IF YOU ARE IN HL IM

EXTREMELY SORRY BECAUSE

I DIDNT EXACTLY INCLUDE
THE DEMAND FUNCTION IN
HERE!
But its still a lot of stuff to read..so read on(also
im obsessed with ellipsesso just try not to mind
that:)) P.S does the bracket after the smiley count
as a part of the smiley? Just something to think
about before you read this. Also, theres probably
like 50 errors in this thing, so im sorry if you dont
do that well in the mid-terms
Demand:
What is Demand?
-Taken from the consumers perspective.
-It is the willingness and ability to buy goods and services.
-Quantity demanded is the amount of a good that consumers are willing and able to buy at a given
price over a given period of time.

What is The law of Demand?

-It is the relationship between the price of a good and the quantity demanded that shows that
consumers buy more of a good when its price decreases and less of a good when its price
increases, ceteris paribus.
This table illustrates how quantity demanded changes for a change in price (for a good that obeys
the law of demand)
Price ()

Quantity
Demanded
(units)

20

100

40

80

60

60

Price ()

Quantity
Demanded
(units)

80

40

There are some goods on the other hand that do not follow this law..i.e they are exceptions to the
law of demand. Take the example of Gold.
Why do people purchase Gold?
-As an investment
-To show superiority among those who cannot
purchase gold.
An interesting thing to note here is that as the
price of Gold falls in the market for gold, the
demand for gold decreases. Hence it does not
obey the law of demand.
So through this example, we have already
identified the first exception to the law of
demandVeblen Goods.
Veblen Goods:
-Goods that have an increase in demand with
an increase in price.
-All Veblen goods start of with a normal/regular
Fig 1.0
demand curve (downward sloping*).
-The transformation to a Veblen good begins
when the price reaches a snob value status, after which the demand curve slopes upwards.
-After the good reaches its snob value status, consumers think that they should consume more
with a rise in price.
-Its consumption is not associated with utility but with exclusivity and status.
-However, underconsumption of the good for its actual value is a mark of demerit and shows
inferiority.
-So we can conclude by saying that an increased consumption of Veblen goods makes people
appear wealthy to society.
Giffen Goods:
-This are the second type of good that disobeys the law of demand.
-These are inferior goods whose demand increases with an increase in the price of the good.
-Take the example of Potatoes and Chicken. In this example were considering the income of a
person who is in poverty/very poor/has a big family to feed but only has very little income.
-Using the following table, we can illustrate this example, wherein the dudes income is 100 and
the cost of potatoes rises from 10 to 30 and the price of chicken stays at 80.
Potatoes Chicken

20

80

30

80

-When the cost of potatoes increases, the total cost exceeds his disposable income. Hence he
cannot consume any more chicken and consume more potatoes.

