Professional Documents
Culture Documents
Point: Demand can rise and fall due to non-price factors such as the
taste and preferences of consumers, the price of complements and
substitutes as well as the level of income of consumers.
Point: The quantity demanded can rise or fall due to price factors.
Income level and substitutes are taken into consideration after the
change in prices to influence the demand for the goods in question.
Point: Supply can rise or fall due to non-price factors such as cost of
production, the number of sellers as well as sellers price
expectations
Points: The quantity supplied can rise or fall depending on the price
of the good itself.
equilibrium price occurs when the rise in demand outstrips the rise in
supply. This is likely to happen due to the fact that the demand for cars is
income-elastic. Hence for a given rise in income, there is a more than
proportionate rise in demand for cars as well, ceteris paribus.
Evaluation: In the case where the rise in supply outstrips the rise in
demand, the equilibrium price falls instead. Hence it can be said that the
effects of the rise in demand and the rise in supply towards the
equilibrium price is indeterminate and depends on the relative extent of
the shifts of the demand and supply curves, while the rise in demand and
supply reinforces each other to cause a sharp rise in the equilibrium
quantity.
Point: The demand for luxury goods, such as luxury bags and sports
cars, is income elastic. Hence a rise in disposable income means
that such goods experiences a more than proportionate increase in
its demand.
Point: The demand for necessities, such as rice and medicine, is
income-inelastic, as they are essential commodities in many
households. Hence a rise in disposable income only results in a less
than proportionate increase in the demand for such goods.
Point: Inferior goods, such as instant noodles and second-hand
electronic gadgets, have a negative YED. Thus, a rise in the
disposable income of consumers causes the demand for such goods
to fall.
necessity, while for the middle class, instant noodles may be considered
an inferior good.
Evaluation: In this analysis, we have utilised the concepts of elasticity of
demand. However, there are various limitations that may hinder the
application of these concepts in real-life situations. For example, the
ceteris paribus conditions may not hold and the values of elasticities of
demand data may also change over time, as the length of time under
consideration of the analysis have an impact on the data.
Evaluation: The coffee shop may not gain any additional revenue if a price
war ensues between rival coffee shops after it lowers it prices, when the
demand for the coffee is price-elastic.
Evaluation 2: Costs may have also risen and thus the owner has to factor
in rising costs when he decides to lower its prices, as it may have an
adverse effect on profits.
Point: Knowledge of the YED will help the owner to decide on the
type of goods to be sold under different economic circumstances.
The global economic landscape has recently been affected by the
sub-prime mortgage crisis in the US. Hence many countries are
facing recession and falling real national income. Thus it will be wise
for the coffee shop to differentiate its products and offer economical
coffee blends with cheap lunches and coffee sets instead of selling
just premium blends of coffee, which demand is income-elastic. If he
firm embarks on this strategy, the fall in demand will be less than
proportionate and the shop can preserve its revenue.
Evaluation: The shop may incur additional unit cost of production from this
strategy, as it may have to advertise and promote new economical sets,
and therefore profits may be adversely affected.
Point: Knowledge of the cross elasticity of demand will help the shop
to decide on appropriate pricing and marketing strategy as a
response to the pricing policies of its rival shops. For example, the
aforementioned local coffee shops blend of coffee may have a high
degree of substitutability with those offered by large coffee chains.
Hence the local coffee shop has to be extremely conscious of its
rivals pricing strategies. IF its rivals decide to lower their prices, the
shop will have to follow suit. IT can also engage in non-price
competition such as product differentiation using a delivery service
to compete with its rivals if it cannot engage in price competition.
Evaluation 1: Rising costs due to additional costs of undertaking nonprice competition, such as advertising and undertaking R&D may
encroach on the shops profits.
Evaluation 2: In this analysis, we have utilised the concepts of
elasticities of demand. However, there are various limitations that may
hinder the application of these concepts in real-life situations. For
example, the ceteris paribus conditions may not hold and the values of
the elasticities of demand data may also change over time, as the
length of time under consideration of analysis may have a crucial
impact on the data.
Price controls
pay the higher black-market prices to consume the goods. The higher
price in the black market in turn negates or worsens the effects of price
ceiling.
Evaluation: However, there are always other factors that influence the
governments choice of policies. One of the factors may be the issue of
equity. The subsidising of primary school education in Singaporeans
occurs not because of the absence of scarcity but because the
government believes that this policy reduces the issue of income
inequality in Singapore.
Evaluation: However, the free market system is not always perfect in realworld situations and market failures may emerge from various sources,
such as the presence of public goods, merit goods and demerit goods as
well as the problem of income inequality.
Value Judgement: Despite all of its flaws, the free-market system is still
the best market system that economies can make use of. The alternative
to the free-market system is the command economy, which allocates
resources based on the preferences of the government which is inefficient,
as so it does not directly cater to the needs of consumers. The free-market