ECON|巿場與價格 Market and Price

  • When the same amount of tax is imposed on HIGH-QUALITY-PRODUCTS and LOW-QUALITY-PRODUCTS
  • The relative price of HIGH-QUALITY-PRODUCTS in terms of LOW-QUALITY-PRODUCTS decreases
  • Relatively higher proportion of HIGH-QUALITY-PRODUCTS will be consumed

Surplus / Shortage

Shortage / Excess demand

Implications

  • Quantity demanded > Quantity supplied
  • Price is below the equilibrium price

Surplus / Excess supply

Implications

  • Quantity supplied > Quantity demanded
  • Price is above the equilibrium price

Elasticity

Shortage / Excess demand

– 迴享 Recurso

When price increases, how total expenditure will be affected?

When demand is inelastic,

  • Price increases, quantity demanded decreases
  • % increase in P > % decrease in Qd
  • Total expenditure increases

When demand is elastic,

  • Price increases, quantity demanded decreases
  • % increase in P < % decrease in Qd
  • Total expenditure decreases

Factors affecting the price elasticity of demand

Availability of close substitutes

  • When there are more and closer substitutes for a good
  • Ed will become more elastic

Degree of necessity

  • If the good is a daily necessity
  • Ed will become more inelastic
  • If the good is a luxury good (which is not daily necessity)
  • Ed will become more elastic

Consumption habits

  • If a good is addictive / people develops a habit of consuming that good
  • Ed will become more inelastic

Proportion of expenditure to income

  • If the proportion of expenditure on consuming that good is higher to income
  • Ed will become more elastic

Number of uses

  • If there are many uses for a good
  • Ed will become more elastic

Time available to adjust competition

  • If there is more time available to adjust consumption
  • Ed will become more elastic

Durability of goods

  • Durable goods (e.g. television)
  • Ed will become more elastic
  • Non-durable goods (e.g. food / clothes )
  • Ed will become more inelastic

Factors affecting the price elasticity of supply

Ease of adjusting factors of production

  • Easier to adjust factors of production
    (e.g. more easier to employ more factors of production)
  • Es is more inelastic

Amount available of the good

  • Some goods have fixed quantity supplied available
  • Es is perfectly inelastic

Factor mobility

  • Higher factor mobility
    (ease of a factor of production to change from one industry to another)
  • Es is more elastic

Ease of entry

  • Firms can enter the market more easily
  • Es is more elastic

Reserve capacity on production

  • Higher reserve capacity
    (more amount of resources are ready to put into production)
  • Es is more elastic

Time allowed for adjusting production

  • More time is allowed for adjusting production
  • Es is more elastic

Government Intervention

When the price control is effective,

Price ceiling (Maximum Price control)

  • Is below the equilibrium price

Price floor (Minimum price control)

  • Is above the equilibrium price

When the quantity control is effective,

Quota

  • Is below equilibrium quantity

Tax burden / Subsidy benefit

Ed (Elasticity of Demand) < Es (Elasticity of Supply)

Ed (Elasticity of Demand) > Es (Elasticity of Supply)

CTB (Consumer Tax Burden) > PTB (Producer Tax Burden)
CSB (Consumer Subsidy Benefit) > PSB (Producer Subsidy Benefit)

CTB (Consumer Tax Burden) < PTB (Producer Tax Burden)
CSB (Consumer Subsidy Benefit) < PSB (Producer Subsidy Benefit)


Paper 2 Structured Question

Background information

Question

Concepts involved in answers

Changes in demand and supply at the same time

Under what condition will price increases / decreases

Under what condition will quantity transacted increases / decreases

Comparing the extent of demand change and supply change

Change in price /
Change in supply

Under what condition will total revenue increase / decrease

The price elasticity of demand

Imposition of tax / subsidy

Comparing the size of CTB and PTB / CSB and PSB

Comparing the elasticity of demand and supply