Price mechanism and Price elasticity

Price mechanism is a manner where prices of good and services affect the demand and supply. It also depends on the situation itself. For example, a good may lack of production due to scarcity and at the same time demand for it is high. These goods usually has intrinsic value and demand for it is very high, such as gold and diamond. Since demand for it is high, producers will set the price higher in order to earn more profit and also eliminating extra demands. Consumers that has higher income will get to purchase it and producers will get tons of money.

As production gets more efficient, due to technology and availability of resources. The average cost of production will be lower and prices of these goods and services will be lower as well. Consumers are able to afford these goods because it's cheap. Usually people wont buy expensive things unless it's a luxury good. If producers understand that their product is too expensive for most of their consumers, they will reduce their price in order to satisfy the market.

Sometimes the price for a particular good produced will signal the producers what the consumers want.Since the goods is cheap, demand will definitely be high. Therefore, shortage might happen. The producers will either increase their price or increase production for that particular good. Conclusion, price mechanism help producers to set their price correctly according to the situation given. THAT'S ALL!

Price elasticity of demand is the responsiveness of the quantity demanded over the change in price. The two main types that I've learnt throughout this week for PeD (Price elasticity of demand) is Elastic and inelastic.

Elastic using happens when the %change in quantity demand/ % change in price is: >1

As you can see this is a demand line. A change in price would change the quantity demanded. For example, the price raise from $0.75 to $1.00 (33% is the % change in price) . The quantity demanded will decreased from 9 to 3 (67% is the % change for quantity demanded). We can conclude that when 67% is divided by 33 the value will be 2.01. It is more than 1. Therefore it's elastic (:  since elastic is more than one therefore inelastic is less than one(<1).

This is an inelastic demand curve and the difference between elastic and inelastic demand curve is the steepness of the graph as well. Inelastic is steeper than elastic. 

The tile above says it all. For this particular graph, the change in price is proportional to the change in quantity demand. That's why the PeD for it is equals to 1.

This is a Perfectly elastic demand line. The PeD is infinite and if there is a slight change in price, the demand will go zero. This graph shows that consumers only accept that particular price. 

This is a perfectly inelastic demand line. The PeD is zero and a slight change in price will not affect the quantity demanded. Consumers will accept any price for this particular good. 

Every point from this line has different elasticity. The top of the line will be elastic, middle will be 1 and the end will be inelastic. 

Factors affecting elasticity of a particular goods and services: 

1. Number of substitutes: The more the substitutes of a good, demand for it will be elastic. 
2. Degree of necessity: A good might be our basic needs and the increase in price wouldn't have much  changes for the quantity demanded. Therefore the demand is inelastic.
3. Proportion of income(y): Some goods play a big role in our income and some doesn't. For people who has high income, an increase in price for food will not affect much for him. This is because food might only take up very little proportion from his income. Therefore, the demand for it is inelastic. 
4. Time: The longer the time, the more elastic a good can become. This is due to change in taste, technology, other cheaper substitute goods coming in. 
5. Habit forming: For example getting addicted. A person will do whatever it takes to get a pack of cigarettes because he's addicted to it. An increase in price for cigarettes will not affect much for the demand. Therefore, the demand in inelastic.

Income Elasticity of demand (YeD) 

The responsiveness of the quantity demanded over the change in income. 

• When income increases, the quantity demanded will increase. The relationship where both a directly proportional to each other gives a (+VE) value. (normal goods)
• When income increase , the quantity demanded will decrease. The relationship where both are inversely proportional to each other gives a (-VE) value. (inferior goods) 

Factors affecting (YeD)

• Proportion from the income. 
• Degree of necessities 

This week I've learnt a lot about the demand and supply curves. Things like.. how they link with each other, and how the price of goods and services affects these curves (vice versa). 
The definition for demand is the amount of goods and services that consumers are willing and able to buy at various prices over a period of time. Where as, effective demand is the ability of a consumer to buy these good and services. For example: A person who has high disposable income is able to purchase more goods compare to those that has low disposable income. The amount of money a person earns will show their level of ability to buy the G&S they want. 