-Giffen goods normally exist only in situations of poverty and when the good is extremely important
to the consumer(i.e it might be a need).
-However, the consumer may take account of rationing, as the price of something such as rice
increases, the demand for rice will decrease and people will have more disposable income that
they can ration on other goods such as chapatis and vegetables. (this will not happen if rice is a
staple)
Uncertainties:
-The role that uncertainties plays in disobeying the law of demand is pretty common
nowadays..Why? Lets look at Lung cancer. Everyone is smoking left right and center, which most
of the time leads to LUNG CANCER! This is something that people are uncertain of getting, and
after they do, they will buy the medicine even if it costs them a gazillion dollars (if they can afford
something that cost a gazillion dollars)
The role of expectations:
-Lets take the example of some kind of soap. Its called Fairness Guaranteed, and it has all the
recommended by dermatologists mumbo jumbo on the packet. The part of the packet that most
people dont like to see is the price tag. So lets say that this soap costs you 15000 per bar. Mad
right? But the thing is, the high price and the mumbo jumbo recommendations actually trick
consumers into thinking that it will work, and so they buy it. (Whether it works or not? Is not a
question we should be answering as of now)
Factors affecting demand:
-Price of complementary goods and substitute goods: For example, consider Colgate toothpaste.
If the price of Crest toothpaste increases, then people will think ColgateCrestsame thing!
and hence the demand for Colgate toothpaste will increase. Complements on the other hand can
go something like this ; if the price of electricity increases, then you will begin to watch less
Television, hence the demand for set top boxes and/or cable will decrease.
-Consumer income: This is pretty darn obvious. If you make more money and have a higher
amount of that disposable income, your
going to spend more on the stuff that
you really like/want more of. For
example, you start to make 100000
compared to the previous 50000 you
made last year. Your demand for classy
pens (lets say you like classy pens) will
also increase.
-Tax on consumer income: The
dreaded tax rate. We all know what
happens when this increases. If you
dont..read the previous point again-_-Changes in tastes/preferences/
fashion: blah blah blah, when
something becomes more popular,
people buy more of it. If you want to know more about this, contact this person (click on the link
if you havent figured yet)
-Demographic changes: population falls/rises. Im starting to think that economics was discovered
by some dude with OCD who just had to put down what was happening everywhere
-Changes in weather i.e. seasonal changes: You've probably heard this example a million times,
but in winter, people demand more jackets than they do in the summer.(If you know who I am then
you know thats not true:P)
-Expectation of price to change in the future: Okayso this is where it all ends huh? When you, a
consumer, expect the price of petrol to rise in the future..youd be on a rampage to get every single
drop of petrol on the earth rn into your petrol storage..or wherever you keep the damn thing. Soo
when everyone does this, demand increases. Im too bored to type the rest of it so..vice versa.

Now, for a chance, lets ask the real question

Why is the demand curve downward sloping?
-So we know from the law of demand that there is a negative relationship between price and
quantity demanded..i.e. the price rises the demand falls, vice versa. Also we will know after you
read this that the amount consumers are able to buy is called effective demand. Now the problem
were facing is, Why? Why is there a negative relationship between price and quantity demanded?
-The answer to this isn't some hidden crap that we've been trying to figure out for years, in fact
nothing in economics is. Its just there, we know it, but we dont apply it. Thats all. Nevertheless,
back to the topic of discussionThere are 2 main factors that influence this unique relationship
that demand has (recall that there are exceptions to the law of demand so this doesn't apply for all
goods).
-These are the income effect and the substitution effect.
The income effect
-So when the price of somethinglets take calculators as an example here, so when the price of
something decreases, you have the ability to buy more calculators with the same amount of
income you always earned. Dont get it? Lets look at the alternative, when the price of calculators
increases, you can buy less because you dont have enough income
Therefore, as the price of a good decreases, its quantity demanded increases, and as the price
increases, its quantity demanded decreasesSounds familiar? Yeah well it should, because thats
the law of demand.
The substitution effect:
-Lets say that theres only two goods in the whole wide world. Oreos and Dark Fantasy cookies.
When the price of Oreos decreases, the people start to buy more Oreos than Dark Fantasy, hence
the quantity demand increases with a fall in price. On the contrary, when the price of Oreos
increases, people spend more of their money on Dark Fantasy, so the quantity demanded for
Oreos decreases with a rise in its price. (Again, if you havent seen the connection between this
and the law of demand, you're probably intellectually incapable of writing the exam:))

CONCLUSION FOR
THIS TOPIC:
Idk, just read through the whole thing again?

SUPPLY:
What is Supply?
-Supply is the willingness and ability of a producer to produce a good/service.
What is the law of Supply?
-This law states that when the price of a good/service rises, the quantity supplied of the good/
service will also increase, and when the price falls, the quantity supplied will also fall.
-Why? This is because of the profit motiveas the price of a good/service increases, the supplier
will know that he can receive a higher revenue by selling more at a higher price.
The following table will give you a glimpse of what this is really all about
Price ()

Quantity
Supplied
(units)

