FACULTY OF ARCHITECTURE,PLANNING AND SURVEYING

UNIVERSITI TEKNOLOGI MARA KAMPUS SERI ISKANDAR,CAWANGAN PERAK

AP114
DIPLOMA IN QUANTITY SURVEYING

DQS156 PRINCIPLES OF ECONOMICS

ECONOMIC OF BUILD ENVIRONMENT

MICROECONOMIC ANALYSIS(1)

NAME: ABDIN ASHRAF BIN ZULKEFLI

STUDENT ID: 2019806266
CLASS: AAP1142N
SUBMISSION DATE: 30 MARCH 2020
LECTURER: DR. MOHD AFFANDI ABU BAKAR

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ECONOMICS ➔ def: a study of how the human manage the scarce resources to produce the output/goods (product and services) in order to satisfy the
unlimited wants of human

In economy - human (society) are divided into 3 groups based on their economic behaviours or activities. The groups are called the economic units/sectors

ECONOMIC UNITS CHARACTERISTICS

HOUSEHOLDS
def: Consists of one or more people • Make consumption decisions and own factors of production.
who live in the same dwelling and • They provide firms with factor services in production, and buy finished goods from firms for consumption.
share meals. It may also consist of a • Have a problem of scarcity which is income
single family or another group of
people.

FIRMS • Make production decisions.

def: A commercial enterprise, a
company that buys and sells products
and/or services to consumers with the
aim of making a profit. In the world of
commerce, the term is usually
synonymous with ‘company’, or
‘business’.
• These include what goods to produce, how these goods are to be produced and what prices to charge.
• They employ the various factors of production and they sell the finished goods to the households for consumption
and to the government. (services - invisible. we can feel it even though we can't touch it or see it) (products –
visible. we can touch, see and get profits from it)
• Have a problem of scarcity which is factor of production

GOVERNMENT
def: Refer to National administration
units that plan infrastructure projects
using limited resources to maximize the
welfare of the people.
• The government collects taxes from households, buys goods from firms, and distributes those goods to households
individually or collectively.
• It also redistributes purchasing power between households.
• Work as a policy makers and policy influent. (make law → influent law → rise market economy)
• Have a problems of scarcirt which is res

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INTERACTIONS of ECONOMIC SECTORS
Circular Flow of Income (3 sectors / closed economic)

Firms Expenditure on Resources

wage, interest, rent, profit

Labour, Capital, Land, Entrepreneur

Government Government
HOUSEHOLD Expenditure GOVERNMENT Expenditure FIRM
Consumers,families, and Public goods and services Producers,businesses and
individuals enterprise
Taxes Taxes

Goods & Services

Household Consumption Expenditure

FINANCIAL INSTITUTION
Saving Investment

3
 Due to scarcity (limited resources), it is impossible for a country/economy to produce everything; therefore, we have international trade - the 4 sector economics (opened economic)

DEFINITION CHARACTERISTICS
HOUSEHOLDS • Make consumption decisions and own factors of production.
A household refers to a social unit of • They provide firms with factor services in production, and buy finished goods from firms for consumption.
people living in a house or a home that • Supply input (SI) and demand output (DO)
under one roof.

FIRMS • Make production decisions.

A commercial enterprise, a company • These include what goods to produce, how these goods are to be produced and what prices to charge.
that buys and sells products and/or • They employ the various factors of production and they sell the finished goods to the households for consumption
services to consumers with the aim of and to the government. (services - invisible. we can feel it even though we can't touch it or see it) (products –
making a profit. In the world of visible. we can touch, see and get profits from it)
commerce, the term is usually
synonymous with ‘company’, or
‘business’.
GOVERNMENT • The government collects taxes from households, buys goods from firms, and distributes those goods to households
The government collects taxes from individually or collectively.
households, buys goods from firms and • It also redistributes purchasing power between households.
distributes those goods to households • Work as a policy makers and policy influent. (make law → influent law → rise market economy)
individually or collectively. It also
redistributes purchasing power between
households.

INTERNATIONAL SECTOR • Imports – flowing into a country from abroad

International trade refers to exchange • Exports – flowing out of a country and sold overseas
of products and services from one
country to another. In other words,
imports and exports. International trade
consists of goods and services moving
in two directions.

