Zamboanga Chong Hua High School
Social Studies
Economics
Second Grading Lecture
Analysis of Demand
Demand – is
defined as the quantity of a commodity that a buyer is willing to purchase at
alternative prices at a given point in time.
Law of Demand –
it is a general economic rule governing the behavior of consumers buying goods
or services with respect to variations in prices. This law states as the price
of a commodity goes down, more of themore of the commodity will be bought. An
increase in the price of a commodity, on the other hand,decreases the demand
for that commodity.
Demand Curve – is
a graphic representation of the relationship between the price of a commodity
and the quantity of it demanded.
The demand curve has a negative slope showing the inverse
or indirect relationship between price and quantity. As the price goes down,
the quantity demanded goes up, and as the price goes up, the quantity demanded
goes down.
It is necessary to understand the uses of graphs in
economic analysis.A two-dimensional graph is a graph showing the relationship
between two variables.
The two dimensions of a graph
are the vertical axis and the horizontal axis.
·
Vertical axis runs from north to south
(top to bottom) and represents a movement from a high level to a low level.We
have assigned the price variable on the vertical axis.
·
The horizontal axis, on the other hand,
runs from west to east (left to right) and represents a movement from a low
value to a high value of the variable.
There are two reasons why the demand for a product increases as its
price. This is a cause by the substitution effect and the income effect.
·
The substitution effect states that if
the price of the commodity decreases, there is a substitution from the
expensive product to a cheaper one. Therefore the expensive product is being replaced
or substituted by a cheaper product by the consumers.
For example, if the price of a corn cob decreases but the
price of a siopao has not changed the price of siopao has become relatively
expensive compared with the price of a corn on a cob.Because of this consumers
will substitute corn on a cob for siopao and the demand for corn on a cob will
increase while the demand for siopao will decrease if the amount of money of
the consumer did not change.
·
Income effect shows that if the price of
a product increases (decreases) despite o change in income, the ability of the buyer to purchase a commodity will decrease (increase).
For example, if a consumer has 500 peso which she can use
to buy papaya at 25 peso each or mangoes at 20 peso each.Thus, because of the
price decrease of mangoes, the purchasing power of her 500 pesos has increased
from 25 mangoes to 50 mangoes.At her current income, the consumer can buy up to
20 pieces of papayas or 25 pieces of mangoes.If the price of mangoes goes down
to 10 peso each while there is no change in the price of papaya, then at the
same income of 500 peso, she can still buy 20 pieces of papayas but 50 mangoes.
Other Factors Affecting Demand
The price of the commodity is the only factor affecting
change in the quantity of the commodity demanded in the market place.
The increase n quantity demanded due to a price decrease is
a result of two contributing effects, the income effect and the substitution
effect.
·
The income effect is due to an increase
in the purchasing power of the consumer when the price of a commodity
decreases.
Suppose a customer has
P100.00 for use in buying papayas priced at P10.00 per unit. With her
budget she can afford to buy 10 papayas. When the price of papayas goes down to
P5.00 per unit, the customer can then afford to buy 20 papayas even if her
P100.00 did not change.This is what meant by an increase in the purchasing
power of income. A price decrease increases the quantity demanded because the
fixed income has increased its purchasing power. This is the income effect.
·
The substitution effect, on the other
hand, is a result of the preference of buyers to consume cheaper goods rather
than more expensive goods.
Let us say that the price of papayas went down but the
prices of other fruits did not change. This reduction in the price of papayas
makes this fruit cheaper than other fruits.
As a result, consumers will buy papayas rather than the more
expensive mangoes and pineapples. This will increase the demand for papayas as
a result.
There are,
however, other factors affecting demand. These include the income level of
consumers, the taste of buyers, the prices of other goods, and the expectations
of the buyers.
·
Income
has a positive effect on the demand for a commodity. Compared to poor person, a
rich individual can afford to buy more of a commodity at a given price. A
substantial reduction in personal income will lead to a corresponding reduction
in the demand for goods and services.
·
Taste
is another important factor affecting demand. The demand for fruit during
Christmas and New Year is high compared to the demand on other days of the year.
