Chapter 2,3 & 4: Price Mechanism and its Applications by Akif

mohamedakif2006 — 2023-05-28 00:14:38 UTC

Non-Price Factors Affecting the Demand of a Product: EGYPTO

mohamedakif2006 — 2023-05-28 00:16:15 UTC

- Expectation of future price changes
- change in Government economic policies
- change in consumers' income (Y) (Normal goods, inferior goods)
- change in Price of related goods (substitutes, complements, derived demand)
- change in consumers' Tastes and preferences
- Other factors (change in availability of credit facilities and hire purchases, change in demographics and change in seasons)

mohamedakif2006 — 2023-05-28 00:33:43 UTC

Non-Price Factors Affecting the Supply of a Product: WETPIGS

mohamedakif2006 — 2023-05-28 00:42:47 UTC

- change in Weather conditions
- Expectations of future price changes
- change in state of Technology
- change in Production of related goods (competitive supply, joint supply)
- change in the price of factor Inputs
- change in Government policy
- change in the number of Suppliers

Steps to explain change in equilibrium price and quantity

mohamedakif2006 — 2023-05-28 00:52:16 UTC

Step 1: Shift DD or/and SS curve
Step 2: Identify shortage or surplus
Step 3: Explain price adjustment process
Step 4: Establish new equilibrium price and quantity
Step 5: Effect of change in DD or/and SS on equilibrium price, quantity & total revenue/ total expenditure

Effects of Changes in Both Demand and Supply (Double Shift)

mohamedakif2006 — 2023-05-28 01:01:49 UTC

Determining scenarios:

First 2 rows:
Think of whether a surplus or shortage occurs due to the extent of shifts, change in price follows respective pressures

Second 2 rows:
Change in quantity follows direction of larger change
(E.g. If DD increase more than SS falling, quantity increase)

mohamedakif2006 — 2023-05-28 01:28:45 UTC

- Consumer surplus (below DD curve and above price line): the difference between what the consumer is willing and able to pay for a good and the actual price paid for it
- Producer surplus (above SS curve and below price line): the difference between what the producer is willing and able to accept for a good and the actual price received for it)
- Total surplus = Consumer surplus + Producer surplus
- When total surplus is a maximum, societal welfare is maximized (allocative efficiency)

mohamedakif2006 — 2023-05-28 01:43:35 UTC

PED measures the responsiveness of quantity demanded of a good due to a change in its price, ceteris paribus

- Negative sign: reflects inverse relationship between price and quantity demanded of a good

- |PED| > 1: Demand is price elastic (gentle DD curve)
- Change in price results in more than proportionate change in quantity demanded

- |PED| < 1: Demand is price inelastic (steep DD curve)
- Change in price results in less that proportionate change in quantity demanded

Factors Affecting the PED for a Good or Service: HINTS

mohamedakif2006 — 2023-05-28 01:54:11 UTC

- Habit of consumers
- proportion of Income spent on the good
- degree of Necessity of the good
- Time period
- number and closeness of Substitutes in the same price range

mohamedakif2006 — 2023-05-28 02:05:12 UTC

PES measures the responsiveness of quantity supplied of a good due to a change in the price of the good itself, ceteris paribus

- Positive sign: reflects direct relationship between price and quantity supplied of a good

- |PES| > 1: Supply is price elastic (gentle SS curve)
- Change in price results in more than proportionate change in quantity supplied

- |PES| < 1: Supply is price inelastic (steep SS curve)
- Change in price results in less than proportionate change in quantity supplied

Factors Affecting the PES for a Good or Service: SMeLT

mohamedakif2006 — 2023-05-28 02:09:53 UTC

- Spare capacity of firms
- Mobility of factors of production
- Level of stocks or inventories
- Time period

mohamedakif2006 — 2023-05-28 02:37:11 UTC

YED measures the responsiveness of demand for a good due to a change in consumers' income, ceteris paribus.

- Positive YED : normal goods (necessities and luxuries)
- |YED| > 1: Demand is income elastic (luxury goods)
- Change in price causes more than proportionate change in demand
- |YED| < 1: Demand is income inelastic (necessities)
- Change in price causes less than proportionate change in demand

- Negative YED: inferior goods
- E.g.: if YED=-4, a 1% increase in income will lead to a 4% fall in demand, ceteris paribus

Factors affecting the YED for a Good or Service: Nice Llama

mohamedakif2006 — 2023-05-28 02:40:58 UTC

- Nature of goods (i.e. degree of necessity)
- Level of income

mohamedakif2006 — 2023-05-28 02:57:39 UTC

XED measures the responsiveness of the demand for a good due to changes in the price of another good, ceteris paribus.