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 Circular Flow of Income (4 sectors / opened economic)

Firm Investment Expenditure

wage, interest, rent, profit

Labour, Capital, Land, Entrepreneur

Taxes GOVERNMENT Taxes

Public goods and services

Government Government
HOUSEHOLD Expenditure Expenditure FIRM
Buy and consume goods Produce and sell goods
Export (X) Import (M)
and services services
Export Export

INTERNATIONAL
Import
• Payments for Import
imports
• Exports and transfer
payments

Goods & Services

Consumption Expenditure

Saving Investment
FINANCIAL INSTITUTION
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 ECONOMIC ANALYSIS
HOUSEHOLD 1. ECONOMIC GROWTH
Def: Def: an increase in the capacity of
A household refers to a social unit of people MICROECONOMIC ANALYSIS MACROECONOMIC ANALYSIS an economy to produce goods and
living in a house or a home that under one INDIVIDUAL ECONOMIC MARKET AGGREGATE ECONOMIC MARKET services, compared from one period of
roof. time to another

Characteristics: P output/goods (product & services) market Significant: can be considered among
1. activities associated with the production, Sg the most crucial indicators that are
distribution and consumption of goods and released
services.
2. one or more people who live in the same
e
dwelling Pe
2. EMPLOYMENT
Def: a paid work agreement between an
FIRM employer and an employee
Def: A commercial enterprise, a company Dg
that buys and sells products and/or services Significant: an important part of the
to consumers with the aim of making a profit. economic, social and environmental
combinations of markets create the economic development process and procedure of
In the world of commerce, the term is usually
synonymous with ‘company’, or ‘business’.
0 Qe Qty of goods AGGREGATE MARKET any country
& services
Characteristics: Input/Factors of production
1. size P market General Price AS
2. leverage
Si 3. GENERAL PRICE LEVEL
Def: hypothetical measure of
e Interaction between overall prices for some set of goods
ECONOMIC SECTORS (Agents) Pe e AS & AD creates the and services (the consumer basket) indicator
People are divided into 4 groups ECONOMIC Pe Macroeconomic issues GDP
based on their economic activities: MARKETS Significant: inflation is a &
sustained increase in the general price
Interaction between sectors creates MARKETS Di AD level of goods and services in an
GNP
economy over a period of time.
GOVERNMENT
Def: The government collects taxes from
households, buys goods from firms and
distributes those goods to households
0 Qe Qty of inputs 0 Qe Qty of national output 4. BALANCE OF PAYMENT
individually or collectively (international/foreign sector)
Def: balance of international payments
Characteristics: AD = {P,AE,r,Mq,….} and abbreviated B.O.P.
1. Central Planning.
P Fund/Money market Significant: to analyze the market
potential of a country, especially in the
2. Abolition of Private Property. Sf short term
e
Pe
INTERNATIONAL or FOREIGN
Def: International trade refers to exchange of Df
products and services from one country to 5. WEALTH & INCOME
another. In other words, imports and exports DISTRIBUTION
Def: the way in which the wealth and
Characteristics: 0 Qe Qty of fund income of a nation are divided among
1. deals with the economic activities of its population, or the way in
various countries 6
Significant: income may help
2. a field concerned with economic accelerate growth and promote
interactions of countries economic development
 ECONOMIC SECTORS INTERACTIONS
Circular Flow of Income (2 sectors / closed economy)

Wage, Interest, Rent, Profit

Labour, Capital, Land, Entrepreneur

Price Inputs/Factors of Production Market

of
Input Si

Pe e

Di

Di

Si 0 Qe Qty (input) Di

HOUSEHOLD Price FIRM

Buy and consume of Output/Goods (Product & Services) Market Produce and
goods and goods Sg sell goods and
services services

Dg Sg
e
Pe

Dg

0 Qe Qty (goods & Services)

Goods & Services

Consumption Expenditure

Fund/Money Market
Price
Sf

r e

Df

Saving 0 Qe Qty (fund) Investment

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FINANCIAL INSTITUTION
 ECONOMIC PROBLEMS
Characteristic Nature

Consumers of unlimited wants 1. What & How much

Output/Goods to produce
(product & services) def:
ECONOMIC BASIC
HUMAN + creates ➔ PROBLEMS ➔1. Scarcity ➔ 2. Choice ➔ 3. Opportunity ➔ ECONOMIC 2. How to produce
or CONCEPTS cost PROBLEMS def:

Owners of Inputs limited of quantity & ability 3. For whom to produce

(Factors of production) def:

Concepts: creates the economic systems

(capitalist; central planned; mixed sys)
1. Needs: def.➔ things we must have to survive our live such as food shelter and cloth

2. Wants: def.➔ things that we would really like to have to satisfied our life such as beautiful cloth and fancy car

3. Output/Goods: def.➔ you can touch it and we buy it such as cloth

4. Product: def.➔ you can touch it and we buy it such as cloth

5. Services: def.➔ work that is performed for other such service of car.

6. Inputs/Factors of production: def.➔

LABOUR CAPITAL LAND ENTREPRENEUR
def: human effort used in def:: investment in goods that can def: natural materials def: creative , who is taking risk to
production produce other goods in the future produce production
including human capital and
physical capital

eg. Workers who has education and eg. Human capital : education and eg. water , air soil and minerals eg. Roshamnor has market by his
do training and provide skills training own
Physical capital : roads and schools
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 1. Scarcity
Scarcity can be explained as wants are always exceeding limited resources to satisfy them. Scarcity is a universal problems faced by
both poor and rich nations in order to fulfil their needs. If there is no scarcity, there will be no economics. The needs or wants are
unlimited but the world has only limited amount of resources of factors of production. Factors of production are the basic resources
used in the production process in order to produce economic goods and services.

2. Choice
When there is scarcity, choices have to be made. Everyone cannot have what he or she wants, so they have to choose from the available
alternatives. Individuals, firms and government made decisions to choose from many alternatives.

Economic
Problems
or
Concepts

3. Opportunity cost
Opportunity cost is the cost of one choice in terms of the best forgone alternative. If you cannot obtain what you need, then you have to
choose among the alternatives. The next alternative that you choose not to do is the cost of the things that you choose to do.

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 Production Possibility ➔def: a tool used to explain the basic economics concepts of scarcity,choices and opportunity cost.A graph that shows
all of the different combinations of output that can be produced given current resources and technology.
Constant Opportunity Table Graph
Cost
def: A steady potential
price to a business that
occurs when a company
does not take advantage of
a feasible chance to earn
profits. An example of a
constant opportunity cost
would be if funds and
resources were allocated
to one project, but could
have been allocated to a
second project instead.

Increasing Opportunity Table Graph

Cost
def: the concept that as
you continue
to increase production of
one good, the opportunity
cost of producing that next
unit increases. This comes
about as you reallocate
resources to produce one
good that was better suited
to produce the original
good

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 Basic/Fundamental Economic Problem
1. What and how much of output (product and services) to be produce
At any given quantity, total revenue minus total cost will equal profit. One way to determine the most profitable quantity to produce is to see at what
quantity total revenue exceeds total cost by the largest amount.

2. How to produce the output (product and services)

Output refers to the total production of goods and services of a whole country over a given period – its gross domestic product. The term may refer
to all the work, energy, goods, or services produced by an individual, company, factory or machine. In the world of computing, it refers to any data
that has been processed by and sent out from a computer or similar electronic device. Anything we view on our computer monitor is output.

3. For whom to produce the output (product and services)

This problem refers to selection of the category of people who will ultimately consume the goods, i.e. whether to produce goods for more poor and
less rich or more rich and less poor. Since resources are scarce in every economy, no society can satisfy all the wants of its people. Thus, a problem
of choice arises.

Goods are produced for those people who have the paying capacity. The capacity of people to pay for goods depends upon their level of income. It
means, this problem is concerned with distribution of income among the factors of production (land, labour, capital and enterprise), who contribute
in the production process.