This is due to the Filipino custom of celebrating the Christmas holidays. They
want their dining tables to have plenty of fruit as well as food at Christmas.
·
Prices of
other goods can also influence the demand for particular commodities. If
two goods are substitutes, an increase in the price of one will lead to an
increase in the demand for the other. Where cassava is considered a substitute
for rice, an increase in the price of rice will increase the demand for
cassava.
Another
relationship existing among commodities is their complementarity. Two
goods are if the consumption of one entails the consumption of the other.Hot
dogs must be eaten with a hot dog bun and mustard, and coffee with sugar and
milk. If the price of the coffee goes up, the demand for sugar and milk may go
down as a consequence of the decrease in the demand for coffee.
·
Another factor influencing demand is expectations.
If the price of the commodity is expected to rise in the near future, you
may buy more of it now and store it for the time being.
When the peso was
allowed to float in 1984, people increased their demand for dollars because
they anticipated the price of dollars to go up as a result.
Changes in Demand
There are two
types of changes in demand. One is cause
by changes in the prices of the commodity. This is also called a movement along the demand curve. The
other change in demand is caused by
changes in the demand curve. These changes include changes in income, taste, prices of other goods.
Elasticity of Demand
We have seen
that there is an inverse relation between price and demand. An increased price
will result in a decrease in demand, and a price decrease will lead to an
increase in demand.
The responsiveness of a change in demand due to a
change in price is known as the price of
elasticity of demand. It is measured by the coefficient of price elasticity
of demand, defined as the percentage change in quantity demanded divided by the
percentage change in price.
Demand is said to be elastic if the percentage change in quantity exceeds the percentage
change in price (or elasticity of demand
is greater than the absolute value of 1). This means that the quantity
demanded is responsive to changes in price. For example, a 2% increase in the
price of mangoes may reduce the quantity of mangoes demanded by more than 2%.
An inelastic
demand, on the other hand, means that the quantity demanded is not very
responsive to changes in prices. The percentage change in quantity is less than
the percentage change in the price (or
elasticity of demand is less than the absolute value of 1). For example, a
5% increase in the price of rice may reduce the demand by 3%.
Marginal Utility
At
this point it would be useful to introduce the concept of marginal utility.
However, it would be more helpful if we learn to distinguish between the ordinal and cardinal utility before proceeding.
There are basically two ways of viewing utility –
ordinal and cardinal.
·
When we say cardinal,
we measure utility in numerical figures. This makes utility mathematically
tractable and thus more convenient to measure and compare.
·
In the ordinal
measure of utility, little emphasis is given to the values attached to levels
of happiness or satisfaction. Instead, it focuses on the preference ranking of consumers.
For example, consumer A prefers hotdogs to
burgers. Consumer B prefers watching cultural performances to watching movies,
etc. in these examples, the ordinal view of utility would not ask how much
utility one has gained from hotdogs and burgers such that one prefers one to
the other. Rather, it will be satisfied with the preference ranking information
given.
Marginal Utility
is the increase in utility one gets after consuming one additional unit of the
good. On the other hand, Total Utility is the overall satisfaction one derives
from consuming a certain amount of goods.
Diminishing Marginal Utility states that as one increases ones
consumption of a particular good, there will be a point in time when the
additional or marginal increases in its utility starts decreasing.
Analysis of Supply
Supply is the
amount of goods and services which sellers are willing to sell or supply in the
market at various alternative prices at a given point in time. If there is a
demand for a particular commodity, a market system calls for producers to
supply that commodity.
The willingness to supply a
commodity in the market is largely influenced by the price of the commodity.
There is a positive or direct relationship between the price of a commodity and
he quantity of it supplied. Fishermen will go out to seas to fish, and market
vendors will sell the fish if they consider the price fair. Farmers will
cultivate their land and plant food crop if prices are attractive enough to
make farming economically attractive.
A high price, therefore, is an
incentive for sellers to put their commodities in the market, while a low price
is a disincentive for production.
A supply curveis
a graphic representation of the relationship between the amounts which sellers
are willing to supply the market with a particular commodity at a various
prices.
The Cost of Production
One of the major determinants of the supply of any
commodity is the cost of production. But
what determines cost of production? The most intuitive answer would be the
price of the inputs used in the production processes. The basic factor inputs
we will discuss in this section are labor, capital, land, and enterprise.
