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Modul Lab 2

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Asep Jamaludin
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4 views

Modul Lab 2

Uploaded by

Asep Jamaludin
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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LAB 2

DEMAND, SUPPLY & MARKET EQUILIBRIUM, AND ITS


APPLICATIONS (CH 3&4)

● All societies face the economic problem, which is the problem of


how to make the best use of limited, or scarce resources. The
economic problem exists because, although the needs and wants of
people are endless, the resources available to satisfy needs and
wants are limited.

● Resources are limited in two essential ways:


- Limited in physical quantity, as in the case of land, which
has a finite quantity.
- Limited in use, as in the case of labour and machinery,
which can only be used for one purpose at any one time.

● Simple explanation of the economic problem:


- What to Produce?
Societies have to decide the best combination of goods and
services to meet their needs. For example, how many
resources should be allocated to consumer goods, and
many resources to capital goods, or how many resources
should go to schools, and how many to define, and so on.

- How to Produce?
Societies also have to decide the best combination of
factors to create the desired output of goods and services.
For example, precisely how much land, labour, and capital
should be used to produce consumer goods such as
computers and motor cars.

- For whom to Produce?


Finally, all societies need to decide who will get the output
from the country’s economic activity, and how much they
will get. For example, who will get the computers and cars
that have been produced? This is often called the problem
of distribution.

● Circular Flow Diagram or circular-flow model is a graphical


representation of the flows of goods and money between two
distinct parts of the economy:
- Market for goods and services, where households purchase
goods and services from firms in exchange for money;

- Market for factors of production (such as labour or capital),


where firms purchase factors of production from
households in exchange for money.

● Demand
The law of demand indicates a negative relationship between price
level and quantity of demand in a period, so when price level
increases, the quantity of demand decreases, vice versa.

Quantity demanded may change due to changes in the price level


that causes movement along the demand curve, while the demand
for most goods may change due to changes in income, wealth,
tastes, prices of other goods, and expectations that caused a shift in
the demand curve.

● Supply
The law of supply indicates a positive relationship between price
level and quantity of supply in a period so when price level
increases causes quantity of supply to increase, vice versa.

Quantity supplied may change due to changes in the price level that
causes movement along the supply curve, while the supply for most
goods may change due to changes in cost of production, and prices
of related goods that caused a shift in the supply curve.

● Market Equilibrium
Market equilibrium occurs when the quantity demanded equals the
quantity supplied which results in equilibrium price level and
equilibrium output.

When the quantity demanded exceeds the quantity supplied, it will


cause excess demand (shortage). This could be caused by a price
ceiling, where the price level is below the equilibrium price.

When the quantity supplied exceeds the quantity demanded, excess


supply (surplus) will occur. This could be caused by a price floor,
where the price level is above the equilibrium price.

● Consumer surplus is the difference between the maximum amount


a person is willing to pay for a good and its current market price.
The area is below a demand curve and above a price level.

● Producer surplus is the difference between the full cost of


production for the firm and the current market price, the area is
above a supply curve and below a price level.
● The deadweight loss (DWL) is the net loss in consumer surplus
and producer surplus due to reduced production or excess in
production.

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