10

100

20

200

30

300

40

400

Just like it is for demand, the law of supply has its own exceptions
Expectations regarding future prices: If a supplier thinks that the prices of a good are going to
rise in the future, they will halt their supply of goods and wait for the price to rise even more (even if
the existing price is high), just so that they can gain a higher revenue from the sale of goods. On
the other hand, they might immediately supply goods if they think that prices will fall in the future.
Hence, when the price is low, the supply increases, and then the price is high, the supply
decreases.
Farm produce: Ever wonder why you're dumb? Its because the farmers put cyanide in their
produce. No im kidding. (They use ricin, not cyanide). So when god doesn't feel like peeing, the
farmers are actually put in a state of quandaryWhat? Quandary? Speak english please. Okay,
okay, so basically there confused. They cannot supply more, lets say carrots,when the price rises,
because theres no rain, so what do they do? Well they do nothingBecause they cant.So a rise in
price doesn't result in a rise in supply, in fact, it results in a fall in supply.
Perishable goods: Well, the best example of this is meat/eggs/fruits/vegetables. As the goods
have a really short shelf life, the supplier needs to supply more as soon as the first batch is
supplied, as by that time, the demand would have risen. So, even when the price is really low, the
suppliers will have to supply more.
Out-of-fashion-goods: When Karlie Kloss wears somethingalot of people seem to want to wear
the same thing, so sellers can command a high price and supply more at the same time. But what
if we went 50 years into the future and the same seller has a couple of Karlie Style clothes in
storage? Well he would sell them at a low price as he knows that its not in fashion anymore and
he's got no other choice (unless suicide is an option)

A recession: A business may be experiencing a recession that the entire country is experiencing
as well. So prices fall and the seller will need to do something to recover his costs, right? So he
increases supply, even at the minuscule price that he is presented withThis, is again contrary to
the law of supply.
A change in business: A seller may wish to completely change his playing field. That is, he may
wish to move from one business to another, so in order to compensate for all the costs involved in
the first business, he will sell everything off at a lower price just to clear them off.
Finally, the supply of labor. You've heard of a backward bending
supply curve right? If you've not and you're from IGCSE, wth
have you been doing for 3 years??? So basically, after one point
in a labours working life, he may decide that wages aren't that
important anymore as they used to be (probably cause he rich af
now). So he will prefer to have more leisure time and high wage
at the same time (cause he cocky af). Hence, the supply curve
will be normal at first, then curve backwards.
For the non-price factors that affect supply, im not going to go
that much into detail so, here it is:
-Cost of production: As this increases, supply decreases, because wellthey cant really
increase supply if theres nothing to supply right? (theres nothing to supply because the costs may
be too expensive).
-Climatic conditions: Farmers, back to the old dudes againSo when the weather becomes
really bad and there is low or no output of lets say vegetables..the supply will decrease as prices
stay the same.
-Technology: When theres technology (good technology to be precise) implemented into a
company, it actually makes the production process smoother, more efficient, and also reduces
costs in the long term (as there may be lesser labor costs). A good example of this is SAP, which
helps an entrepreneur manage and run his business more productively.
-Transport conditions: Lets say that amazon has a really poor delivery service, all the drivers are
drunkards and they crash the trucks everywhere they go, destroying all the products. This will
cause a decrease in
supply of the goods
even as the price stays
the same.
-Availability of the
factors of production:
Obvious much, if you
cant produce, then your
supply isn't really going
to increase is it?
-Fiscal policy: When
the government
increases the tax on
capital goods, the cost
of production basically
increases, so to reduce
costs, the company will reduce supply (production).
-Prices of related goods (substitutes): When the price of wheat rises, farmers producing rice will
shift production to wheat, this reduces the supply of rice at the same price of rice.
-Producers expectations: If a company like apple comes out with a new iPod, then another
company selling low class mp3 players will try and sell all its mp3 players ASAP. SO supply
increases at the same price.

-The number of producers in the market: If you have a greater market share, then you're
obviously going to be supplying more aren't you? So lesser competition leads to a rise in supply,
and vice versa.

I DIDNT DRAW THE DIAGRAMS THIS TIME,

BECAUSE ITS EXTREMELY IMPORTANT THAT I DO
IT.

Equilibrium, Surplus,
and Deficit
- So by looking at the diagrams we know what a surplus in supply and shortage in supply is. (vice
versa for demand). But how does a market reach equilibrium when it is in a surplus/shortage.

