Please enable JavaScript.
Coggle requires JavaScript to display documents.
Theme 2: Markets, Theme 2.1 Price Mechanism and its Applications, TU from…
Theme 2: Markets
Theme 2.1 Price Mechanism and its Applications
1.1 price mechanism (rationing method)
most efficient use of available resources
eg. coupons, lotteries, queues (first-come-first-served), rationing etc.
answers the 3 qns
What and how much to produce
prices changes act as a
signal
to producers indicating what goods are demanded by consumers
(Consumers Sovereignty)
+ market conditions
price signals acts as
incentive
for producers to reallocate resources; selling more demanded goods at higher price, ceteris paribus --> increasing firms' profits
How to produce
free market system --> competition forces firms to use
least cost combination of inputs
to produce given level of output -- earn higher profits
if companies do not employ least costly production technique, other firms can undercut their price, become inefficient
price mechanism helps determine method of production based on
price of inputs
(eg. labour wages vs price of capital)
For whom to produce
free market system --> distribution of products is based on consumers' ability (purchasing power)/willingness to pay for market price of product
resources are allocated to production of g/s according to "dollar votes" of consumers --> those that can afford more can buy goods with higher prices --> more resources allocated and vice versa.
relative prices
ration
available resources, g/s among those are most willing and able to pay them
describes the means by which various decisions are made by consumers and firms interacting to determine allocation of scare resources between competing uses
Allocates scare resources in free market through signalling, incentive and rationing functions
1.2 Key features of the Free Market Economy (idealised system)
a) Private ownership of property
individuals have right to own, control, dispose of land, capital and natural resources + right to income earned from them
b) Freedom of choice and Enterprise
households and firms undertake all decisions (consumer sovereignty, workers employment, firms)
c) Pursuit of Self-interest
to maximise profts, satisfaction, high-returning jobs etc. --> leads to maximum good for society
d) Competition
essential feature of free market economy --> price competition, all consumers and producers have insignificant share of market, no influence on market demand and supply (cannot control market, exploit) --> perfect competition
Theory of demand
Demand
defined as quantity of well-defined commodity that consumers are both willing and able to buy at each and every price during a given period of time, ceteris paribus
known as effective demand/desire backed by purchasing power
expressed in 3 main ways:
equation (demand function)
Demand = f(price of good, income, preference, prices of other goods, etc.)
table (demand schedule) [need to include in case studies]
eg. price per litre / quantity demanded per month
diagrammatic form as a graph (demand curve)
Price to quantity
definition: demand curve shows the relationship between price and quantity demanded of a well-defined commodity that consumers are willing and able to buy at each possible price during a given period of time ceteris paribus
2.1 Law of Diminishing (marginal) utility (basis for downward sloping demand curve)
"Utility' refers to perceived satisfaction derived from g/s;
Total Utility (TU)
increases with more consumption of g/s (but increases at a decreasing rate beyond a certain point)
Marginal utility (MU)
refers to additional satisfaction derived from consumption of additional unit of g/s, decreases with more consumption of g/s (beyond a certain point of consumption), price willing to pay decreases
determines prices/value individual places on good
price willing to pay for each additional unit of g/s eventually decreases
keep consuming additional unit of good as long as MU>Price, stops when MU=P
2.1 Individual Demand VS Market Demand
draw table, include individual + market (total sum)
deriving market demand curve
the horizontal summation (summation of quantity demanded across each & every price level) of individual demand curves gives the market curve
2.3 Law of Demand
states that in a given time period, the quantity demanded of a product is inversely related to its price, ceteris paribus
2.4 Change in quantity demanded versus change in demand
Change in quantity demanded
change in price of g/s --> change in amt of g/s purchased
illustrated by movement along demand curve of g/s
change in demand
due to factors not related to price of g/s
illustrated by shift of demand curve of g/s
2.5 Non-price determinants of Demand
results in shift of curve (either left or right)
factors
changes in consumers' income
quantity demanded for g/s increases at every price level, increase demand of g/s to increase consumption and level of satisfaction
market demand curve of
normal
good: illustrated by rightward shift of demand curve from D0 to D1
however, demand may decrease due to high income level for
inferior
goods
leftward shift
changes in price of related goods
two g/s related by substitutes/complements in consumption
substitutes in consumption; goods used in place of another for the satisfaction of a particular purpose
changes in consumers' expectation
changes in consumers' taste and preferences
changes in number/composition of consumers
government policies
2.6 Derived demand
Theory of Supply
3.1 Individual Firm Supply VS Market Supply
TU from consumption of a good; Q is quantity consumed
