Why Study Economics

Why study Economics?
Top reasons to study Economics
1. Economists are armed and dangerous: "Watch out for our invisible hands."
2. Economists can supply it on demand.
3. You can talk about money without every having to make any.
4. Mick Jagger and Arnold Schwarzenegger both studied economics and look how they turned out.
5. When you are in the unemployment line, at least you will know why you are there.
6. If you rearrange the letters in "ECONOMICS", you get "COMIC NOSE".
7. Although ethics teaches that virtue is its own reward, in economics we get taught that reward is its own virtue.
8. When you get drunk, you can tell everyone that you are just researching the law of diminishing marginal utility.
9. When you call 1-900-LUV-ECON and get Kandi Keynes, you will have something to talk about.

Fishball

Cute!! Interesting to find out why a bowl of 6 fishballs and 6 beefballs are solld@ HK$20 respectively whereas a bowl of 3 fishballs and 3 beefballs is sold@ HK$22. IT IS ALL ABOUT DEMAND! Might go through the concept discussed one day in class....

(But for those who understands Cantonese! Canto speakers you might want to help translate the content to your non-canto speaking frenz)

Factors Affecting Supply

As I do not think it is nice to leave discussion on the on the supply side, I have decided to put in an entry on some NON PRICE FACTORS affecting supply. (NB: Non-price supply factors will result in a shift of supply curve graphically)

Here it goes!

FACTORS AFFECTING SUPPLY OF A PRODUCT

(a) State of technology
Technological changes take place over time as a result of innovation and enterprise. With improved production methods, output of goods would go up, thus giving rise to increases in supply.

(b) Prices of factor inputs
The price at which producers are willing and able to sell output depends on the costs of factors, including wages, rent payments, fuel, interest rates and raw material prices. If factor prices increase, then the costs of producing the same quantity of the good also increases, so producers need to cut back on supply, even though the price of the good itself has not changed. The effect of this increase in the costs of production shifts the supply curve to the left.

d) Prices of related goods
Changes in the prices of other related goods may affect the supply of a commodity whose price does not change. If the prices of other goods increase, the production of these goods will become more profitable, and resources would tend to move towards the industries making these higher-priced commodities. The production of goods, with prices unchanged, would now be less attractive to suppliers.

e) Government policy
The imposition of indirect taxes and granting of subsidies will bring about changes in supply. A tax imposed on a good increases the cost of supplying that good, forcing suppliers to cut back on production. Subsidies have the opposite effect; they lower the costs of production and supply is increased.

f) Number of suppliers
More suppliers increase supply. On the other hand, if suppliers leave the industry, market supply will fall.
g) Weather conditionsThe output of agricultural products is determined by variations in the weather. Favourable weather conditions can increase supply while poor conditions would bring about decreases in supply

Factors Affecting Demand

Hi!

As many of you have requested for the notes on NON-PRICE FACTORS affecting demand, I have decided to put up this entry. (NB:non-price factors result in a shift of the demand curve graphically). I have tried to cut down on the words but tried to retain the essence of the explanation as much as possible. Hope you guys find it useful!

(a) Prices and demand of related products
i. Substitute(s)
A substitute product is an alternative product that can replace another because it satisfies the same want. Examples of substitutes include coffee & tea and public buses & the MRT. If the price of tea changes, demand for coffee will change in the same direction eg a rise in tea prices causes a fall in the quantity demanded for tea and a rise in demand for coffee, even though the price of coffee itself has not changed.

ii. Complement(s)
A complementary product is one which must be used at the same time with another to satisfy the same human wants eg coffee and milk and petrol & cars. If petrol prices rise, demand for cars will change in the opposite direction (though the prices of cars have not risen, people find it more expensive to own cars, resulting in a fall in its demand). Complements are said to be goods that are jointly demanded.

(a) Consumers’ money income
i. Normal goods
These are goods whose demand rise with a rise in money income of consumers and vice versa. ie we buy more electronic gadgets, clothes and travel more when our incomes rise.

ii. Inferior goods
These are goods whose demand vary inversely with consumers’ money income. For instance Pentium 1 computers and fans. Consumers prefer less of such goods when their incomes grow.

(b) Consumers’ tastes and preferences
Consumers' tastes and preferences are influenced by their income, peers, advertisements, pop-star appeal, age, sex, culture etc. Changes in consumers’ tastes in favour of (or against) a good/service will raise (or reduce) its demand.

