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#economics

• Law of Demand: As price increases, quantity demanded decreases, and vice versa (inverse relationship).

• Demand Curve: A downward-sloping graph showing this relationship.

Factors Affecting Demand (Non-Price Factors)

1. Income: More income → higher demand for normal goods.

2. Substitutes & Complements: Price of related goods affects demand.

3. Tastes & Preferences: Trends and advertising can shift demand.

4. Population: More people → higher demand.

5. Expectations: If prices are expected to rise, current demand increases.

Movements vs. Shifts in Demand

• Movement (along curve) → Due to price change.

• Shift (of curve) → Due to non-price factors.

#economics

1. Definition of Demand

• Demand refers to the willingness and ability of consumers to purchase a good or service at a given price over a specific period.

2. The Law of Demand

• Law of Demand: When the price of a good increases, the quantity demanded decreases, and when the price decreases, quantity demanded increases (ceteris paribus—other factors remain constant).

• Demand Curve: Downward-sloping from left to right, showing the inverse relationship between price and quantity demanded.

3. Factors Affecting Demand (Determinants of Demand)

Price Factor (Causes Movement Along the Demand Curve)

• Increase in Price → Contraction of Demand (move up the curve, lower quantity demanded).

• Decrease in Price → Expansion of Demand (move down the curve, higher quantity demanded).

Non-Price Factors (Cause Shifts in the Demand Curve)

• Income Levels:

  • Higher income → More demand for normal goods, less demand for inferior goods.

  • Lower income → Less demand for normal goods, more demand for inferior goods.

• Prices of Related Goods:

  • Substitutes: A rise in the price of one good increases demand for its substitute (e.g., if Pepsi price rises, demand for Coca-Cola increases).

  • Complements: A rise in the price of one good decreases demand for its complement (e.g., if fuel prices rise, demand for cars may fall).

• Tastes and Preferences: Trends, advertising, or health factors influence demand.

• Population Size & Structure: More people = higher demand; changes in age groups affect demand (e.g., aging population = higher demand for healthcare).

• Expectations of Future Prices: If consumers expect prices to rise, they buy more now (increasing current demand).

• Seasonal Factors: Some products have higher demand during specific seasons (e.g., demand for ice cream rises in summer).

4. Individual Demand vs. Market Demand

• Individual Demand: Demand of one consumer.

• Market Demand: Total demand from all consumers in a market.

5. Shifts vs. Movements in the Demand Curve

| **Cause** | **Effect on Demand Curve** |

|----------------------------------------------|--------------------------------------|

| Change in price of the good itself | Movement along the demand curve |

| Change in income | Shift in demand curve |

| Change in price of related goods (substitutes/complements) | Shift in demand curve |

| Change in population size | Shift in demand curve |

| Change in preferences or trends | Shift in demand curve |

| Future price expectations | Shift in demand curve |

#economics

The price mechanism . It refers to how prices are determined in a market economy through the interaction of supply and demand. It helps allocate resources without direct government intervention.

How the Price Mechanism Works:

Determination of Prices:

• When demand increases, prices rise.

• When demand decreases, prices fall.

• When supply increases, prices fall.

• When supply decreases, prices rise.

Market Equilibrium:

• The equilibrium price is set where quantity demanded = quantity supplied.

Signaling Function:

• Prices signal producers and consumers about scarcity or surplus.

• High prices indicate strong demand or limited supply.

• Low prices indicate weak demand or excess supply.

Incentive Function:

• High prices encourage producers to supply more.

• Low prices encourage consumers to buy more.

Rationing Function:

• When goods are scarce, higher prices ration demand to those willing to pay more.

Advantages of the Price Mechanism:

✔ Efficient Resource Allocation – Directs resources to the most profitable uses.

✔ Consumer Choice – Buyers can decide based on price and preference.

✔ Competition & Innovation – Firms improve products and reduce costs.

✔ Flexibility – Adjusts to market changes automatically.

Disadvantages of the Price Mechanism:

❌ Market Failure – May not provide public goods (e.g., street lighting).

❌ Income Inequality – Can lead to wealth gaps.

❌ Negative Externalities – Prices may not reflect social costs (e.g., pollution).

❌ Unstable Prices – Sudden price changes can disrupt markets.

Government Intervention in the Price Mechanism:

• Price Ceilings (Maximum Prices): Prevents prices from rising too high (e.g., rent controls).

• Price Floors (Minimum Prices): Prevents prices from falling too low (e.g., minimum wages).

• Taxes and Subsidies: Adjusts prices to correct market failures.

#economics

Resource allocation is about deciding how to use limited resources to meet human wants. Every economy must answer three key questions:

1. The Three Key Economic Questions

What to produce?

• Decides which goods and services should be made (e.g., food vs. luxury cars).

How to produce?

• Chooses between labor-intensive or capital-intensive methods.

For whom to produce?

• Determines who gets the goods—based on income, need, or government policy.

2. Factors Influencing Resource Allocation

• Price Mechanism (Market Economy) – Supply and demand decide allocation.

• Government Intervention (Planned & Mixed Economies) – Taxes, subsidies, and public services influence decisions.

• Opportunity Cost – Choosing one option means giving up another.

• Economic Efficiency – Maximizing output without waste.

3. Economic Systems and Resource Allocation

4. Production Possibility Curve (PPC)

• Shows trade-offs between two goods.

• Inside the curve = inefficient use of resources.

• Outside the curve = unattainable with current resources.

Conclusion

Scarcity forces choices in all economies. Whether through markets or government planning, resource allocation impacts efficiency, growth, and fairness.

#economics

• A market system (or free market economy) is where economic decisions are made through supply and demand, with minimal government intervention.

Key Features of a Market System:

• Private Ownership – Individuals and businesses own resources and production.

• Consumer Sovereignty – Consumers decide what gets produced through their choices.

• Competition – Firms compete to attract buyers, leading to efficiency.

• Profit Motive – Businesses focus on maximizing profits, driving innovation.

• Price Mechanism – Prices are determined by supply and demand forces.

• Limited Government Role – The government mainly regulates to ensure fairness.

Advantages of a Market System:

✅ Efficiency – Resources are allocated based on demand, reducing waste.

✅ Innovation – Competition encourages new ideas and product improvements.

✅ Consumer Choice – A variety of goods and services are available.

✅ Economic Growth – Investments and businesses boost the economy.

Disadvantages of a Market System:

❌ Income Inequality – Wealth distribution is uneven, leading to social gaps.

❌ Market Failures – Some goods (e.g., streetlights) are not provided efficiently.

❌ Exploitation – Workers and the environment may suffer as firms cut costs.

❌ Monopolies – Large firms can dominate and charge high prices.

Role of Government in a Market System:

Although mostly free, governments intervene to:

• Provide Public Goods – Services like roads, healthcare, and education.

• Regulate Monopolies – Prevent firms from overcharging consumers.

• Reduce Market Failures – Address issues like pollution and unfair wages.

• Protect Consumers & Workers – Ensure fair wages and product safety.

Examples of Market Economies:

• United States – A mostly free market with some government involvement.

• United Kingdom – A mixed economy balancing market forces and regulation.

• Singapore – A free-market economy with strong government oversight.