A production function is a technical relationship between inputs and
outputs. It shows the maximum technically possible output which can be produced
for a given level of inputs.
The production function is
usually governed b an economic principle known as diminishing marginal productivity. According to this law, given a
fixed input (for example, capital), increases in variable input (for example,
labor) will result in increases in total production at a decreasing rate.
In the process of production,
there are two categories of inputs used: intermediate
inputs and factor inputs.
·
Intermediate
inputs are also known as raw materials which are supposed to be transformed
and processed into new products.
·
Factor
inputs are the inputs utilized in transforming the raw materials into
processed products. The services of factor inputs are not mixed with the raw
materials, but they facilitate b the transformation of intermediate inputs into
new products.
We will focus
our discussion on four major factor inputs and their prices: labor, capital,
land, and enterprise.
·
Labor is part of human resources
which gives the individual the strength to move and change objects, the power
to think, and the capacity to make decisions related to the process of
production. Also included under labor are the skills and productive capacity of
workers.
The payment for
labor services is known as wage. In a
market economy, the wage rate is determined by two factors: the productivity of workers and the
opportunity cost of working.
A technician and
an engineer, for example, have higher levels of productivity than an ordinary
carpenter because they have invested a lot of time and resources to acquire
their present talents.
On the other hand,
the opportunity cost of working will depend on how the individual will value
alternative activities to working. If one has several options and opportunities
for one’s limited time, he/she may not be willing to work at a very low wage.The equilibrium wage rateis a payment
reflective of the productivity of the workers as well as the amount he/she is
willing to accept to entice him/her.
·
Capital consists of equipment,
machines, buildings, plants, and other man-made structures which are used in
the process of production.
The process of
creating or augmenting the capital stock of the economy is called investment,
or capital accumulation.
Investment is defined as a direct
process of increasing the productive capacity of the economy through capital
stock accumulation.
The payment for
the use of capital equipment in the production process is known as interest.
·
Land is part of the natural resources
which are also used in the production process. The payment for the use of land
in productive activities is called rent.
·
Enterprise is another category of
factor input used in the production process. It is part of the qualities of
human resources of the owner and managers of business undertakings. The payment
for enterprise is usually called profit.
Changes in Supply
The are many reasons that affect the supply schedule. The
price of inputs, both factors and raw materials, changes in productivity and
external factors can change the supply of goods and services.
For example, if the price of the flour which is a raw
material used in the production of a pan
de sal can shift the supply to the left. Increase in the cost of production
can decrease the amount being supplied by producers in the market. Therefore
for every price level, the producer can only supply less amount of a product
due to the increase of the price of the raw materials needed for production.
Price Elasticity of Supply
The amount of influence exerted by a change in price on a
change in the quantity of goods supplied by sellers is known as price elasticity of supply. The
coefficient of the price elasticity of supply is the percentage change in the
quantity supplied divided by the percentage change in price.
An elastic supply means that the
percentage change in the quantity supplied exceeds the percentage change in
price, or elasticity of supply is greater
than 1. In other words, sellers are quite responsive to price changes.
On the other hand, if the
percentage changes in quantity supplied is less than the percentage change in
price,or elasticity of supply is less
than 1- the supply is said to be inelastic.In
this case, sellers are, therefore, less responsive to changes in price.
Competitive Market
A business enterprise is a social institution organized informally or
organized through the use of legal procedures by an individual or a group of
individuals pulling together their financial and other resources to perform
different kinds of activities for productive and distributive purposes in
expectation of a monetary return to their activities.
A partnership is a business enterprise or agreement between two or
more people with joint ownership and liabilities of a business.
A corporation is
a business enterprise created under the operation of law that gives the
enterprise a legal personality. Corporations can be classified into stock and non-stock corporations:
·
Stock
corporations are business enterprise whose capital for the operation of the
enterprise is raised from the funds generated in the issuance and selling of
stocks to the public. San Miguel Corporations is an example of a stock
corporation.
·
Non-stock
corporations are business enterprise that are organized and funded by the
non-issuance of stocks to the public.
