2023 ACJC H2 Price Mechanism Lecture Notes

©ACJC Econs Dept/2023/JC1/H2 Economics 1 ANGLO-CHINESE JUNIOR COLLEGE JC1 Economics 2023 H2 PRICE MECHANISM & ITS APPLICATIONS Section Content Page 1 Theory of Demand 5 1.1 Consumer’s behavior 5 1.2 Concept of demand 5 1.3 Types of demand 5 1.4 Law of diminishing marginal utility 6 1.5 Law of demand 6 1.6 Demand curve 7 1.7 Factors affecting the demand curve 8 2 Theory of Supply 12 2.1 Producer’s behavior 12 2.2 Concept of supply 12 2.3 Types of supply 12 2.4 Law of supply 12 2.5 Supply curve 12 2.6 Factors affecting the supply curve 14 3 The Market: Interaction of Demand and Supply 17 3.1 Market equilibrium 18 3.2 Movement to a new equilibrium 19 3.3 Equilibrium quantity and society’s welfare 21 4 Price as a Mechanism in Resource Allocation 24 4.1 The price mechanism 24 5 Elasticity of Demand 27 5.1 Price elasticity of demand (PED) 27 5.2 Factors influencing price elasticity of demand 30 5.3 Price elasticity of demand and change in producer revenue and consumer expenditure 32 5.4 Cross elasticity of demand (XED) 34 5.5 Income elasticity of demand (YED) 36 6 Price Elasticity of Supply 37

©ACJC Econs Dept/2023/JC1/H2 Economics 2 6.1 Price elasticity of supply (PES) 37 6.2 Factors influencing price elasticity of supply 40 7 Application of Price Elasticity of Demand and Supply to Determine New Equilibrium Price and Quantity 42 7.1 Price elastic vs price inelastic demand when supply changes 42 7.2 Price elastic vs price inelastic supply when demand changes 44 8 Relevance of Elasticity Concepts to Producers in Raising Total Revenue 46 8.1 Relevance of price elasticity of demand for producers 46 8.2 Relevance of cross elasticity of demand for producers 47 8.3 Relevance of income elasticity of demand for producers 47 8.4 Relevance of price elasticity of supply for producers 48 8.5 Limitations of elasticity concepts to producers 48 9 Government Intervention in Competitive Markets 49 9.1 Why government intervenes in markets 49 9.2 Indirect tax 50 9.3 Subsidy 51 9.4 Price controls – maximum & minimum prices 53 9.5 Quantity control - quota 57 10 Applications to Real World Markets 57 Reference Text (Optional): 1. Karl Case, Ray Fair, Sharon Oster. Principles of Economics, 11th Edition, Pearson, Chapters 3-5

©ACJC Econs Dept/2023/JC1/H2 Economics 3 WHAT IS THIS TOPIC ABOUT? Why are the prices of the latest smartphones like the iPhone 14 and Samsung Galaxy S22 so high when they are first introduced in the market? Why are air tickets much more expensive during school holidays? How has the entry of Grab and Gojek affected the revenue of traditional taxi companies like ComfortDelGro? These are some of the questions which will be dealt with in this