- Positive XED: substitutes
- Demand for a good and price of another good change in the same direction

- Negative XED: complements
- Demand for a good and the price of another good change in opposite directions

- XED=0: unrelated goods

- |XED| > 1: Demand is cross elastic
- Change in the price of another good causes a more than proportionate change in the demand for a good

- |XED| < 1: Demand is cross inelastic
- Change in the price of another good causes a less than proportionate change in the demand for a good

Factors Affecting the XED for a Good or Service

mohamedakif2006 — 2023-05-28 02:59:20 UTC

- Closeness between substitutes
- Closeness complements

mohamedakif2006 — 2023-05-28 03:07:33 UTC

Application to Markets

mohamedakif2006 — 2023-05-28 03:09:22 UTC

PED & PES
1. When supply changes, use PED to analyse extent of change in equilibrium price and quantity and thus TR/TE
2. When demand changes, use PES to analyse extent of change in equilibrium price and quantity (not TR/TE as change in demand will change equilibrium price and quantity in same direction)
3. Both can be used to illustrate extent of price change
4. When market is in disequilibrium (shortage/surplus) PED & PES can be used to explain why a large price change is needed to restore equilibrium (tutorial q1a, section 3)

YED
1. Used only when there is a change in income to analyse changes in price, quantity and TR/TE

XED
1. Used only when there is a change in price of related goods to analyse changes in price, quantity and TR/TE

Application to Firms

mohamedakif2006 — 2023-05-28 03:34:25 UTC

PED: Price Decisions
- Decisions whether to raise/lower price
- Decrease price if PED > 1
- Increase price if PED < 1

XED & YED: Non-price Decisions
Decisions regarding:
- Production output & level of inventories
- Product placement
- Product development

Application to Governments

mohamedakif2006 — 2023-05-28 03:34:49 UTC

PED & PES
Price floor (agricultural price floors, minimum wage) - Protect income of workers/farmers

Price ceiling (basic necessities, rent control) - Protect welfare of consumers (prevent producers from exploiting consumers) ; keep prices affordable
- Price ceiling creates a shortage in the market
- The more price elastic the demand & supply, the bigger the shortage in the market

- The new max/min price line acts like a supply curve (see tutorial 5a)
- Can talk about extent of price floor/ceiling for evaluation

Indirect taxes - Discourage production or consumption (more effective if |PED|>1)

Subsidies - Encourage production/consumption (more effective if PED>1) , keep prices affordable (more effective PED<1), protect income of farmers

Quota - Restrict quantity of goods at acceptable level, prevent depletion of scarce resources

Factor affecting Labour Demand: My Frail Donkey

mohamedakif2006 — 2023-05-28 03:56:57 UTC

- Macroeconomic factors and policies
- changes involving other Factor inputs (complementary and substitutable factors)
- changes in Demand for the product (labour is in derived demand)

Wage Elasticity of Demand (WED)

mohamedakif2006 — 2023-05-28 04:03:28 UTC

WED measures the responsiveness of quantity demanded for labour due to a change in wage rate, ceteris paribus

- Wage elastic: Change in wage rate leads to a more than proportionate change in the quantity demanded for labour
- Wage inelastic: Change in wage rate leads to a less than proportionate change in the quantity demanded for labour

Factors affecting WED for labour: SP PED

mohamedakif2006 — 2023-05-28 04:05:27 UTC

- availability of Substitutes
- Proportion of labour cost in total cost
- PED for the final good or service

Factors affecting Labour Supply: MeLTS

mohamedakif2006 — 2023-05-28 04:13:37 UTC

- Macroeconomic factors and policies
- changes in other Labour markets
- changes in Tastes and preferences
- changes in the Size and composition of qualified workers

Wage Elasticity of Supply (WES)

mohamedakif2006 — 2023-05-28 04:17:30 UTC

WES measures the responsiveness of quantity supplied of labour due to a change in wage rate, ceteris paribus.

- Wage elastic: Change in wage rate leads to a more than proportionate change in the quantity supplied of labour
- Wage inelastic: Change in wage rate leads to a less than proportionate change in the quantity supplied of labour

Factors affecting WES for labour: ST

mohamedakif2006 — 2023-05-28 04:18:47 UTC

- Skills and education level
- Time period

mohamedakif2006 — 2023-09-09 02:31:03 UTC

Must mention:
- Definition
- Sign
- Magnitude
- Factors affecting