- The first thing that we need to look at how suppliers react to a change in price. So when the

price is above the Pe, there is an surplus of supply and a shortage in demand. In this situation,
the supplier will have to lower costs in order to eliminate the surplus. So with a fall in price, the
quantity supplied falls and the quantity demanded increases, leading to the price returning to its
equilibrium eventually.
- Secondly, When there is a shortage in supply and a surplus of demand, the supplier will rise
price as they know that they can sell at a higher price (and receive more profits as demand is
high). This rise in price will raise quantity supplied and decrease quantity demanded, allowing
the price to return to its equilibrium.

Explain the rationing, signalling,

and incentive function of price and
explain how changes in price lead
to a reallocation of resources
- Lets consider the market for oil.
- Why oil? Because its inelastic and changes in price will not affect changes in demand that much.
How is this useful? Because it allows us to look at situations such as the ones that will follow in
more detail, as a small change is what matters, rather than a big change in an elastic good.
Also, oil is one of the most used goods in the world so yeah, theres
that.

- (RATIONING FUNCTION)When the supply of oil decreases (i.e due

to non price factors, ceteris paribus) the Pe increases in order to
prevent the surplus of demand. This rise in price gives the
consumers an incentive to ration their use of resource, i.e their
money. So this leads to a fall in the quantity demanded, leading to a
moment up the curve. As the supply keeps decreasing, the amount
people ration their resources increases, so the market demand also
decreases. Hence when there is no surplus in demand, the resource
(oil) is conserved,

- (INCENTIVE) An incentive is something that motivates a producer or

consumer to change behaviour. When the demand increases, (due
to non price factors, ceteris paribus), the demand curve shifts to the
right. The price of the product will then increase in order to eliminate
the surplus in demand at the Pe. This rise in price will then act as an
incentive for producers to allocate more resources to the production
of oil. This will increase the quantity supplied. Why? Because the
rise in price gives the producer a profit motive. Hence there is a
movement up and along the supply curve.

- This rise in price will act as an incentive for consumers to reduce

their consumption, leading to a movement up the demand curve
(contraction), which will ultimately lead to an equilibrium at Q1 in the
diagram.

- Now this is only considering one firm, but theres not just one widget
producer in the world/your country is there? So if the profits of this
widget company are increasing due to the rise in price, then other firms producing widgets will
also raise their production of widgets and supply will increase. Another thing to note is that firms
outside the industry will also start to reallocate their resources into producing oil, which will also
rise supply at the same price of widgets.

- Now there is excess supply at P1, so the price falls to eliminate the surplus. Which is basically
reducing the incentive for the producer to make the good. This fall in price sends a signal to the
consumer to increase consumption which ultimately leads to a new equilibrium at P2 and Q2.

Normal Goods Vs
Inferior goods
- Normal goods are those which experience a rise in demand as consumer income increases.
- This is because the consume is spending a greater proportion of his income on the same good.
- For example, inexpensive clothing that a certain company produces, these clothes might be

extremely comfortable according to one group of customers, or one household. So as the

income in that household increases, the amount of money spent on these clothes will rise as
their increased consumption is a sign of utility.
However, if another household finds the same clothes to be really uncomfortable, then he might
not increase his consumption on the good as his income increases. In fact, he will be able to
spend it on another comfortable set of clothing. This tells us that a good can be normal
depending upon consumer tastes and preferences.
This above example allows us to dive into the next type of good. Inferior goods.
The demand for inferior goods decreases as consumer income increases. So we can see that
the first clothing set is an inferior good to the second person, but a normal good to the first
person.
The reason this happens to inferior goods is because the consumer can purchase a costlier
substitute with the larger amount of income he has. Whether the utility of the costlier substitute is
higher depends on the mindset of the consumer (see Veblen goods).
Lets take another example, Donuts. Everyone likes donuts. But the thing we need to look at is
which donuts do people like. The Iyengar bakeries in Bangalore make excellent cream donuts,
but they only cost Rs.20/-. The other donuts are made by suppliers like KispeeKreem, and
Mad.Obar.Donats., but these cost around Rs.80/- per donut.
When consumer income increases, people will tend to buy the high end donuts, which are pretty
much of the same quality. This makes the Iyengar donuts inferior goods, and the high end
donuts normal goods.
However, some consumers, such as myself will prefer the iyengar donuts simply because they
might taste better in their opinion. This makes the iyengar donuts normal goods.
This can be represented through shifts in the demand curve.

