PRICING THEORY PART I

On (Wednesday, 27th of January), we start to learn a new chapter which is pricing theory.

DEMAND

• DEFINITION OF DEMAND

Demand is refer to ability and willingness to buy specific quantities of goods in a given period of time at a particular price.

Willingness + ability to buy

(consumer must have money to buy the product)

• LAW OF DEMAND

Negative relationship between product and quantity demanded.

When the price of the product increase,quantity demanded of that product will be decrease.

When the product decrease, the quantity of that product will be increase.

• DEMAND SCHEDULE AND DEMAND CURVE

INDIVIDUAL DEMAND AND SCHEDULE FOR ORANGE

COMBINATION	PRICE (RM)	QUANTITY (UNITS)
A	P1	Q1
B	P2	Q2
C	P3	Q3

DEMAND CURVE FOR ORANGE

• INDIVIDUAL DEMAND AND MARKET DEMAND

Individual demand- Relationship between the quantity of a product demanded by a single and its price

Market demand- Relatiomship between the total quantity of a product demanded by additional all quantities damanded by all consumers in the market and its price.

DEMAND MARKET IS THE COMBINATION OF INDIVIDUAL DEMANDS

Individual 1 + Individual 2 = MARKET DEMAND

• DETERMINANT OF DEMAND

v  PRICE OF RELATED GOODS

                                I.            SUBSTITUTE GOODS-GOODS OR SERVICES THAT CAN BE USED IN PLACE ANOTHER PRODUCT OR SERVICES.

                              II.            COMPLEMENTARY GOODS-GOODS THAT ARE USED IN CONJUNCTION WITH ANOTHER PRODUCT

	PRICE (A)	QUANTITY DEMANDED (B)
SUBSTITUTE GOODS	INCREASE	INCREASE
COMPLEMENTORY GOODS	INCREASE	DECREASE

SUBSTITUTE GOODS

v  CONSUMER’S INCOME

-WHEN INCOME INCREASE, CONSUMER’S DEMAND FOR GOOD AND SERVICE INCREASE.

v  TASTE AND FASHION

-CHANGE SIGNIFICALLY

-AS TASTE AND FASHION CHANGE, DEMAND WILL ALSO CHANGE.

-IF A PRODUCT BECOME MORE FASHIONABLE, THE DEMAND FOR IT WILL INCREASE

-BUT IF THE SAME PRODUCT BECOMES OUTDATED, THE DEMAND FOR IT WILL FALL.

v  POPULATION

-A LARGE NUMBER OF POPULATION WILL CREATES A GREATER DEMAND FOR GOODS OR SERVICES.

v  FESTIVE SEASONS AND CLIMATIC CONDITION

-DURING FESTIVE SEASON, DIFFERETNT PRODUCTS WILL BE IN HIGH DEMAND.

-FOR EXAMPLE, DURING CNY, THE DEMAND FOR MANDARIN ORANGE WILL BE GREATER.

v  PRICE EXPECTED

-IF THE PEOPLE THINK THAT THE PRICE ARE GOING TO RISE IM THE FUTURE, THEY ARE LIKELY TO BUY MORE NOW BEFORE THE PRICE DOES GO UP.

PRICE (EXPECTED)	QUANTITY DEMAND (NOW)
INCREASE	INCREASE

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MARKET EQUILIBRIUM

On the previous week, Sir Amir had go through a new subtopic in The Pricing Theories chapter which is market equilibrium. Don`t worry guys, at the end end of this subtopic you guys will have a better understanding about what  market equilibrium is. So let`s get started!

Definition of Market Equilibrium.
-Is a situation when quantity demanded and quantity supplied are equal and there is no tendency for price or quantity to change.
                                              
                                           Quantity demanded (Qd) = Quantity Supply(Qs)

Market equilibrium price and quantity
-market equilibrium is determined by the intersection of both the demand and supply curves.

