ECO162 TOPIC 2 PART 2

Introduction

This tutorial will guide you through key concepts from ECO162 Topic 2 Part 2, focusing on essential economic principles relevant to the course. Understanding these concepts will enhance your grasp of economics, helping you apply theoretical knowledge to real-world scenarios.

Step 1: Understanding Supply and Demand

• Define Supply and Demand:

  • Supply refers to the quantity of a good or service that producers are willing to sell at different prices.
  • Demand is the quantity that consumers are willing to purchase at various price levels.

• Law of Demand:

  • As prices decrease, demand typically increases, and vice versa.

• Law of Supply:

  • As prices increase, supply generally increases, and vice versa.

• Practical Tip:

  • Use real-world examples, such as the housing market or consumer electronics, to visualize how supply and demand interact.

Step 2: Market Equilibrium

• Definition:

  • Market equilibrium occurs when the quantity of goods supplied equals the quantity demanded at a particular price.

• Equilibrium Price:

  • This is the price at which the market clears, meaning there is neither surplus nor shortage.

• Graphical Representation:

  • Sketch a graph showing the supply and demand curves intersecting at the equilibrium point.

• Common Pitfall:

  • Avoid confusion between shifts in supply/demand and movements along the curves. Shifts occur due to external factors (e.g., changes in consumer preferences, production costs).

Step 3: Shifts in Supply and Demand

• Factors Causing Demand Shift:

  • Consumer income changes
  • Changes in tastes and preferences
  • Price of related goods (substitutes and complements)

• Factors Causing Supply Shift:

  • Changes in production costs
  • Technological advancements
  • Number of suppliers in the market

• Real-World Application:

  • Examine how a new technology can lower production costs, increasing supply and potentially reducing prices.

Step 4: Price Elasticity of Demand

• Definition:

  • Price elasticity of demand measures how much the quantity demanded responds to a change in price.

• Calculation:

  • Use the formula:

    Price Elasticity of Demand = (% Change in Quantity Demanded) / (% Change in Price)
    

• Types of Elasticity:

  • Elastic (>1): Demand changes significantly with price changes.
  • Inelastic (<1): Demand changes little with price changes.
  • Unitary (1): Demand changes proportionately with price changes.

• Practical Tip:

  • Consider necessities (inelastic) versus luxuries (elastic) when assessing how price changes affect consumer behavior.

Conclusion

In summary, understanding supply and demand, market equilibrium, shifts in these curves, and price elasticity are crucial for grasping economic principles in ECO162. As you progress, consider how these concepts play out in various industries and everyday situations. Engage with real-world examples to deepen your understanding and application of these economic theories. For further study, review the materials related to these topics and practice graphing supply and demand scenarios.