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 Solution on Economic Fundamental Problems
Capitalist Economic Characteristics Solutions on Economic Basic Advantages Disadvantages
System 1. Private ownership’s Problems • Automotive working. • Misallocation of
def: Mixed of resources 1. What to produce is resolved • Higher efficiency and resources
economics system is 2. Each person is by making goods and incentive to work hard • Wasteful competition
the mixture of both motivated by his or services requested by the to earn higher profits. • Human Welfare
the capitalist system her own self-interest. consumer only. • Create efficiency to ignore
and the central- 3. The price system 2. How much to produce is maximize profit. • A wide gap between
planned economic control by market solved through a pricing • Best quality goods the rich and the poor
system. mechanism mechanism. • Economic development
4. Quantity of good 3. How to produce is resolved and prosperity are
and services by manufacturers decision achieved through
influenced by the used the most efficient technological progress
consumer’s demand production techniques. and R&D.
5. Economic power are 4. For whom to produce is
widely dispersed resolved through
6. Great competition consumer’s income
among buyer and distribution patterns
sellers
7. Role government is
Central Planned Characteristics
very minimum Solutions on Economic Basic Advantages Disadvantages
Economic System • Government plan the Problems • Better allocation of • Lack of incentives to
def: : is an economic allocation of resources • What to produce is resources individual
system in which a between current • resolved goverment’s decision • Create efficiency in • Loss of economic
central authority, consumption and usually goods and services. production freedom
such as a investment for the future • How much to produce is • Social justice between • Concentration of
government, makes • Government making • resolved through goverment poor and rich power in the state
economic decisions economic decisions make decision for amount of • Classless society
regarding the • Government decide goods and services to be
manufacturing and resources, techniques produced.
the distribution of and other resources for • How to produce is solve
products. each firm and industry. • through government decision.
• Government give all • For whom to produce is
consumer output fairly • resolved through government
decision is for all consumer to
be fair.

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 Solution on Economic Fundamental Problems
Mixed Economic Characteristics
System • Government may control
def:Mixed relatives prices of goods and
economics system is inputs, by taxing or
the mixture of both subsidising them or by
the capitalist system directing price controls.
and the central- • Government helps to control
planned economic incomes, through income
system. taxes, welfare payments or
direct controls over wages,
profits, rents, etc.
• Government supports in
providing certain goods and
services that are under-
produced or not produced at
all by the market system
Islamic Economic Characteristics
System ⚫ God is the owner of wealth, Problems
def: while the man is the Caliph
Islamic economic (ruler) of wealth.
system is a study of ⚫ Economics is bound
science that deals by aqidah, sharia (law) and
with human behavior morals
in utilizing and ⚫ The balance between
managing the spirituality and materiality
resources for his ⚫ Justice and balance in
own benefit as well protecting the interests of
as the welfare of the individuals and society
society as a while ⚫ Individual freedom
guaranteed in Islam
⚫ State Authority in the
Economy
Solutions on Economic Basic Advantages Disadvantages
Problems ⚫ Use the price mechanism ⚫It can leave the less
• Use the price (as in the free market competitive members of
mechanism (as in the system) society without support.
free market system) ⚫ The direct intervention by ⚫ The mixed economy
• The direct intervention government in offering doesn’t eliminate the
by government in goods and services (such as possibility of
offering goods and the planned economy monopolies.
services (such as the system) ⚫ A mixed economy often
planned economy produces high taxation
system) responsibilities.
⚫ Organizations have
restrictions in their
overall size.
⚫ The state has the power
to change its mind in a
mixed economy.
Solutions on Economic Basic Advantages Disadvantages
• Bank are not charging • Do not get the benefit of
• Forbidding of riba interest on loan. falling rates. According
• Forbidding private or • It leaves the borrower to some critics of system,
state ownership of water fee from changes in it is riddled with
resources interest rate. incoherence introduced
• Forbidding selfishness • The Quran forbids the by different
and hoarding of wealth earning of profits interpretation of the
• Zakat : the wealth tax through unfair trading or Quran. Banking relies on
• Encouraging charity via practices which are an honour system, which
strong spiritual damaging or harmful to often encourages fraud
motivation society. and non-payment. This
can hinder the growth
and stability of the
economy.
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 MARKET/PRICE MECHANISME – def.:
price

def: Supply is a fundamental economic concept that describes the total amount
Supply of a specific good or service that is available to consumers. If the market price
is the equilibrium value, there is an excess supply in the market (a surplus),
which means there is more supply than demand.

Market equilibrium: def. . Market equilibrium is the condition when the quantity
e demanded equals the quantity supplied. The equilibrium price is the price of a
Pe equilibrium good or service when the supply of it is equal to the demand for it in the market
(DD=SS).

def: Demand is an economic principle referring to a consumer's desire to

Demand purchase goods and services and willingness to pay a price for a specific
good or service. If the market price is below the equilibrium value, then there
is excess in demand (supply shortage)

0 Qe Quantity
Output/goods (product and services) market: Output in economics is the quantity of goods or services produced in a given time period, by a firm,
industry, or country, whether consumed or used for further production. The term may refer to all the work, energy, goods, or services produced by an
individual, company, factory or machine.

