ECON｜巿場與價格 Market and Price

Relative 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

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