                                              Determinant of equilibrium Price and Quantity

                          
So, market equilibrium of price and quantity is:

Price     :  £16
Quantity:  8 000 units


Market equilibrium based on mathematical form
The demand function and supply for a goods in the market are as follows:

                                         Qd= 140-10P
                                         Qs =20 + 10P
Where,
                              Qd =Quantity demanded
                              Qs = Quantity Supply
                              P    = Price

Shortage and surplus

Shortage is the situation where the price was set up below than equilibrium price. In other words, the quantity demanded is greater than the quantity supplied. In the figure above, there is occurring the excess demand. Therefore, the amount of excess demand (shortage) is (Qd-Qs). If the shortage happened, the rational customer or producer will accept that price and sell back at the market price. 

Surplus is the situation where the price was set up above than equilibrium price. In other words, the quantity supplied is greater than quantity demanded. In figure above, there is occurring the excess supply. The amount of excess surplus can be obtained as follows (Qs- Qd)

Changes in Demand and Supply.

The changes in demand and supply curve will change the market equilibrium. The demand and supply curve will shift based on the following situations.

• The demand curve shifts and supply remains constant.
• The supply curve shift and demand remains constant.
• Changes in demand and supply curves shift simultaneously. 

Changes in demand curve or supply curve are because the factor of determinants demand or determinant of supply.


Supply, demand and government policy.

Maximum Price or Ceiling Price 
Government imposed regulations that prevent prices from rising above a maximum level set by the government which can lead to shortage.

A price ceiling is imposed by the government below the equilibrium price (market price). That price is not allowed to rise above this level but it is allowed to fall below it. 

Problem: emergence of black market
-Black market is where people ignore the government`s price and quantity controls and sell illegally at whatever price equates illegal demand and supply.


Minimum Price or Floor Price

Government imposed regulations that prevent price from falling below a minimum level set by the government which can lead to surplus. 

A  price floor is imposed by the government above the equilibrium price (market price). That price is not allowed to fall below this level but it is allowed to rise above it.

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ECONOMIC SYSTEMS

Economic system was not a new thing for the class because we had learn this topic during the last semester. And, it is apart of microeconomics so it is not a big deal.Hence, Sir Amir had ordered us to revise this topic on our own. 

 A) FREE MARKET ECONOMY/ CAPITALIST/LAISSEZ FAIRE

Definition

-is an economy system was operation without government intervention. 

Features:

1. decisions are taken by individual and firm with no government intervention.
2. it ussusally associated with a pure capitalist, where land and capital are privately owned. 
3. the price mechanism used in this system whereby changes in price in response to change in demand and supply have the effect of making demand equal to supply.

Advantaged

1. Individual are free to make their own economic choice
2. Freedom to workers and firm to choose where to work and what production methods to use.

Disadvantages:

1. Existence of wide gap between the rich and the poor.
2. Existence of unemployment problem.

B) CENTRALLY PLANNED OR COMMAND ECONOMY/ SOCIALIST ECONOMY

Definitions:

-is economy was fully controller by government.

Features:

1. Decisions are taken by the governments or central authorities. 
2. It usually associated with a socialist or communist economy system, where land and capital are collectively owned. The government or central authorities plan the allocation of resources.

Advantages:

1. decisions of allocation of resources always are in the interest of society as a whole and with specific national goals.
2. unemployment could be largely avoided if the government carefully planned the allocation of labour.
3. Same income distribution
4. Produces the goods and services at efficiency level.

Disadvantages:

1. mistake decide in economy (decision made by some people only)
2. technology and innovation are undeveloped because all productions are decided by government.

C) MIXED ECONOMY

Definitions:

is a economy system that incorporates a mixture of private and government ownership or control (capitalism and socialist)

Features:

1. this system use market mechanism and allow government intervention in economy activities.
2. price level determine by price`s mechanism but basic economy`s problem resolved together between government and private.
3. individual and firm free to have properties.

Advantages:

1. the government will try to reduce gap of income between rich and poor people(taxes and subsidies)
2. government will also control the existence of monopolies. 

Disadvantages:

1. Business freedom is not totally offered for enterprise.

D) ISLAMIC ECONOMY

Definitions:

economy which uses Allah`s creation natural resources with most efficient and fair way based on Islamic laws.