Inputs (factors of production/resources) market: Inputs are what is used in the production process to produce output—that is, finished goods and services.
The input necessary to obtain an “output.” However, not all the inputs that must be applied are to be regarded as factors in the economic sense.

Fund (money) market: Money market basically refers to a section of the financial market where financial instruments with high liquidity and short-term
maturities are traded. Money market has become a component of the financial market for buying and selling of securities of short-term maturities, of one
year or less.

15
 DEMAND: def.
Law of demand Diagram Explanation
def: as the prices rises, the quantity The demand curve shows how
demanded decrease and as price quantity demanded responds to
falls, the quantity demanded changes in price
increases
The price and the quantity are
table: negatively related
Price(rm )per Quantity
kg demanded (kg)
1.40 8
1.20 13
1.00 20
0.80 30

Individual demand Diagram Explanation

def: the demand of a person The demand the curve show how
participating in a market for he quantity demanded by Mr. X
particular product. responds to changes in price

table The price and the quantity

Price of good C Quantity demanded by Mr. X is
demanded Mr.x negatively related.
1.40 3
1.20 5
1.00 10
0.80 15

Market demand: def: the demand of all person participating in the market for that particular product

Table, diagram and explanation

Price /kg(RM) Quantity demanded
Buyer 1 Buyer 2 Buyer 3 Market demand
5 2 1 3 6
4 4 2 6 12
3 8 4 12 24
2 8 4 12 24
1 10 5 15 30

The market demand is total of all consumer in demand or can be sum up in formula (D1 + D2 + D3 = DD)

16
 Determinants of demand:
(explain at least 6 determinants with diagram(s))

17
 Difference between:
Change in quantity demanded
• It is movement from one point to another
point example from one price and quantity to
another price and quantity.
• The cause of change is due to a change is due
to a change in price either to P2 or P1.
• A movement from quantity A to B is called
Contraction of demand and movement from
A to C is called Expansion of DD.
• Contraction means decrease in quantity
demanded as price goes up
• Expansion means an incease in quantity
demanded as price goes down
Change in demand
• It is shift in the entire demand curve either
demand curve either to the right or to the left.
• The cause of change is not due to price (Price
of fixed) but when one or more of the non-
price factors, such as income taste and
preferences or population changed.
• When the demand curve shift from DoDo to
DiDi, leftwards, in demand and when demand
curve moves upward to the right from DoDo
to D2D2 is known as increase in demand
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 Interrelated demand
1. . Derived demand
- a demand for a commodity, service, etc. which is a consequence of the demand for something else.

2. Competitive demand
- A state of affairs observed between the markets for goods that can readily be substituted for one another.

3. Compesite demand
- is where goods have more than one use. An increase in the demand for one product leads to a fall in supply of the
other.

4. Joint demand
- Joint demand refers to the relationship between two or more commodities or services when they are demanded
together.

Exceptional demand
1. exceptional demands curves slopes upward from left to right that means the demand increase with the rise of 1.
price.

2. the law of demand itself describes that when the price increase, the demands falls (negative) 2.

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 Elasticity: def. . is a measure of a variable's sensitivity to a change in another variable, most commonly this
sensitivity is the change in price relative to changes in other factors. In business and economics, elasticity refers to
the degree to which individuals, consumers or producers change their demand or the amount supplied in response to
price or income changes. It is predominantly used to assess the change in consumer demand as a result of a change
in a good or service's price.

Elasticity of demand: def. The elasticity of demand is an economic principle that measures the extent of
consumer response to changes in quantity demanded as a result of a price change, as long as all other factors are
equal. In other words, it shows how many products customers are willing to purchase as the prices of these products
increases or decreases.

