2024 SAJC JC1 H1 Price Mechanism and its Applications Part 1 Lecture Notes

1 Important concepts and tools of analysis  Price mechanism  Ceteris paribus  Demand and its determinants  Change in demand vs. change in quantity demanded  Supply and its determinants  Change in supply vs. change in quantity supplied  Market equilibrium – equilibrium price and quantity  Market disequilibrium – shortage and surplus  Consumer expenditure and producer revenue  Taxes and subsidies  Price controls – maximum and minimum prices  Quantity controls – quotas Key questions to consider 1. What are the different roles of prices and how do they facilitate resource allocation? 2. What is the ceteris paribus assumption? 3. What is demand and how is it affected by its determinants? 4. What is the difference between a change in demand and a change in quantity demanded? 5. What is supply and how is it affected by its determinants? 6. What is the difference between a change in supply and a change in quantity supplied? 7. How does the interaction between demand and supply determine the market equilibrium level of price and quantity? 8. What happens when there is a market disequilibrium in the form of either a shortage or surplus? 9. How do changes in demand and supply impact the equilibrium price and quantity and what are the consequences on consumer expenditure and producer revenue? 10. Why do governments intervene in markets? 11. What are the different types of interventions and how do they affect the market equilibrium level of price and quantity? The theme on Price Mechanism and its Applications provides an introduction on how markets deal with the Central Problem of Economics, and how decisions are made by self - interested consumers and producers in markets. You will learn how market forces of demand and supply interact to bring about market equilibrium, allocating resources via the price mechanism to maximise social welfare. You will also be able to apply this knowledge to analyse market outcomes in different situations. ST ANDREW’S JUNIOR COLLEGE JC1 H1 ECONOMICS 2024 Price Mechanism and its Applications Part 1

PRICE MECHANISM AND ITS APPLICATIONS PART 1: DEMAND, SUPPLY & PRICE DETERMINATION 2 Contents Important concepts and tools of analysis ............................................................................................................................... 1 Key questions to consider .......................................................................................................................................................... 1 INTRODUCTION .......................................................................................................................................................................... 3 1. PRICE MECHANISM AND ITS FUNCTION .................................................................................................................... 3 1.1. Introduction to Demand and Supply ................................................................................................................... 4 2. THEORY OF DEMAND...................................................................................................................................................... 6 2.1. Definition of Demand ............................................................................................................................................. 6 2.2 Demand Curve ........................................................................................................................................................ 6 2.3 The Law of Demand .............................................................................................................................................. 7 2.4 Individual vs. Market Demand ............................................................................................................................. 8 2.5 Price and Non-Price Determinants of Demand ................................................................................................ 9 3. THEORY OF SUPPLY....................................................................................................................................................... 19 3.1 Definition of Supply ............................................................................................................................................. 19 3.2 Law of Supply ....................................................................................................................................................... 19 3.3 Supply Curve ......................................................................................................................................................... 19 3.4 Individual Supply vs. Market Supply ............................................................................................................... 21 3.5 Price and Non-Price Determinants of Supply ................................................................................................. 22 4. PRICE DETERMINATION ...................................................................................................................................................... 29 4.1 The Interaction of Demand and Supply ........................................................................................................... 29 4.2 Market Equilibrium ............................................................................................................................................... 29 4.3 Demand and Supply Analysis ............................................................................................................................ 31 4.4 Effect of Changes in Both Demand and Supply............................................................................................. 34 4.5 Effect of Changes in Demand for and Supply of labour ............................................................................. 38 5. CONSUMER EXPENDITURE AND PRODUCER REVENUE ......................................................................................... 41 5.1. Consumer Expenditure and Producer Revenue .............................................................................................. 41 6. GOVERNMENT INTERVENTION IN THE FREE MARKET ............................................................................................... 42 6.1 Price Control: Maximum Price (Price Ceiling) ................................................................................................. 42 6.2 Price Control: Minimum Price (Price Floor) ....................................................................................................... 44 6.3 Indirect Taxes (Expenditure Taxes) .................................................................................................................. 46 6.4 Subsidies .................................................................................................................................................................. 47 6.5 Quantity Control: Quotas ........................................................................................................................................ 48

PRICE MECHANISM AND ITS APPLICATIONS PART 1: DEMAND, SUPPLY & PRICE DETERMINATION 3 INTRODUCTION In the previous chapter, we were introduced to the Central Economic Problem and why economic agents need to make choices and incur opportunity costs. We also learnt how economic agents make decisions using the decision-making framework. In this chapter, we will examine in greater detail how markets deal with the Central Economic Problem and how decisions are made by economic agents in markets. 1. PRICE MECHANISM AND ITS FUNCTION Key Question 1: What are the different roles of prices and how do they facilitate resource allocation? In any economic system, scarce resources have to be allocated am