Features:

1. al-Quran and Hadith was the main source in Islamic economic`s activities.
2. individual free to own property.
3. individual no give priority to profit in business.
4. fair competition permitted.
5. free to decide in economics.

Advantages:

1. Good in the world and afterworld
2. Free competition.

EXTRA:-

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PRODUCTION POSSIBILITIES CURVE (PPC)

On Monday, 25th of January 2016, the class was still continued with the last topic from the previous class which was attainable & unattainable combination of Production Possibilities Curve (PPC).

Attainable and unattainable combination

• Attainable and efficient combination

-With reference to PPC graph, the best possible combination are point A and B (attainable). Where resources are fully utilized and the country is said to be at full employment level. The firm is also to be efficient (no waste in the use of resources).

• Attainable but not efficient combination

-Combination C (inside PPC) is attainable because it can be produced, but the economy is not efficient and the resources are not fully utilized (unemployment exist)

• Not attainable combination 

-Combination D is not attainable because it situated outside the PPC. It cannot be producing because not enough resources and new technology.

• Extreme Combination

-Extreme combination is combination can be produced and it efficient but all resources will use for produce only one goods.

Change in production possibilities curve

Each combination of production possibilities curve can increase or decrease due to several factors. Increased or decreased in production possibilities curve can occur for one side product only, or both. There are many factors that cause the shift of production possibilities curve.

• Increasing in population

Manufacturers will increase the volume of goods when there is an increase in the population. Production of both goods will increase. This causes production possibilities curve shift to the right.

• Technology progress.

The factors can shift the PPC outward through an improvement in technology. It allows more efficient production using existing economics resources. Based on diagram above, if the improvement of production (technology progress)  happened only in producing goods X, the economy will produce more goods X compare to goods Y. So, the PPC will shifted outwards towards the horizontal axis.


How To Determine The Opportunity Cost  

                                                                                       

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ECONOMICS ISSUES PART I

       On the first week ( Wednesday . 20^th January 2016), we’ve learn about the Economics Issues which is not a very common subject for us. From learning session with Sir Amir about 2 hours, we got so much input about economy. So, this is what we got from that session.

MICROECONOMICS – Study of small economic units namely action by the Firm and Household.

MACROECONOMICS – Research about the whole of economy issue in the country included the inflation, unemployment, economy growth and so on.

                                                               

                                                     Positive vs Normative Economics statement

Basic Economy Concept

v  Scarcity

§  We do not have enough resources ( lack of resources ) to produce everything we want because the factor of production are limited on the same time the amount of output that can be produce also limited .

v  Choice

§  Because of the resources are limited, we should choose the rational decision to satisfy unlimited human want. A choice has to be made among several wants which involves some trade off known as opportunity cost.

v  Opportunity Cost

§  It is defined as the value of the second best alternative foregone when a choice is made

Basic Economy problems

v  What to produce

-Concerned with that goods and services will be produces.

-This is because of the limited factor of production but the demand are unlimited

- So, the firms will produces goods based on demand that will give maximum utility to people

v  How much to produces

Ø  Decide how many quantity of the product should be produces

Ø  So it must be based on total demand for the goods

v  How to produces

Ø  Usually the firm will make decision either use the labour intensive or capital intensive.

Ø  The intensive must be decreasing the production cost.

v  For whom to produces

Ø  This is the target market to sell the product

Ø  The producer decides to distribute the goods and services to society

Ø  It is also based on income of the society

ØUsually, people with high income are able to consume more goods or services that people with low income.

Factor of production

Production possibilities curve (PPC)

Ø  Show the maximum combination on goods that can be produced given the available factors of production and the available technology of production.

Ø  Purpose

·         To understand the concept of scarcity and constrained choice

·         To emphasize the distinction between movements along a PPC nd shifts the PPC

·         To show the concept of opportunity cost usin the PPC model

Ø  3 Assumptions to build the PPC

·         Only two goods will be produce

·         The production of technology is available and not changes

·         Limited factor of production

·         Economy has achieved level of full employmen

·         Example of the production possibilities curve

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