This an example of a demand curve: 

Every single one of us would want to buy the cheapest possible goods we want. As you can see, the demand curve diagram here shows it all. When the Price is $0.50 the quantity demanded is 100. However, when the Price is $0.20 the quantity demanded is 400. The demand curve(although this is a straight line) is a downwards slopping curve and it show's the inverse relationship between price and quantity demanded. The lower the price, the more the quantity demanded. A change in price would change the quantity demanded and it involves the movement along the demand curve. 

Shifting of demand curve happens when other factors affecting the demand and not the price of theses goods and services. These factors could be, the amount of disposable income a person has, a rise in complement goods, the trend in the market, natural disasters, war and many more. 

As you can see, the price of the particular good remain constant but the demand curve shift to the left. It shows that price is now not the main factor that affects the quantity demanded. For example, a trend for LV green bags is growing wild. Since the trend for LV green bags is growing in the market. The trend for other bags will reduce. Therefor there will be a shift in demanded curve to the left. Where as the demand curve for LV green bags will shift to the right. This can be an example which is known as substitute goods.

There is another type of demand curve which is very common to the society. The curve is known as exceptional demand curve. It’s an upward slopping curve. The higher the price the more the quantity demanded. For example:  property(speculative goods), shares(speculative goods), branded goods(snob appealing goods) and many more.

Besides demand curve, I've learnt about supply curve too. The definition of supply curve is the amount of goods a producer willing and has to sell at various prices over a period of time. What is sold is actually determined by the demand as well.

This is an example of a supply curve diagram:

The supply curve is an upward slopping curve. It shows that the Price of goods and services produced is proportional to the quantity supplied. As you can see... When the price of a product increases, the quantity demanded is high. Producers set their price high because they can earn more profit. They noticed that their product has a high demand, consumers are willing to buy. Therefore they set the price higher and increase the quantity supplied. As price change, quantity supplied will be changed as well and it involves the movement along the supply curve.

 Factors affecting supply curve to shift are cost of production, technology, efficiency, price of substitute goods or competitive goods, weather, Govt legislation (tax, subsidy) and many more.

I’ve learnt about equilibrium price as well. Equilibrium means balance and equilibrium price: price that a buyers is willing to pay = price that the seller are willing to accept. Well, is known as the market price.

·        The point where both curves intersect with each other is the equilibrium.

·        When supply is more than demand: it’s known as surplus.

·        When demand is more than supply: it’s known as shortage.

The change in equilibrium price is affected my both demand and supply.

This is an example where equilibrium price is changed and it’s affected by the demand. I’ll use vegetables for example. When there is an increase in demand for vegetables due to having a healthier lifestyle, the demand curve will shift to right from D1 TO D2. It signals the producers to grow more vegetables for their consumers; the movement of the demand curve is increased along the supply curve from Q1 to Q2. The price for vegetables will increase from P1 to P2 because people are willing to purchase. Therefore, producers will get to earn more profit.

This is another diagram where the equilibrium price is affected by the supply curve. I’ll use petroleum for an example. Due to scarcity, the supply for petroleum has decreased which shifts the supply curve to the left from S1 to S2. The producers will start setting up the price higher from P1 to P2 in order to earn more profit in the future. Since the price of petroleum became higher, the demand for petroleum is reduced from Q1 to Q2. Consumers may start using other alternatives such as public transport or carpooling in order to save money.

The types of goods I’ve learn during the week are:

Normal goods: The demand on certain good has increased due to higher income.

Inferior goods: The demand on certain good has decreased due to higher income.They can afford better G&S

Interrelationship between markets:

Joint demand: Complement goods. “You need to buy this in order to use that” such as car and petrol, socks and shoes...

Competitive demand: Substitute goods. Such as LV and Gucci, jam and butter.

Derived demand: Occurs when a good is demanded in order to produce another good. Such as Wood and furniture, plastic and Tupperware.

Joint supply:  When two or more goods supplied together. Such as sheep (meat, wool), crocodile( leather bags and meat).

Competitive supply: Producing using the same FOP. Such as Rice and brown rice.