Explain the 3 types of elasticity of demand

a) Definition
- The word elasticity has the same meaning as sensitivity or responsiveness. Therefore elasticity of
demand means the responsiveness of demand due to the same changes to the factors which influence demand

b) Type of elasticity

i) Price

- It measures the responsiveness of the quantity demanded due to the change in its price. As
mentioned in the Law of Demand, when price increases, quantity demanded will decrease.

ii) Income

- The increase or decrease in consumer’s income will affect the demand of different products. As
consumer’s incomes rises, the demand for most products also increases—but not always. The exception to this is
giffen goods (or inferior goods), whose demands decrease as income increases.

iii) Cross
- Can be either negative or positive cross price

- Positive cross-price elasticity of demand means that an increase in the price of one product will
cause an increase in the demand for the other product and vice versa (the relationship between these two products
are substitute)

- Negative cross-price elasticity of demand means that an increase in the price of one product will
cause a decrease in the demand for the other product and vice versa ( the relationship between these two products
are complements)

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SUPPLY: def.
Law of supply Diagram Explanation
def: It says that there is a positive An increase in price will lead to
relationship between the quantity of an increase in quantity supplied,
good supplied and price. and the lower price will lead a
decrease in quantity supply.
table:

Price / Per Kg Quantity

(RM) Supply (Kg)

Individual supply Diagram Explanation

def: Individual supply describes the Stated that the higher the price,
willingness of an individual firm to the greater the quantity supplied
provide a specific quantity of a in a given period, ceteris paribus.
good or service to the market over a
given period of time.

Table :
Price of Good Quantity
X (RM) Supplied per
Week ( unit )

Market supply: def: Table, diagram and explanation

Def : The market supply is the total quantity of a good or service all producers are willing to provide at the
prevailing set of relative prices during a defined period of time.

The market supply is the sum of all individual producer supplies. It is understood that "Supply" means Market
Supply, unless it refers to one producer.

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 Determinants of Supply:
(explain at least 6 determinants with diagram(s))

22
 Changes in Quantity Supplied vs. Changes in Supplied
Change in quantity supplied Change in supplied

Causes the entire supply curve to change, for example

Change in quantity supplied is shown by a
movement along the same supply curve. The change
in quantity supplied is caused by the change in the
price of the good itself, ceteris paribus. If the price of
the good increases from P0 to P1, the quantity of
supplied also increase from Q0 to Q2. The increase
in quantity supplied is know as expansion in supply.
If the price of the good decreases from P0 to P1, the
quantity supplied also decreases from Q0 to Q1
units. The decrease in quantity is know as
contraction in supply
involving a rightward or a leftward shift of the supply
curve. The change in supply is caused by other factors
influencing supply, whereas the price of the good itself
remains unchanged. There would be an increase in
supply if the supply curve shift rightward from S0 to S2.
Price remains at P0, but quantity supplied has increased
from Q0 to Q2. There would be a decrease in supply if
the supply curve shifts leftward from S0 to S1. Price
remains at P0 but quantity supplied has decreased from
Q0 to Q1

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 Elasticity of supply: def. The responsiveness of quantity supplied to a change.
Explain the elasticity of supply

The elasticity of supply can be determined by comparing the % change in quantity supplied with the % change in
price of the product. Elasticity supply have 5 part :-

a. Supply is fairly elastic (Ess > 1 )

- shown by a supply curve that cuts the Y-axis.
- the % change in quantity supplied is greater than % change in price.

b. Supply is fairly inelastic (Ess < 1)

- shown by a supply curve that cuts the X-axis.
- the change % in quantity supplied is less than % change in price.

c. Supply is unitary elastic (Ess = 1)

- shown by a supply curve that passes through the origin.
- the % change in quantity supplied is equal to the % change in price.

d. Supply is perfectly inelastic (Ess = 0)

- shown the supply curve is a vertical straight or perpendicular line.
- the % change in quantity supplied is zero despite the change in the price.

e. Supply is perfectly elastic (Ess = )

- shown by supply curve that is horizontal straight line.
- % change in quantity supplied is infinitely large compared to the % change in price.

Factors influencing elasticity of supply

- time
- nature of the good
-cost and feasibility of storage
- substitutability of factors or inputs used
- perishability

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 Interrelated Supply
1. Joint supply - Refers to good supplied or produced jointly.Some commodities have a common origin and a re 1
produced in the same process.Example are wheat and straw,cotton and cotton seed,wool,and mutton.When any one
of them are produced,the other is produced automatically.For instance,when we produced wheat,the straw comes
out itself.One is called the main product,and the other called by product.In some cases,the joints products are
produced in nearly fixed proportions.Their proportions cannot be varied.In other cases,the proportions can be
varied.For example,it has been found that is possible through cross-breeding to breed sheep either for wool or for
meat.The quantity of one can be increased at the expense of the other.

