topic 4 - unit 7 - how prices are determined

8/8/2019 Topic 4 - Unit 7 - How Prices Are Determined

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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

topic 4 - unit 7 - how prices are determined

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