Corporation for
profit are business enterprise whose surplus is distributed in terms of
dividends to the major stockholders as well as to other people who are holding
the stocks of the corporation.
Nonprofit
corporations are business enterprise whose surplus goes back to the
corporation and are not distributed to its owners.
Profit is a surplus income generated by the business enterprise for
the efficient and effective management of the business.
The concept of profit shows the difference between total revenue and
total costs (TR –TC).
Total revenue refers to the product of the price commodity being
sold and the quantity sold. The cost of production may involve not only
accounting costs but more importantly economic costs.
Accounting costs are explicit
costs of production since there are monetary outlays in the use of factors or
production.
Accounting profit as a consequence is based on the difference
between total revenue and total explicit costs.
Market Equilibrium
Concept of Equilibrium
The process of resolving the
conflict in the diverging behavior of buyers and sellers in the market is a
movement toward equilibrium. Equilibrium is a concept borrowed from physics. It
refers to the state of rest. In economic analysis of markets, equilibrium
refers to the state in which the suppliers are in agreement with the buyers on
the price and quantity of goods to be sought and sold. In effect, the market is
at rest when there is such equilibrium.
The market is not in equilibrium when the price asked by
consumers for merchandise is too low for producers to supply for it. And there
is no market equilibrium if the price asked is too high, which may encourage an
increase in production and supply, but at the same time discourage consumers by
cutting their demand.
Role of Competition
The
attainment of a state of equilibrium is based on the existence of competition
between buyers and sellers. Consumers must compete among themselves by bidding
the price up if the commodity being traded is scarce. Those who need a
commodity very badly will bid high to acquire it if the supply is limited.
Similarly, sellers will offer a
lower price to increase their share of a crowded market for a commodity.
Ceiling price – a maximum price set for goods
Floor price – a minimum price set for goods
Market equilibrium – a condition in the market where the quantity
demanded is equal to the quantity supplied
Price – a mechanism by which the scarcity and limitedness of goods
are expressed
Quantity – amount of goods
Surplus – a situation where supply is greater than the demand
Monopoly
A monopoly can be
described as a market structure where there only one producer of a specific
product or service.
Legal and
institutional barriers refer to restrictions on entry arising from
intellectual property rights held by monopolist that prevent other firms to
copy a product or service that he is producing and selling in the market.
Example of these intellectual property rights are patents on certain products
like medicines and trademarks on how the product is marketed to the consumers.
Scale barriers,
on the other hand, refer to obstacles to enter the market due to the huge
amount of resources needed to undertake large scale operation of a firm in a
monopolistic market.
There are cases when a monopolistic firm can divide its
market and sell almost the same output or service at two or more levels of
prices; this firm is called a discriminating
monopolist.
Monopoly power
can be achieved if the company has its own formula and technology in making the
product that will make the product different from its competing products.
Collusion – agreement between different
firms to cooperate by raising prices, dividing markets, or restraining
completion
Homogenous product – identical products
Market Structure – the general
environment wherein the forces of supply and demand interact
Monopolistic competition – a market
structure wherein there are many sellers who are supplying goods that are
slightly differentiated
Monopoly – a market structure wherein a
commodity is supplied by a single firm
Monopsony – the mirror image of
monopoly; this is a market wherein there is only a single buyer – a buyer’s
monopoly
Oligopoly – a situation wherein an
industry is dominated by a small number of suppliers
Optimization – the process of maximizing
the use of resources
Perfect competition – refers to markets
where no firm or consumer is large enough to affect the market price or output
Perfect knowledge – perfect information
Profits – revenue less costs
Note: please study and
familiarize the lecture
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Second Grading Project
Reaction Paper: “Zamboanga Crisis”
Consider
the following:
1.
Short Biography of NurMissuari
2.
Short history of MNLF or Moro National
Liberation Front
3.
How the government addresses the situation
4.
How the crisis affects the economy of Zamboanga
City
Note: write your reaction in a paragraph form (minimum of 2 pages)
Submission
When:
On or before Periodic Test
How:
Email your work at joeytubaga@yahoo.com or fhox_cute@yahoo.com
` Prepared by: .
Mr. Joey B. Tubaga
09276603480
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