d.
Perfect information
Perfect competition
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An Open Source Education Project Consumer surplus – The excess of what a consumer is willing to pay over
what he actually pays
Free market economy – Decisions about production and consumption are
left to those who are willing and able to participate in the market place
1. Private ownership of economic resources Producer surplus – The excess of what a producer is actually paid over
2. Profit maximisation for consumers, maximum satisfaction for what he is willing to be paid
consumers
3. Price mechanism determines demand and supply
For whom to produce: Consumers with purchasing power gets the goods
that have been produced
Types of Demand
1. Usually a negative value due to the law of demand
1. Individual demand
2. Price elastic demand – Elasticity < -1
2. Market demand
a. A change in price of the good brings about a more than
3. Complimentary demand (compliments)
proportionate change in quantity demanded
4. Competitive demand (substitutes)
3. Price inelastic demand – Elasticity > -1
5. Derived demand (factors of production)
a. A change in price of the good brings about a less than
6. Composite demand
proportionate change in quantity demanded
4. Unit elastic demand
Supply – Willingness and ability of producers to produce goods
a. A change in the price of the good brings about a
proportionate change in quantity demanded
Law of Supply – The quantity supplied of a good is proportional to the
5. Perfectly elastic demand
price of a good
a. A change in the price of the good will bring about an infinite
Change in quantity supplied – Movement along the supply curve change in quantity demanded
b. Horizontal demand curve
Change in supply – Shift of supply curve 6. Perfectly inelastic demand
a. A change in the price of the good will not bring about any
Factors Affecting Supply change in the quantity demanded
b. Vertical demand curve
1. Costs of production
2. Goals of firm Factors Affecting Price Inelasticity of Demand
3. Technological improvements
4. Government policies 1. Availability of substitutes
5. Speculations 2. Proportion of income spent on good
6. Climate and weather 3. Necessities vs luxury goods
7. Number of producers 4. Time period
8. Prices of related goods
a. Competitive supply (substitutes in production) Price Elasticity of Demand Affecting Total Revenue
b. Complementary supply (complements in production)
1. Elastic
Types of Supply
1. Individual supply
2. Market supply
3. Competitive supply
4. Complementary supply
Market Equilibrium
3. Conditions
a. No external benefits 2. Inelastic
b. No external costs
1. Productivity (MPP changes)
2. Price of good (MR changes)
3. Demand for goods and services using skills offered by labour market
4. Market value of product
1. Time period
3. Unit elastic
2. Proportion of wages to total cost
a. Loss = gain
3. Price elasticity of demand of products
Income Elasticity of Demand 4. Supply of substitute factors
5. Strength of economy
6. Ease of substitution of resources (eg. labour and capital)
Supply of Labour
1. Positive income elasticity 1. Upward sloping as more labour supply at higher wage rates
a. Rightward shift of demand curve
b. Normal and luxury goods (inelastic) Factors Affecting Supply of Labour
2. Negative income elasticity
a. Leftward shift of demand curve 1. Ease of entry of new labour
b. Inferior goods 2. Population structure
3. Zero income elasticity 3. Wages and working conditions in alternative industries
a. Basic necessities
Elasticity of Supply of Labour
Cross Price Elasticity of Demand
1. Degree of responsiveness of quantity of labour supplied to a change
in wage levels
1. Time period
2. Existence of spare capacity (short run) • Diagrams plotted with (eg.) Price of S$ in US$ vs Quantity of S$
1. Improve resource allocation and achieve social efficiency Effects of Price Ceiling
2. Government revenue
1. Shortage of good
2. Black market may result