand to shift from Do to D1. This resulted in the equilibrium quantity to shift from Qo to Q*. 2. THE WORKING OF THE PRICE MECHANISM... Definition | Price Mechanism: Price mechanism refers to the system where the forces of demand and supply determine the prices of commodities and the changes therein. It is the Buyers and sellers who actually determine the price of a commodity. A concept of invisible hand which operates in-a competitive market through the pursuit of self-interest to allocate scare resources in society’s best interest. There are THREE main functions of price mechanism: S Functions — | Description Dae ae ae ee T. Rationing | Due to'scarce resources firms increase prices to eliminate excess of demand. he increase in price discourages. demand and conse i For example, plane ticket prices might rise as seats are sold, because spaces are running out, This is a disincentive to some consumers to purchase the tickets, which rations the tickets. The rationing function of a price rise is associated with a contraction of demand along the demand curve. 2 Signaligg_ Price changes send contrasting messages to consumers and producers about an Baw whether to enter or leave a market. Rising prices give a signal to consumers 4" | to reduce demand or withdraw from a market completely, and they give a nore | signal to potential producers to enter a market. Conversely, falling prices give fe 4 positive message to consumers to enter a market while sending a negative — | signal to producers to leave a market. The signaling function is associated with shifts in demand and supply curves. Incentives } An incentive is something that motivates a producer or consumer to follow a course of action or to change behavior. Higher prices provide an incentive to existing producers to supply more because they provide the possibility or more revenue and increased profits. The incentive function of a price rise is associated with an extension of supply along the existing supply curve. 4ON AS. ry TS With a stable S/HCRO— ores) —cuaeren ices supply CqUIlibE : ateach TIM, Whore Price. The price ig no te Price, Thies 18H equals supply A supply shock Price, dem; Teed up t eS AN exces, sah ce, d NOW price (p, “Sees of demand at the q "atoning efter and oY Me brought into i Where the market clears Ati iy Al an extension OFsupply (the imeem us! contraction of demand (the Initial equitit,; 2 ium ive effect, Pee Roving and incentive tects recut t i 1 I Q uietay als, ether for existing firms to introduce better 8¢5 the supply curve to ‘ork effectively through a combination of In conclusion, the price mechanism is said to w rationing, incentives and signals. AATIK TASNEEM | AS / LEVEL: ECONOMICS (9708) | 03041122845AS / MICRO — [NOTES| — CHA pLUS TOPIC 4: CONSUMER AND PRODUCER SURPL 1. CONSUMER SURPLUS + price consumers Definition | Consumer Surplus: Consumer surplus is defined as the Seis js shown in the are willing to pay for a good minis the price actually paid. CONUS Try curve, and the diagram below as the shaded area between the demand (oF marginal be equilibrium price Pl 2. PRODUCER SURPLUS Definition | Producer Surplus: Producer surplus is defined as the price received by firms for selling their good minus the lowest price that they are willing to accept to produce the good. The lowest price they are willing to accept represents the firms" cost of producing an extra unit of the good (or marginal cost) and is shown by the supply curve. The logic behind this is ‘ery simple: the lowest price that the firm is willing to accept must be just enough to cover its cost of producing each extra unit; this cost is known as marginal cost, abbreviated as MC. Producer surplus is shown as the area above the firms” supply curve and below the price received by firms, P2, which is determined in the market, DTZ ITE Mowe ice _ | PY Procecer suctus | | | ‘Quan supped M | AS/ LEVEL: ECONOMICS (9708) | 03041122845 AATIK TASNEE! a crt =ee ee ee ben wa oo bine thee aby: poy, dag MN Yas way, " A oo 7 " “Mev congunne | ine wnnar | lini », pine aan prodcar " guia apis 7 TA YA atid " orkid wg 1, inna ", "% U1 0 0 rand Producer surplus eluanges with Mie market price Chine In Produce 5 Suurple In Consumer San plus Hones Nes 5 i l ZA "4 4 7 FL PO senate nest 0 o u rs amainy sant that when the the producer Fron the diageann above we c thal when f rustle price shifts from 02 to From the di the market price shifts from PL to P2. the consumer suuphis shrinks stu plursinevennc, ‘The increase is shown by the jey eopion, Market Price 4° Consumer Suuphis Minkel Price > Producer Surplus 7 Market Price ‘Consumer Surplus v Market Price ++ Consumer Surplus AATIK ‘TASNEEM | AS / LEVEL: ECONOMICS (9708) | O04 L122845