Course: ECON6017003 - ECONOMICS THEORY

Effective Period : even semester 2022

The working of competitive markets

and Demand and the consumer
Targeted Learning Outcome :
LO1: Identify working of competitive markets and
Demand and the consumer
Material References :
Sloman, John, Jones,Elizabeth, Essential Economics for
Business, 2019, pearson, Singapura
 Sub topic
Supply

Demand

Market intervention

Understanding consumer behaviour

Price and output determination

Elasticity of demand and supply

 Demand: The relationship between demand
and price

Law of demand The quantity of a good demanded per period of

time will fall as the price rises and rise as the price falls, other
things being equal (ceteris paribus). Income effect The effect of a
change in price on quantity demanded arising from the
consumer becoming better or worse off as a result of the price
change.

Substitution effect The effect of a change in price on quantity

demanded arising from the consumer switching to or from
alternative (substitute) products. Quantity demanded The
amount of a good that a consumer is willing and able to buy at a
given price over a given period of time.
 Other determinants of demand
Substitute goods A pair of Complementary goods A pair of
goods which are considered by goods consumed together. As
consumers to be alternatives to the price of one goes up, the
each other. As the price of one demand for both goods will fall.
goes up, the demand for the Normal goods whose demand
other rises. rises as people’s incomes rise.

They have a positive income

Inferior goods whose demand
elasticity of demand. Luxury
falls as people’s incomes rise.
goods will have a higher income
Such goods have a negative
elasticity of demand than more
income elasticity of demand
basic goods.
 Demand: The relationship between
demand and price
• Demand schedule for an individual A table
showing the different quantities of a good that
a person is willing and able to buy at various
prices over a given period.
• Market demand schedule A table showing the
different total quantities of a good that
consumers are willing and able to buy at
various prices over a given period. Demand
curve A graph showing the relationship
between the price of a good and the quantity
of the good demanded over a given time
period. Price is measured on the vertical axis;
quantity demanded is measured on the
horizontal axis. A demand curve can be for an
individual consumer or a group of consumers,
or more usually for the whole market.
 Movements along and shifts in the demand
curve
• People’s actions are influenced by their expectations. People
respond not just to what is happening now (such as a change
in price), but to what they anticipate will happen in the future.
• Partial analysis: other things remaining equal (ceteris
paribus). In economics it is common to look at just one
determinant of a variable such as demand or supply and see
what happens when the determinant changes.
• For example, if price is taken as the determinant of demand,
we can see what happens to quantity demanded as price
changes. In the meantime, we have to assume that other
determinants remain unchanged. This is known as the ‘other
things being equal’ assumption (or, using the Latin, the
‘ceteris paribus’ assumption). Once we have seen how our
chosen determinant affects our variable, we can then see
what happens when another determinant changes, and then
another, and so on.
 SUPPLY
• Supply schedule A table showing
the different quantities of a good
that producers are willing and
able to supply at various prices
over a given time period. A
supply schedule can be for an
individual producer or group of
producers, or for all producers
(the market supply schedule).
• Supply curve A graph showing
the relationship between the
price of a good and the quantity
of the good supplied over a given
period.
 Other determinants of supply
Substitutes in supply These
Goods in joint supply These
are two goods where an
are two goods where the
increased production of one
production of more of one
means diverting resources
leads to the production of
away from producing the
more of the other.
other.

Change in the quantity

Change in supply The term
supplied The term used for a
used for a shift in the supply
movement along the supply
curve. It occurs when a
curve to a new point. It
determinant other than
occurs when there is a
price changes.
change in price.
PRICE AND OUTPUT
DETERMINATION
• Market clearing A market
clears when supply
matches demand,
leaving no shortage or
surplus.
• The market is in
equilibrium.
 PRICE AND OUTPUT DETERMINATION
(continued-1)

If the demand for a good

If the supply of a good exceeds Price will settle at the
exceeds the supply, there will
the demand, there will be a equilibrium. The equilibrium
be a shortage. This will result
surplus. This will result in a fall price is the one that clears the
in a rise in the price of the
in the price. market, such that demand
good.

If the demand or supply

curves shift, this will lead
equals supply. This is shown in either to a shortage or to a
a demand and supply diagram surplus. Price will therefore
by the point where the two either rise or fall until a new
curves intersect. equilibrium is reached at the
position where the supply and
demand curves now intersect.
PRICE AND OUTPUT DETERMINATION (continued-1)
 ELASTICITY OF DEMAND AND SUPPLY: Price elasticity of
demand A measure of the responsiveness of quantity
demanded to a change in price

• for example, a 20 per cent

rise in the price of a product
causes a 10 per cent fall in the
quantity demanded, the price
elasticity of demand will be: -
10%/20% = -0.5
• The use of proportionate or
percentage measures, The
sign (positive or negative), The
value (greater or less than 1).
 ELASTICITY OF DEMAND AND SUPPLY
• Price • Elastic demand If demand is (price) elastic,
elasticity of then any change in price will cause the
demand A quantity demanded to change
measure of proportionately more. (Ignoring the negative
sign) it will have a value greater than 1.
the
• Inelastic demand If demand is (price)
responsive inelastic, then any change will cause the
ness of quantity demanded to change by a
quantity proportionately smaller amount. (Ignoring
demanded the negative sign) it will have a value less
to a change than 1.
in price • Unit elasticity when the price elasticity of
demand is unity, this is where quantity
demanded changes by the same proportion
as the price. Price elasticity is equal to -1
Price elasticity of demand and consumer
expenditure

• Total consumer expenditure (TE)

(per period) The price of the
product multiplied by the
quantity purchased: TE = P * Q.
• Total revenue (TR)(per period)
The total amount received by
firms from the sale of a product,
before the deduction of taxes or
any other costs. The price
multiplied by the quantity sold: TR
= P * Q.
Price elasticity of demand and total expenditure: (a) elastic
demand between two points; (b) inelastic demand between
two points
Other elasticities
• Income elasticity of demand The responsiveness of
demand to a change in consumer incomes: the
proportionate change in demand divided by the
proportionate change in income.
• Cross-price elasticity of demand The responsiveness of
demand for one good to a change in the price of another:
the proportionate change in demand for one good divided
by the proportionate change in price of the other.
• Normal goods whose demand increases as consumer
incomes increase. They have a positive income elasticity of
demand. Luxury goods will have a higher income elasticity
of demand than more basic goods. Inferior goods whose
demand decreases as consumer incomes increase. Such
goods have a negative income elasticity of demand.
• Inferior goods whose demand decreases as consumer
incomes increase. Such goods have a negative income
elasticity of demand
 Price elasticity of supply (P«S )

Price elasticity of supply The

responsiveness of quantity
supplied to a change in price:
the proportionate change in
quantity supplied divided by the
proportionate change in price.

Supply curves with

different price
elasticity of supply
ThAnKs YoU