2. Composite supply - When there are different sources of supply of a commodity or service,we say that its supply 2
is composed of all these sources.We can get light from electricity,gas,kerosene oil and candles.All these sources go
to make up the supply of light.It is a case of composite supply.Whenever there are substitutes or rival sources of
supply,the supply is composite.There is competition among them and the most economical source of supply is
tapped first.But they also combine and cooperate to satisfy the same need.

Exceptional Supply
1.The relationship between quantity supplied and the price of the product or service is negative.
2.When price falls,quantity supplied increase and when the price increase,quantity supplied decrease.
3.It is normally found in the supply of labour service.
4.A worker is faced with the best way of ‘spending’ the limited amount of time available of the day.They spent their
time earning income by working,while the time spent not working is called ‘leisure’.
5.The opportunity cost of working,therefore is forgone leisure time.
6.A higher real wage is needed to induce workers to give up leisure time and spend more time working.
7.Higher real wages often induce workers to decrease the quantity of labour supplied.
8.The quantity of labour supplied declines

MARKET EQUILIBRIUM: def: Market equilibrium is the condition when the quantity demanded equals the
quantity supplied (DD=SS)

25
Determination of Market Equilibrium Price and Quantity
Table Table

Price per unit (RM) Quantity Demanded (Units) Quantity Supplied (Units)

3.00 600 200

6.00 500 300

9.00 400 400

12.00 300 500

15.00 200 600

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Market Shortage: Explanation
Based on the diagram, the maximum price (P1) is set
Diagram: below the equilibrium price (P*). Therefore, the sellers
have to abbey this legal price set by the government.
Such as, the market price of 1kg of chicken is USD8.50.
When the government sets the maximum price at
USD7.50 per kg, the seller must sell 1kg of chicken at
USD7.50, not USD8.50. Here, when the maximum price
is below the market price would be a shortage of goods
and services. In this example, the quantity demanded for
chicken (9kg) is greater than the quantity supplied of
chicken (5kg). An excess demand or shortage of chicken
(4kg) occurs due to the maximum price.

Market Excess/Surplus: Explanation

Based on the diagram, the minimum price is set at P,
Diagram which is above the market price P*. This will create
problem of surplus, where the quantity supplied is greater
than quantity demanded. For example, the market price
for 1 kg is USD10 and the government fixed the
minimum price at USD15 per kg. Therefore, the price of
1 kg of paddy cannot be sold at any price lower than
USD15. Here, there would be a surplus of 10kg of paddy
(20 kg – 10 kg)

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 Effects of a Change in Demand and Supply on The Equilibrium
Change in Demand and Supply Remains Constant Change in Supply and Demand Remains Constant

Diagram: Diagram:

Explanation Explanation
o A change in demand will shift the whole demand o A change in supply will shift the whole supply
curve curve
o An increase in demand will shift the demand • An increase in supply will shift the whole supply
curve to the right curve to the right.
o The result will be an increase in equilibrium price
• The equilibrium price will fall and the
and quantity
equilibrium quantity will increase
o A decrease in price will shift the demand curve to
• A decrease in supply will shift the whole supply
the left
curve to the left
o Then, there will be a decrease in the equilibrium
price and quantity • Then, the equilibrium price will increase and
equilibrium quantity will decrease

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 Simultaneous Change in Demand and Supply
(show at least 10 possibilities what will be the effect on equilibrium)
A decrease in demand causes excess supply to develop at An increase in demand will cause an increase in the
the initial price. The equilibrium price and quantity also equilibrium price and quantity of a good. An increase in
will decrease due to a decrease in demand. An excess demand causes excess demand to develop at the initial
supply will cause price to fall, and as price falls price. Excess demand will cause the price to rise, and as
producers are willing to supply less of the good, then it price rises producers are willing to supply more goods
will decrease the output. and services.

An increase in supply makes an excess supply at initial
price. Excess supply causes the price to fall and quantity
demanded to increases.
A decrease in supply will cause an increase in the
equilibrium price and decrease in the equilibrium
quantity of a good. The decrease in supply makes an
excess demand at the initial price and make the price rise
while the quantity demanded will decrease.

