M.

5 Social Studies

TOPIC 4
UNIT 7 – HOW PRICES ARE
DETERMINED (P.104 – 134)
Unit Objectives

 Understand forces of supply and

demand.
 Market demand curve, supply
curve and equilibrium price.
 Price elasticity of demand and
price elasticity of supply.
 Effects of tax and subsidy.
 What is
demand?
  Demand – want / willingness of
consumers to buy goods and
services.

 Quantity demanded – amount of
products consumers are willing to
buy.

Demand curve

 Shows amount of goods and services

people are willing to buy.
 Downward sloping.

Possible price of chocolate bar Your demand per month
(pence)

200p

150p

50p

30p

20p

10p

5p

1p

Now plot your
demand curve
in your
handout.
 Demand curve is
downward
sloping.
Pr As price is high,
ic quantity demanded
e is low.

As price is low,
quantity demanded
is high.

Quanti
ty
Revenue
The revenue for
Pr producers is shown by
ic the white rectangle.
e 50 x 100 = 5000
50

100
Quanti
ty
Changes in demand curve

Movement along demand curve

 Changes in quantity because of
changes in price
 Ceteris Paribus – all other things
remain the same.
 Changes
P,Q in
Pr quantity
ic demanded
e P1 , as price
Q1
changes .

P ,
Q
Quanti 
ty P ,
Q
Shifts in demand curve

 Demand curve shifts in or out

(Increase / decrease in demand)

What causes shift in
demand?
1. Changes in income
 When income rises, people
consume more goods.
 Normal goods – demand rises as
income rises.
 Inferior goods – demand falls as
income rises.
2. Changes in taxes on incomes.
 Lower tax = more disposable
income (money people have left
after spending or paying tax).


3. Complementary and substitute

goods
 Complementary goods – goods
used in combination with other
goods.
 Substitutes – goods which can
replace other goods.
 4.Changes in tastes, habits
 Demands change as people’s
tastes and preferences change.


5.Population change

Possible Price of Original Demand per Increased demand per
Chocolate bars month month

50 100,000 200,000
40 150,000 250,000
30 200,000 300,000
20 260,000 360,000
10 330,000 430,000
5 400,000 500,000
 Expansion
of quantity
Pr demanded as
ic income of
e consumers
increase .

D1
D

Quanti
ty
 Shift in demand curve  S ame
priceS 
bigger quantitS
Pr
ic
e
P

D1
Q Q1 D

Quanti
ty
 Movement along demand curve is
due to changes in price only,
ceteris paribus.

 Extension or contraction of demand
curve is due to changes in other
factors (income, tastes and
preferences).
What is supply?
 Supply is want / willingness of
producers to sell goods and services.


 Quantity supplied – amount of

products, producers are willing to sell.
Possible price of Market supply per
tankards
20 month
1600
16 1100
12 700
8 300
4 100
 As price rises,
quantity
supplied by
producers rises.
S

Pr
ic
e

Quanti
ty
Changes in supply curve

Movement along supply curve

 Changes in quantity because of
changes in price.

 S

P1 ,
Q1

Pr
ic P, Q
e

Quanti
ty
 Shifts in demand curve
S

Pr
ic S1
e

Quanti
ty
 Shift in supply curve  Same
priceS bigger
quantitS
Pr S
ic
e S1
P

Quanti Q Q1
ty
What causes shift in
supply?
1.Changes in the cost of factors of
production.
2.Changes in price of other goods and
services.
3.Technological advances.
4.Business optimism and expectations.
5.Global factors.
 Exercise 6, P. 114
 Exercise 7, P. 116
Market Price
Reaching equilibrium

 Market price (equilibrium) is reached

when we combine supply and
demand curve.
 Equilibrium is the price and the
quantity of product that will be sold
and purchased.
 S
Pr
ic
e
Equilibri
P um

D
Quantit Q
y
  In free market economy, the market
will determine the price and
quantity of goods / services.


 At equilibrium, the amount supplied

equals the amount demanded.
 Exercise 8, P.
118
Disequilibrium
Pr
ic Excess Supply S
e
30
0

20
0

10
0
Excess Demand
D
200 Quantit
y
 When we have disequilibrium, the
market forces will force the price
and quantity to the equilibrium
point again.
 Exercise 9, P. 120
 Exercise 10, P.

121
 Exercise 11, P.

122
Price Elasticity
Price Elasticity of Demand

 Responsiveness of quantity
demanded to changes in the price.
Formula

Elasticity < 1 = Inelastic demand

Elasticity = 1 = Unitary elastic
demand.
Elasticity > 1 = = Elastic demand.
Elasticity = 0 = Perfectly inelastic.
Elasticity = ∞ = Perfectly elastic.
Inelastic Demand
Small change
in quantity .
Big change in
price .
Elastic Demand
Big change in
quantity .
Small change
in price .
Factors that affect elasticity

1. Number of substitutes

 Demand is elastic if there are many
substitutes.
 Demand is inelastic if there are few
substitutes (e.g. Medicine)
2. Time Period
 When price rises, people search for
substitutes. The longer the time, the
more chance they have to find
substitute.


3. Proportion of income spent

 Cheap items (e.g. Newspaper) will
be inelastic.
 Expensive items (e.g. Cars) will be
elastic.
 Exercise 12 –
14, P.124 - 125
Price elasticity of supply

 Price elasticity of supply measures

the responsiveness of quantity
supplied to a change in price.
 INELASTI
Pr C S
ic
e

P1

D D1

Q Q1 Quantit
y
 ELASTIC
Pr
ic
e S

P1
P

D D1

Q Q1 Quantit
y
What affects elasticity of
supply?
1.Time
 Supply is price inelastic in the short
run.
 Supply is price elastic in the long
run.


 Producers have limited resources

and will have limited amount of
products to sell. It will take time to
produce more.
 2.Availability of resources.
 If firms want to expand production,
they need more factors of production
(land, labour, capital).
 If all resources have been used up,
they cannot increase their
production, so supply is inelastic.
Taxes and Subsidies

 Governments often intervene in a

free market.
 Influences price and quantity of
products traded.

Taxes

 Taxes on goods and services are

called Indirect taxes
 Value added tax (VAT) – percentage
of price.
 Excise duties – fixed tax mark-up
(petrol, alcohol, cigarettes.)
Effects of tax on supply
S
P S1

S
P1
P

Q1 Q Q
Effects of subsidy on supply
S
P S

S1
P
P1

Q Q1 Q