topic 4 - unit 7 - how prices are determined
TRANSCRIPT
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TOPIC 4UNIT 7 HOW PRICES AREDETERMINED (P.104 134)
M.5 Social Studies
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Unit Objectives
Understand forces ofsupply anddemand.
Market demand curve, supplycurve and equilibrium price.
Price elasticity of demand andprice elasticity of supply.
Effects oftax and subsidy.
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What isdemand?
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Demand want / willingness ofconsumers to buy goods and
services.
Quantity demanded amount ofproducts consumers are willing tobuy.
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Demand curve
Shows amount of goods and servicespeople are willing to buy.
Downward sloping.
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Possible price of chocolate bar(pence)
Your demand per month
200p
150p
50p
30p
20p
10p
5p
1p
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Now plot yourdemand curve
in your
handout.
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Price
Quantity
Demand curve sownwardsloping.
,As price is highquantity demanded
.is low
,As price is low
quantity demanded.is high
D
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Revenue
Price
Quantity
D
50
100
The revenue forproducers is shown by.the white rectangle
=50 x 100 5000
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Changes in demand curve
Movement along demand curve Changes in quantity because of
changes in price Ceteris Paribus all other things
remain the same.
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hangesn
uantityemanded
s price.hanges
,PQ ,P
Q
Price
Quantity
,Q
,1Q1
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Shifts in demand curve
Demand curve shifts in or out(Increase / decrease in demand)
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What causes shift in
demand?1. Changes in income When income rises, people
consume more goods. Normal goods demand rises as
income rises. Inferior goods demand falls as
income rises.
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2. Changes in taxes on incomes. Lower tax = more disposable
income (money people have leftafter spending or paying tax).
3. Complementary and substitutegoods
Complementary goods goodsused in combination with othergoods.
Substitutes goods which canreplace other goods.
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4.Changes in tastes, habits Demands change as peoples
tastes and preferences change.
5.Population change
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Possible Price ofChocolate bars
Original Demand permonth
Increased demand permonth
50 100,000 200,00040 150,000 250,000
30 200,000 300,000
20 260,000 360,000
10 330,000 430,000
5 400,000 500,000
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Price
Quantity
xpansionf quantity
emanded asncome of
onsumers.ncrease
D D1
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Price
QuantityD D1
P
Q Q1
Shift in demand curve mpr S
r qu nt t S
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Movement along demand curve isdue to changes in priceonly,
ceteris paribus.
Extension or contraction of demand
curve is due to changes in otherfactors (income, tastes andpreferences).
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What is supply?
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Supply is want / willingness ofproducers to sell goods and services.
Quantity supplied amount ofproducts, producers are willing to sell.
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Possible price oftankards
Market supply permonth20 1600
16 1100
12 700
8 300
4 100
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Price
Quantity
S
,As price risesquantitysupplied by
.producers rises
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Changes in supply curve
Movement along supply curve Changes in quantity because of
changes in price.
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Price
Quantity
S
, Q
,1Q1
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Shifts in demand curve
Price
Quantity
S
S1
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Price
Quantity
SS1
P
Q Q1
Shift in supply curve mpr rqu nt t
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What causes shift in
supply?1.Changes in the cost of factors ofproduction.
2.Changes in price of other goods andservices.
3.Technological advances.
4.Business optimism and expectations.
5.Global factors.
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Exercise 6, P. 114 Exercise 7, P. 116
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Market Price
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Reaching equilibrium
Market price (equilibrium) is reachedwhen we combine supply anddemandcurve.
Equilibrium is the price and thequantity of product that will be soldand purchased.
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Price
Quantity
S
D
P
Q
Equilibrium
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In free market economy, the marketwill determine the price and
quantity of goods / services.
At equilibrium, the amount supplied
equals the amount demanded.
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Exercise 8, P.
118
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Disequilibrium
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Price
Quantity
S
D200
200
300
Excess Supply
Excess Demand
100
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When we have disequilibrium, themarket forces will force the price
and quantity to the equilibriumpoint again.
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Exercise 9, P. 120
Exercise 10, P.121
Exercise 11, P.
122
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Price Elasticity
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Price Elasticity of Demand
Responsiveness of quantitydemanded to changes in the price.
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Formula
Elasticity 1 = = .Elastic demand=Elasticity 0 = .Perfectly inelastic= Elasticity = .Perfectly elastic
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Inelastic Demand
mall change.n quantity
ig change in.rice
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Elastic Demand
ig change in.uantity
mall change.n price
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Factors that affect elasticity
1. Number of substitutes Demand is elastic if there are many
substitutes. Demand is inelastic if there are few
substitutes (e.g. Medicine)
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2. Time Period When price rises, people search for
substitutes. The longer the time, themore chance they have to findsubstitute.
3. Proportion of income spent Cheap items (e.g. Newspaper) will
be inelastic. Expensive items (e.g. Cars) will be
elastic.
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Exercise 12
14, P.124 - 125
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Price elasticity of supply
Price elasticity of supply measuresthe responsiveness of quantitysupplied to a change in price.
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Price
Quantity
S
D
PP1
D1Q Q1
INELASTIC
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Price
Quantity
S
D
PP1
D1Q Q1
ELASTIC
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What affects elasticity ofsupply?
1.Time Supply is price inelastic in the short
run. Supply is price elastic in the long
run.
Producers have limited resourcesand will have limited amount ofproducts to sell. It will take time to
produce more.
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2.Availability of resources. If firms want to expand production,
they need more factors of production(land, labour, capital).
If all resources have been used up,
they cannot increase theirproduction, so supply is inelastic.
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Taxes and Subsidies
Governments often intervene in afree market.
Influences price and quantity of
products traded.
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Taxes
Taxes on goods and services arecalled Indirect taxes
Value added tax (VAT) percentage
of price. Excise duties fixed tax mark-up
(petrol, alcohol, cigarettes.)
Effects of tax on supply
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Effects of tax on supply
P
Q
S
D
PP1
Q1
S
S1
Effects of subsidy on supply
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Effects of subsidy on supply
P
Q
S
D
PP1
Q Q1
S
S1