Composite demand: When products has many uses. But one of its uses is very important to the society. If it’s used for other things, it’ll be charged higher compare to before.  

There are 3 types of economy system in this world and they're Free Market, Planned (Command Economy) and Mixed Economy. 

Free market is basically a system where all the FOPs are produced and sold by private sectors only and with a little bit of government intervention involved as well. Countries that are currently using this system are Hong Kong, USA and Canada(haha it's in the econs notes book too lazy to find the others) Well, a market system allocate their resources by using the term price mechanism (Supply and demand). They decide on what to produce by knowing what the consumers want. Knowing what's the trend in the market is very important for every producers.Having these information will help them gain more costumers and earn more profit from their production. They tend to reduce their cost of production as much as possible in order to gain more profit too. Sometimes, due to saving more cost, they're not employ more workers if it does not contributes anything to the firm, Unemployment rate will go higher. The rich will be become richer, the poor will become poorer due to lost of jobs. In a free market, competition is very high. Many companies will try to be the best in market and this creates growth to many firms. Competitions help firms to be more innovative and hard working as well. They'll produce more variety of G&S and this benefits the consumers to have many choices of G&S when they're buying. Besides, the growth of the economy will increase as will due to the efficiency of production which increases the GDP of the country. The bad part of a market system is that many firm are so focused on making profits that they don't care about the social effects of the environment. Over consumption of demerit good will happen and the pollution as well. Private sectors are not able to provide merit and public goods too and these two goods are very important to the community. Although, free market may create growth to the economy so a short while but the in long run the country will have huge gap between the rich and the poor. This creates more mess and it's not fair to the others who don't get to enjoy. 

Planned economy is where all the FOPs are controlled by the government. Countries that are planned are Cuba, Libya and  North Korea. The government decide on what to produce, how to produce and whom to produce. The government produces goods and services based on social cost and social benefits. They'll provide free health care, education and transport system if the poor can't able to afford them. Under a command economy, theoretically unemployment does not exist. Government would make sure that the distribution of wealth is equal for everyone. Since government are the ones who decide on what to produce, they're not as efficient as private firm because their main aim is not to gain profit but to reduce unemployment. Therefore, they might produce too much on certain goods and resources are wasted. The goods and services provided will have poor quality due to lack of competition which means low innovation.Consumers are not be able to have a variety of G&S to choose and economic growth might be slow as well. 

Mixed Economy is the combination of both Free and Planned economy. The FOPs are partially owned by private sectors and partially owned by government. the best of both worlds! Government is there to set rules and regulations to reduce market failure, where as private sectors get to spice up the economy. Both economy have their own part to play and the combination is perfect, that's why most countries are mixed. 

Transition economies is one that is changing from planned to free market. For example China, Poland and Bulgaria. Many firms will be privatized and a financial sector will be formed. They're have to face some problems in the future such as unemployment, inflation, negative economic growth and unfavorable balance of payment (import>exports). 

SPECIALIZATION 

Specialization is known as division of labour. It's a system of organization where individuals or nations are not self sufficient but concentrate on producing certain G&S and trade the surplus with others. Division of labour increases the efficiency and productivity of  the production. Since more G&S are produced the rate GDP has increased as well which stimulates the growth of the economy. Besides, the national income increases too which means the living standards of the nation will be better. This is an overall picture on what happens when division of labour occur. Sometimes is not always good for a country or an individual to be specialized on producing a certain good. This is because they are not able to change jobs, they'll also be bored if they kept doing the same thing, people or the country will become too dependent on each other. A change in technology will effect the previous labours who specialized on producing the previous goods. Unemployment level be increased as well as these labour can find any other job to do. the GDP WILL DECREASEEEEEEE!! wohoooo!! 

MONEY

• Medium of exchange 
• store of value 
• measure of value
• a standard of deferred payment 

The characteristics are:

1. portable 
2. durable 
3. divisible 
4. scare 
5. difficult to forge 
6. acceptable by all 

Liquidity: The assets that easily can be converted into cash (gold diamond, stocks) 

Intrinsic value: It naturally has value in it. e.g: Gold, Diamond.