An increase in demand and a decrease in supply will A decrease in demand and an increase in supply will
cause an increase in equilibrium price, but the effect on cause a fall in equilibrium price, but the effect on
equilibrium quantity cannot be determined equilibrium quantity cannot be determined.

If both demand and supply increase, there will be an If both demand and supply decrease, there will be a
increase in the equilibrium quantity, but the effect on decrease in the equilibrium output, but the effect on price
price cannot be determined cannot be determined.

If there is a fall in demand and supply and the fall in If there is a fall in the demand and supply and the fall in
demand is more than the fall in supply, then the new supply is more than the fall in demand, then the new
equilibrium price will become lower than the old equilibrium price will become higher than the old
equilibrium price. equilibrium price.

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 Government Intervention in The Market
Def: The government tries to combat market inequities through regulation, taxation, and subsidies. ... Examples
of this include breaking up monopolies and regulating negative externalities like pollution. Governments may
sometimes intervene in markets to promote other goals, such as national unity and advancement.

Reasons for government intervention: The government tries to combat market inequities through regulation,
taxation, and subsidies. Governments may also intervene in markets to promote general economic fairness.
Maximizing social welfare is one of the most common and best understood reasons for government intervention.

Government Intervention Tools in The Market – Price Control, Subsidies and Indirect Taxes

Price Control: def.

Price controls are government-mandated minimum or maximum prices set for specific goods and are
typically put in place to manage the affordability of the goods. ... Over the long term, price controls can lead
to problems such as shortages, rationing, inferior product quality, and black markets.

Two forms of price control:

National and local governments sometimes implement price controls, legal minimum or maximum prices for
specific goods or services, to attempt managing the economy by direct intervention. Price controls can be price
ceilings or price floors. A price ceiling is the legal maximum price for a good or service, while a price floor is the
legal minimum price. Although both a price ceiling and a price floor can be imposed, the government usually only
selects either a ceiling or a floor for particular goods or services.

Effect of price control on market equilibrium:

Price ceilings only become a problem when they are set below the market equilibrium price. When
the ceiling is set below the market price, there will be excess demand or a supply shortage. Producers won't
produce as much at the lower price, while consumers will demand more because the goods are cheaper.

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Subsidies: def.

➔ A subsidy is a payment a government makes to business or household to achieve a particular purpose.

Subsidy typically given to remove some type of burden and it is often considered to be in the overall
interest of the public, given to promote a social good or an economic policy.

Effect of subsidy on market equilibrium:

➔ The effects of subsidies on the equilibrium price and output are the opposite of tax effects. Subsidies will
lower the cost of production. For example, if the government provides a subsidy of RM10 on a unit of
radio, there will drop in the price of radios and an increase in the quantity of radios. In Malaysia, the
government provides subsidies for the purchase of fertilizers, petrol, diesels and others.
➔ Supply increase and the supply curve shifts to the right from S0 to S1. The equilibrium price decrease
from RM 50 to RM 45 and the equilibrium output increase from 10 to 20 units. So, buyers will enjoy the
price reduction of RM 5 and sellers will enjoy another RM 5 in the form of a subsidy.

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Indirect Taxes: def. Indirect taxes are those imposed by a government on goods and services, in contrast to
direct taxes, such as income and corporation tax, which are levied on incomes of households and firms. Indirect
taxes are also called expenditure taxes.

Effect of indirect tax on market equilibrium:

Indirect taxes are imposed by the government on producers - but the burden of the tax can be passed onto
consumers depending on the price elasticity of demand and elasticity of supply for the product. Therefore in most
cases, consumers end up paying some or all of any indirect tax introduced into a market.
An example of this is the air passenger duty per flight for domestic flights. Most airlines pass this straight onto the
consumer when the final price is published and customer pay the all weight.
A marginal tax on the sellers of a good will shift the supply curve to the left until the vertical distance between the
two supply curves is equal to the per unit tax; when other things remain equal, this will increase the price paid by
the consumers (which is equal to the new market price), and decrease the price received by the sellers.
Alternatively, a marginal tax on consumption will shift the demand curve to the left; when other things remain
equal, this will increase the price paid by consumers and decrease the price received by sellers by the same amount
as if the tax had been imposed on the sellers, although in this case, the price received by the sellers would be the
new market price. The end result is that no matter who is taxed, the price sellers receive will decrease and the price
consumers pay will increase.

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