Consumer and Producer Surplus. And

How it is related to the price of a
product.
Also, this thing contains what
community surplus is, and how it is
affected by price as well.
- OkayI normally start all these notes with Okay, idk whyIf you've gone
through the previous ones you'd notice it, maybe, idk, I'm pretty lost. These
notes might just suck, so I'm sorry about that, I'm really tired you see, and
typing all this stuff out is pretty annoying.

- Okay, so consumer surplus.

- What is consumer surplus?
- Lets say you go to the mall with all your friends and you're all chilling with loads

of cash in your pockets. What do you do? You want to impress your friends right?
By spending more? So considering this, lets say you guys go to Krispy Kreme,
which is a company from the USA.
Now at Krispy Kreme, you're all like Imma show these guys how loaded I am,
and you pull out 1000.
Now, to your disappointment, ten donuts (one for each of your friends), cost only
500. So you actually gain 500 from the purchase, as you were willing to spend
1000, but you had spent only 500. The difference between how much you were
willing to pay and how much you actually paid is called your consumer surplus.
Got it?
Now this surplus thing pops up even on the producers side. Lets assume the guy
who is selling you donuts actually owns Krispy Kreme. He is one rich ass bugger
and he (in his mind) thinks that if you pay him 400 it is enough to sustain his
business. But no, you're also one rich ass bugger so you pay him 500. So his
gain from your purchase is actually the difference between how much he
expected and how much he got. This is his producer surplus,which you can, in a
way think of as his profit.
So you're consumer surplus is (1000-500=500) and his producer surplus is
(500-400=100).
Makes sense? If it doesn't I suggest you go jump in a wellso that you wont get
distracted and you can read it again, quietly:)

What is the relation between consumer

surplus, price and consumer welfare?
-The thing we need to understand here is
that as the price of the good increases, the
difference between the amount you're
willing to pay an the price also decreases.
And we know that this difference is actually
your consumer surplus, Hence, consumer
surplus falls.
-Consumer welfare on the other hand may
sound like the same thing, but don't get all
confused. Its not. Consumer welfare is just
a measure of the benefit obtained from
your consumption. So as your consumer
surplus decreases, (in the case above), your consumer welfare actually decreases.
-All of this is the exact opposite when we talk about a decrease in price, (which
increases your consumer surplus and also consumer welfare).
What is the relation between producer surplus, price and producer welfare?
-The benefit gained from the sale of the product is just the duded profit right? So as
the price increases, his profit also increases, hence the difference between how
much he is willing to receive and how much he gets increases, leading to a rise in
producer surplus.
-Producer welfare also increases in this case as there is a higher measure of his
benefit obtained from selling a donut.
You see the diagram above? The one that I stole from the textbook? Its got like two
weird triangles in it? Yeah that one.
This is basically an illustration of consumer and producer surplusoh wait
sorry. Its an illustration of market consumer and market producer surplus. Is there a
difference? Well yeah. Its pretty similar to market demand and market supply,
compared to individual consumer demand and
supply.
So at equilibrium price, there is no consumer or
producer surplus. As this is how much you're
willing to spend and the producer is willing to sell
for. So when the price is 3, the quantity
demanded is 3000 units. But when you actually
add up the costs when you're buying at 4 and 5,
it exceeds 3000 units. So you're willing to pay
more for the 3000 units than what you're actually
paying. Hence, the consumer surplus is the area of
the blue triangle on top. (If this is a print out in
black and white, its the area of the triangle on top).

Community surplus is the sum of producer surplus and consumer surplus.

Welfare loss: This is just the loss in community surplus when the price increases/
decreases. The shaded part is the welfare loss in a situation where the price
increases. The increase in price actually reduces quantity demanded and supplied,
and therefore reduces allocative efficiency.
(I think we all agree that things are better when they're biggerjust like this
diagram)