The Price System and the Micro-economy
Price Mechanism
The means of allocating resources in a market economy
Market
It is a place where buyers and sellers’ trade
Demand
Demand is the willingness to pay a price for a specific good or service
National Demand: It is speculative and it is not backed up by the ability to pay
Effective Demand: Demand that is supported by the ability to pay
Demand Curve: It shows the relationship between the quantity demanded and the price of a product
Demand Schedule : The data from which a demand curve is drawn
Market Demand: It is the total quantity demanded across all consumers in a market
Factors influencing Demand
- Income
- Price of a product
- Fashion and tastes
- Taxes
- Subsidies
There are 2 types of goods :
- Normal goods: As demand of goods increases income increases
- Inferior goods: As demand of goods decrease income increases
Supply
Supply describes the total amount of a specific good or service that is available to consumers
Supply Curve: It is graphic representation of the relationship between product price and quantity of product
Supply Schedule: The data from which a supply curve is drawn
Factors Influencing Supply
- Costs
- Size and Nature of the industry
- Change in price of other products
- Government Policies
- Climate
- Technology
Elasticity
It used to measure the change in the aggregate quantity demanded for a good or service
Elastic: When the change in demand or supply is greater than the change in price
Inelastic: When the relative change in demand or supply is greater than the change in price
Perfectly Elastic: All the products produced are sold at a given price
Perfectly Inelastic: Change in the price does not affect the quantity demanded
Price elasticity of Demand
It is an economic measure of the change in the quantity demanded or purchased of a product in relation to its price change
PED = % change in quantity demanded of a product / % change in income
Unit Elasticity: The change in price is the same as the change in quantity demanded
Factors affecting PED
- Time
- Durability
- Range and attractiveness of substitutes
Income Elasticity of Demand
Income elasticity of demand measures the responsiveness of demand for a particular good to changes in consumer income
YED = % change in quantity demanded / % change in income
Cross Elasticity of Demand
The cross elasticity of demand is an economic concept that measures the responsiveness in the quantity demanded of one good when the price for another good change.
XED = % change in quantity demanded of product A / %[MS1] change in price of product B
Price Elasticity of Supply
It measures the responsiveness to the supply of a good or service after a change in its market price
PES = % change in quantity supplied/ % change in price
Factors Influencing PES
- Time
- Availability of resources
- Number of firms in the market
Equilibrium and Disequilibrium
Equilibrium: Economic equilibrium is a condition or state in which economic forces are balanced.
Disequilibrium: Economic disequilibrium is a situation where demand and supply are not equal
Equilibrium Price: Price where demand and supply are equal
Equilibrium Quantity: It is the amount that is traded at the equilibrium price
Causes of shifts in the Demand Curve
- People’s income
- Availability of the products
- Price of the products
- Fashion and Taste
Causes of shifts in the Supply Curve
- Costs associated with supplying the products
- The size, structure and nature of the products
- Government policies
- Climate
Consumer Surplus and Producer Surplus
Consumer surplus: The difference between the value a consumer places on units consumed and the payment needed to actually purchase the product
Producer surplus: The difference between the price a producer is willing to accept and what is actually paid