(c) Expectations of future price changes
The fear or expectation of a future price rise will induce people to buy more now thus raising demand for the good (consumer durables) concerned. If they expect the price to fall in future, they will postpone their purchases now thus reducing demand for the good concerned.

(d) Availability of credit facilities and hire purchases
Easy credit facilities eg. availability of low interest loans and favourable terms offered by banks makes the cost of borrowing funds or spending on credit more attractive. This would raise the demand for loans to encourage consumption of, and demand for, goods and services.
Less stringent hire purchase terms eg. longer repayment periods and smaller downpayment sum will allow more consumers the ability to buy the products now and encourage more purchases and thereby raising demand for goods such as cars, household appliances etc.

(e) Size and composition of population
A fast-growing population will demand more of most goods and services, other things held constant. Increased proportion of teenagers will raise demand for commodities that appeal to this age group eg. sports gear, fashion wear etc.
Increased birth rates will result in higher demand for baby-related goods while a rapidly greying population will mean higher demand for medical services, dentures, walking sticks etc.

(f) Seasonal factors
The demand for many goods and services such as clothing, food, water, healthcare and travel is influenced by seasonal climatic conditions.

“In the month of January, around the island of Singapore, heavy downpours have boosted businesses for some and caused havoc for others.” ST 15/1/06.
What were some of these affected businesses?
Did the changes represent a movement along, or shift of, the demand curves of these goods services?


(g) Government distribution of income
A reduction in personal income tax rates will result in greater disposable income and encourage the consumption of goods and services. On the other hand, an increase in GST tends to reduce the consumption of goods and services.
A progressive tax system (by taxing the rich more heavily) and giving subsidies to the poor will redistribute income in favour of the lower income group, thus their demand for other goods besides basic necessities may rise eg better food and housing.

(h) Other government economic policies
Anti-smoking campaigns, car ownership schemes eg. Certificates of Entitlement (COE) and Electronic Road Pricing (ERP), housing grants and the Economic Restructuring Shares are further examples of government policies that affect demand for related goods and services.

Economics Basics: Demand and Supply

Supply and demand is perhaps one of the most fundamental concepts of economics and it is the backbone of a market economy. Demand refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship. Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship. Price, therefore, is a reflection of supply and demand.

The relationship between demand and supply underlie the forces behind the allocation of resources. In market economy theories, demand and supply theory will allocate resources in the most efficient way possible. How? Let us take a closer look at the law of demand and the law of supply.

A. The Law of Demand
The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded. The amount of a good that buyers purchase at a higher price is less because as the price of a good goes up, so does the opportunity cost of buying that good. As a result, people will naturally avoid buying a product that will force them to forgo the consumption of something else they value more. The chart below shows that the curve is a downward slope.

A, B and C are points on the demand curve. Each point on the curve reflects a direct correlation between quantity demanded (Q) and price (P). So, at point A, the quantity demanded will be Q1 and the price will be P1, and so on. The demand relationship curve illustrates the negative relationship between price and quantity demanded. The higher the price of a good the lower the quantity demanded (A), and the lower the price, the more the good will be in demand (C).

B. The Law of Supply
Like the law of demand, the law of supply demonstrates the quantities that will be sold at a certain price. But unlike the law of demand, the supply relationship shows an upward slope. This means that the higher the price, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at a higher price increases revenue.

A, B and C are points on the supply curve. Each point on the curve reflects a direct correlation between quantity supplied (Q) and price (P). At point B, the quantity supplied will be Q2 and the price will be P2, and so on.

Time and Supply
Unlike the demand relationship, however, the supply relationship is a factor of time. Time is important to supply because suppliers must, but cannot always, react quickly to a change in demand or price. So it is important to try and determine whether a price change that is caused by demand will be temporary or permanent.

Let's say there's a sudden increase in the demand and price for umbrellas in an unexpected rainy season; suppliers may simply accommodate demand by using their production equipment more intensively. If, however, there is a climate change, and the population will need umbrellas year-round, the change in demand and price will be expected to be long term; suppliers will have to change their equipment and production facilities in order to meet the long-term levels of demand.

C. Supply and Demand Relationship
Now that we know the laws of supply and demand, let's turn to an example to show how supply and demand affect price.

Imagine that a special edition CD of your favorite band is released for $20. Because the record company's previous analysis showed that consumers will not demand CDs at a price higher than $20, only ten CDs were released because the opportunity cost is too high for suppliers to produce more. If, however, the ten CDs are demanded by 20 people, the price will subsequently rise because, according to the demand relationship, as demand increases, so does the price. Consequently, the rise in price should prompt more CDs to be supplied as the supply relationship shows that the higher the price, the higher the quantity supplied.

