Topic 3 Economics

Overall notes:
★ Schedules in economics can be graphed on a table

Law of Demand:
★ Price of a product is inversely proportional to the quantity demanded
★ Changes in QUANTITY demanded:
○ This is movements along the curve
○ It is only related to the price related factors

★ Changes in demand:
○ Would be the whole curve shifted
○ It is related to factors other than price

○
 ○ Factors affecting demand:
■ Prices of complements and substitutes
● If the price of a complementary good increases, demand falls
● If the price of a substitute good decreases, demand falls
■ Individual Income
● Demand increases as individual income increases, unless it is an
inferior good
● Inferior goods: Any good whose demand decreases as income
increases
○ eg. junk food
■ Individual tastes & preferences
■ Expectations
● A person’s expectations of the future may affect the demand
■ Changes in population, demographic, income distribution & technology

Law of Supply:
★ If the price of a good or service increases, then the quantity supplied would increase and
if the price of a good or service decreases, then the quantity supplied would decrease,
therefore supply is proportional to supply.
★ Changes in QUANTITY supplied:
○ This is only related to price-related factors
○ Only changes along the curve

○
★ Changes in supply
○ Changes that occur due to factors other than price
○ Shifts the whole curve
 ○
○ Factors affecting supply:
■ Cost of production
■ Price of other goods & services
● Prices of complementary goods
○ If the price of complementary good increases, then
demand would decrease, therefore supply would decrease
● Prices of substitute goods
○ If the substitute goods increase, a producer would supply
more.
■ Number of suppliers
● If there are more suppliers in a market, then a firm would supply
less of a good or service unless demand for the good or service
increases
■ Expected future prices
● If the expected price of a good or service would increase in the
future, then a firm would temporarily decrease its supply to get
more revenue in the future
○ They do not want to waste current supply on the current
lower prices
■ Technology
● Technological improvements would increase supply

Market Equilibrium:
● Where supply and demand meet
● How does a market reach equilibrium using a diagram?
● When there is a shortage, consumers drive equilibrium
● When there is a surplus, suppliers drive equilibrium
○ They lower the price to increase demand because they have too much
Alternatives to market solutions - role of government
Price Ceiling & Price Flooring

● Price Ceiling is the maximum price that the is allowed in a market

○ Designed to help the consumers
○ Sometimes this could lead to shortages which would lead to illegal activity
○ Ceilings would lead to a shortage to occur because the price is lowered, this
would increase the quantity demanded.
● Price Flooring is the minimum price that is allowed in a market
○ Designed to help producers
○ Ceilings would lead to surpluses because suppliers would naturally produce more
when the price of a good is higher, but quantity demanded would be lowered.
○ To get rid of the excess, they would remove the excess supply as aids
○ They will dump the excess stock to an overseas market

Market Failure
● Public Goods
○ Goods that a private firm would not generate because they would not get profit
○ Two characteristics of a public goods:
■ Non-exclusivity
● A good is a public good if an individual is still able to use a good
even if they are not able to pay for it
■ Non-rivalry & shared consumption
● Consumption of a good doesn’t prevent another individual from
using a good
○ Roles of public goods:
■ The free market aims to generate profit for their owners
■ Private firms can not gain profits from public goods, so private firms
cannot gain profit for it
 ● Merit Goods & Demerit Goods
○ Goods that private firms would produce but would not produce enough of it (e.g.
private schools)
○ Merit goods are goods that are produced when
○ If a government wants a private firm to produce more a merit good, they may:
■ Provide the private sector with subsidies
■ Reduce taxes
○ If a government wants a private firm to produce less of a demerit good, they
would:
■ Tax them more
● Externalities
○ The benefits that result from an individual consuming a good or service from a
third party, who is not involved in the consumption of a good or service. (e.g.
education)
○ Negative externalities are the disadvantages that are created from a third party
that does not participate in the consumption of a good or service (e.g. smoking)

Price Elasticity
Price elasticity: The responsiveness of demand and supply to changes in the price.

● Price elasticity can be calculated with the total revenue method / total outlay method.
○ Total revenue = Q*P
○ Inelastic
■ When price increases & total revenue increases
■ When price decreases & total revenue decreases
○ Elastic
■ When price increases & total revenue decreases
■ When price decreases & total revenue increases
● If the coefficient of elasticity
○ is less than 1, then the price is inelastic
○ if it is equal to 1, then it is a unit elastic
○ if it is higher than 1, then it is elastic.

Elasticity in demand:

● Factors:
○ Time frame:
■ Elasticity of demand increases over the long term
○ Durability:
■ More durable goods are more inelastic
○ Addictiveness:
 ■ More addictive goods and services are more inelastic
○ Necessities vs luxuries:
■ Necessities are less elastic
■ Luxuries are more elastic
○ Existence of close substitutes
■ If there are more close substitutes, then people are more responsive
■ If there are less close substitutes, then people are less responsive
○ Proportion of income spent on goods
■ If it takes a larger proportion of an individual’s income, then individuals
are more responsive
■ If it takes a smaller proportion of an individual’s income, then they are less
responsive