2.1.1 Price Mechanism and its Functions
2.1.1.a
Central Economic Problem = scarcity
> How to allocate scarce resource?
> price mechanism
> signalling = what to produce?
> incentive = how to produce?
> rationing = for who to produce?
producer surplus = willing - able P higher than P_equilibrium > price_mechanism__func01_signalling > high price signals demand is strong > > q_demanded is more than q_supplied > surplus (ie. too much, can't sell)
government goal max societal welfare consumer goal max utility producer goal max profit
Total Welfare
+-- Externalities
+-- Pollution Taxes, Public Goods, etc..
+-- TS = Total Surplus
+-- CS = Consumer Surplus = upper left triangle
+-- PS = Producer Surplus = lower left triangle
CS = consumer surplus
= upper left triangle
= (left-to-right downward-sloping hypotenuse) - (base)
= willing - actual
= budget - actual
Demand Curve of Consumers
if iPhone SGD 3,000.00, q_demanded = 0 ===> So expensive, nobody wants
if iPhone SGD 1,000.00, q_demanded = 2000, q_supplied = 2000
market clears at the equilibrium price
The Upper-Left Triangle
is formed by
+-- vertical = part of the y-axis or price-axis
+-- base = the horizontal line at the equilibrium price
+-- hypotenuse = part of the left-to-right downward-sloping demand curve (line)
Consumer Surplus
is the difference between
+-- what the consumer is willing to pay, and
+-- what the consumer actually paid, which is the equilibrium price in the market
willing = (left-to-right downward-sloping hypotenuse) of the upper left triangle
= drawn from (q=0, p=3k) to (q=50mm, p=1k)
actual = (base) of the upper left triangle
+-------------+----------------+-----------------+-----------------------+
| Consumer_Id | Willing to Pay | Actual Paid | CS = consumer surplus |
| | (budget) | (p_equilibrium) | CS = Willing - Actual |
+-------------+----------------+-----------------+-----------------------+
| ___1 | SGD 2,999.00 | SGD 1,000.00 | SGD 1,999.00 |
| ___2 | SGD 2,998.00 | SGD 1,000.00 | SGD 1,998.00 |
| ... | ... | ... | ... |
| 1000 | SGD 2,000.00 | SGD 1,000.00 | SGD 1,000.00 |
| ... | ... | ... | ... |
| 2000 | SGD 1,000.00 | SGD 1,000.00 | SGD _,__0.00 |
+-------------+----------------+-----------------+-----------------------+
In Mathematics, y = f( x ) y-axis = dependent factor x-axis = independent factor In Economics, it is opposite when we look at Elasticity y-axis = price x-axis = quantity
Responsiveness > consumer = d_q_demanded / q_demanded > producer = d_q_supplied / q_supplied
The extent of change in (ss,dd) when these determinants change When these determinants change ==> what is the extent of change in (ss,) What are “these determinants”? For demand (DD), the key non‑price determinants (shift‑factors) are: Income (for normal vs inferior goods) Prices of related goods (substitutes and complements) Tastes / preferences Expectations (about future prices, income, product availability) Number of buyers in the market For supply (SS), the key non‑price determinants are: Input / factor prices (wages, raw‑material costs) Technology (more efficient production) Taxes and subsidies Prices of other goods (if firms can switch production) Producer expectations (about future prices) Number of sellers
2.1.2. The extent of change Elasticity of demand and supply Responsiveness of consumer ? Responsiveness of producer ?
