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Chapter 2A Price Theory, Access Ch2A notes here! https://drive.google…

- - - - How do producers produce:
        In a free market system, competition forces firms to use the least cost
        combination of inputs to produce a given level of output.
      - For whom to produce: In a free market system, the distribution of finished products to consumers is based on consumers' ability and willingness to pay for the market price for the product.
        
        Dollar voting
      - What & how to produce: In a free market system, consumers indicate their preferences by the price they are willing to pay for various goods and services. The prices signal to producers what goods are demanded by consumers. (Consumer sovereignty)
      - Private Ownership of Property
      - Freedom Of Choice And Enterprise
      - Pursuit Of Self-Interest
        
        Individual pursuit of self-interest leads to the maximum good for society.
      - Competition
- - - - Change in quantity demanded (due to change in price) is illustrated by a movement along the demand curve.
      - Change in demand (due to factors not relating to price) is illustrated by a shift in the demand curve.
        
        Non-price determinants of demand
        
        (a) Changes in consumers' income
        (b) Changes in the price of related goods
        (c) Changes in consumers' expectation
        (d) Changes in consumers' taste and preferences
        (e) Changes in the number or composition of consumers
        (f) Government policies
        
        (a) As income increases, more of a good/service is demanded at the existing price so as to increase the level of satisfaction resulting from increased consumption. However, as income increases, consumers demand less of a inferior good.
        
        (b) Substitutes in consumption are goods that can be used in place of one another for the satisfaction of a particular purpose. Complements in consumption are goods used in conjunction with one another in the satisfaction of a particular purpose.
        
        Complements in consumption is not to be confused with derived demand.
        
        (c) (when consumer learns about) Change in future income of consumer or future price of a good may influence consumer's expectations and demands.
        
        (d) Advertising and latest fashion trends can affect taste and preferences of a consumer.
        
        (e）The market demand curve is the horizontal summation of the individual demand curves of all consumers in the market.
        
        (f) Government policies can influence both the purchasing powers and taste & preferences of consumers.
  - - - Note: marginal utility decreases but total utility still increases, just at a decreasing rate.
      - The price an individual is willing to pay for a unit of a good is determined by the satisfaction he derives from consuming that unit of the good (ie its marginal utility).
        
        Since the MU of a good decreases as the individual consumes more of it, the price he is willing to pay for each additional unit of the good also decreases.
- - - - Change in quantity supplied (due to change in price) is illustrated by a movement along the supply curve.
      - Change in supply (due to factors not relating to price) is illustrated by a shift in the supply curve.
        
        Non-price determinants of supply
        
        (a) Changes in the cost of relevant resources
        (b) Changes in the price of related goods
        (c) Nature, 'random shocks' and other unpredictable events
        (d) Expectation of future price changes
        (e) Changes in technology
        (f) Changes in the number of sellers
        (g) Government policy - Indirect taxes and indirect subsidies
        
        (c) Weather and diseases affecting farm output, wars affecting the supply of raw materials, the breakdown of machineries, industrial disputes, earthquakes, flood, etc. These will cause a fall in the supply of goods and services.
        
        (d) If price of a good/service is expected to rise, producers may temporarily reduce the amount they sell and build up their stocks to release them on the market when the price does rise.
        
        (e) If a more efficient technology is discovered, production costs will fall. Supply will therefore increase.
        
        (g) An indirect tax levied on the product will shift the supply curve upwards. When an indirect subsidy is paid to producers, the supply curve will shift rightwards.
- - - - (refer to example on pg35 of ch2A notes)
    - - Producer surplus is the difference between the price that producers in the market are prepared to sell their good or service and how much they actually receive.
        
        (refer to example on pg37 of ch2A notes)