Please enable JavaScript.
Coggle requires JavaScript to display documents.
2A resource allocation: competitive markets price theory (theory of demand…
2A resource allocation: competitive markets price theory
free market key features
free of choice and enterprise (consumer sovereignty)
pursuit of self-interest
private ownership of property (own, control and dispose of land, capital and natural resources, right to the income, WRIP)
competition (price competition, insignificant share of the market, no influence on the market demand and supply)
price mechanism (how it answers three economic qns
how to produce? (least cost combination of inputs)
for whom to produce? (ability and willingness, purchasing power, dollar votes)
what and how much to produce? (price signal, divert resources, to higher price relative to costs)
theory of demand (quantity of a well-defined commodity, willing and able to buy, at a given price, during a given period of time, ceteris paribus)
law of diminishing marginal utility
beyond a certain point of consumption, as more and more units of a good or service are consumed, the additional utility a consumer derives from consuming successive units decreases.
marginal utility: additional satisfaction derived from the consumption of an additional unit of a good or service
equate the price he is willing to pay to MU
law of demand
in a given time period, the quantity demanded of a product is inversely related to its price, ceteris paribus
change in quantity demanded (due to change in price, movement along the demand curve)
change in demand (EGYPPT)
consumers' income
normal good
inferior good
necessities (rate of satisfaction is high, quickly satisfied)
luxury items (increase significantly, more than proportionately)
price of related goods
substitutes in consumption (in place, for the satisfaction of a particular purpose, in competitive demand)
complements in consumption (in conjunction with, in joint demand)
consumers' expectation on future prices
consumers' taste and preferences (advertising, latest fashion trend)
number or composition of consumers
government policies (eg. healthy eating campaign)
market demand: horizontal summation of quantity demanded across each price level of individual demand curve
derived demand
demanded not for its own sake, but for the purpose of producing another good)
different from complements where both goods are final goods consumed by the consumers
theory of supply (quantity of a well-defined commodity, willing and able to put on for sale, at a given price, during a given period of time, ceteris paribus)
change in quantity supplied (due to a change in price, movement along the supplied curve)
change in supply ()
costs of relevant resources
raw material
fuel and power
wages of labour
interest rate
prices of related goods
substitutes (same resources, in competitive supply)
complements (jointly or simultaneously produced, in joint supply)
nature, random shocks and unpredictable events
expectation of future price changes
technology
government policies: indirect taxes (shift upwards) and indirect subsidies (shift rightwards)
number of sellers
law of supply: increasing opportunity cost of additional output, increasing marginal cost of production for additional units of output, a higher price for the additional units of output)
market equilibrium
price mechanism
Supply increases: surplus (P decreases, Q decreases)
demand increases: shortage (P increases, Q increases)
demand decrease, supply increase (P decrease, Q ambiguous)
demand increase, supply decreases (P increase, Q ambiguous)
demand decrease, supply decrease (P ambiguous, Q decrease)
demand increase, supply increase (P ambiguous, Q increases)
consumer surplus (prepared to pay - actually paid)
producer surplus (actually receive - prepared to receive)