If, however, there are 30 CDs produced and demand is still at 20, the price will not be pushed up because the supply more than accommodates demand. In fact after the 20 consumers have been satisfied with their CD purchases, the price of the leftover CDs may drop as CD producers attempt to sell the remaining ten CDs. The lower price will then make the CD more available to people who had previously decided that the opportunity cost of buying the CD at $20 was too high.

D. Equilibrium
When supply and demand are equal (i.e. when the supply function and demand function intersect) the economy is said to be at equilibrium. At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. Thus, everyone (individuals, firms, or countries) is satisfied with the current economic condition. At the given price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding.

As you can see on the chart, equilibrium occurs at the intersection of the demand and supply curve, which indicates no allocative inefficiency. At this point, the price of the goods will be P* and the quantity will be Q*. These figures are referred to as equilibrium price and quantity.

In the real market place equilibrium can only ever be reached in theory, so the prices of goods and services are constantly changing in relation to fluctuations in demand and supply.

E. Disequilibrium

Disequilibrium occurs whenever the price or quantity is not equal to P* or Q*.

1. Excess Supply
If the price is set too high, excess supply will be created within the economy and there will be allocative inefficiency.

At price P1 the quantity of goods that the producers wish to supply is indicated by Q2. At P1, however, the quantity that the consumers want to consume is at Q1, a quantity much less than Q2. Because Q2 is greater than Q1, too much is being produced and too little is being consumed. The suppliers are trying to produce more goods, which they hope to sell to increase profits, but those consuming the goods will find the product less attractive and purchase less because the price is too high.

2. Excess Demand
Excess demand is created when price is set below the equilibrium price. Because the price is so low, too many consumers want the good while producers are not making enough of it.

In this situation, at price P1, the quantity of goods demanded by consumers at this price is Q2. Conversely, the quantity of goods that producers are willing to produce at this price is Q1. Thus, there are too few goods being produced to satisfy the wants (demand) of the consumers. However, as consumers have to compete with one other to buy the good at this price, the demand will push the price up, making suppliers want to supply more and bringing the price closer to its equilibrium.




F. Shifts vs. Movement
For economics, the “movements” and “shifts” in relation to the supply and demand curves represent very different market phenomena:

1. Movements
A movement refers to a change along a curve. On the demand curve, a movement denotes a change in both price and quantity demanded from one point to another on the curve. The movement implies that the demand relationship remains consistent. Therefore, a movement along the demand curve will occur when the price of the good changes and the quantity demanded changes in accordance to the original demand relationship. In other words, a movement occurs when a change in the quantity demanded is caused only by a change in price, and vice versa.

Like a movement along the demand curve, a movement along the supply curve means that the supply relationship remains consistent. Therefore, a movement along the supply curve will occur when the price of the good changes and the quantity supplied changes in accordance to the original supply relationship. In other words, a movement occurs when a change in quantity supplied is caused only by a change in price, and vice versa.

2. Shifts
A shift in a demand or supply curve occurs when a good's quantity demanded or supplied changes even though price remains the same. For instance, if the price for a bottle of beer was $2 and the quantity of beer demanded increased from Q1 to Q2, then there would be a shift in the demand for beer. Shifts in the demand curve imply that the original demand relationship has changed, meaning that quantity demand is affected by a factor other than price. A shift in the demand relationship would occur if, for instance, beer suddenly became the only type of alcohol available for consumption.

Conversely, if the price for a bottle of beer was $2 and the quantity supplied decreased from Q1 to Q2, then there would be a shift in the supply of beer. Like a shift in the demand curve, a shift in the supply curve implies that the original supply curve has changed, meaning that the quantity supplied is effected by a factor other than price. A shift in the supply curve would occur if, for instance, a natural disaster caused a mass shortage of hops; beer manufacturers would be forced to supply less beer for the same price.

Taken from: www.investopedia.com

24Hour Economics

This video gives you a quick look at how pervasive Economics is in your Life. (NB: there are some terms/concept which you have not learnt....sit back and enjoy the cinematography than!)

24Hour Economics
http://video.google.com/videoplay?docid=8948269088526980955

Captain Economics
http://video.google.com/videoplay?docid=-6124055809087653757

Hahaha....worth a watch