ghana telecom university college 3rd lecture presentation bsc ict bte

8/8/2019 Ghana Telecom University College 3rd Lecture Presentation Bsc Ict Bte

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GHANA TELECOM UNIVERSITY

COLLEGE, GHANA GT UNIVERSITY

BUSINESS SCHOOLFIRST SEMESTER, 2010 / 2011 ACADEMIC YEARBsc ICT / BTE SSC 351 / BTE L300: ECONOMICS

SUBJECT: ECONOMICS

LECTURER: FRED ASAH-APAU

DATE: MONDAY 13THAND THURSDAY 16TH SEPTEMBER 2010

OFFICE: C/O OFFICE OF THE DEAN, IT BUSINESS

VENUE & TIME: AC 4, 10.15 12.15 & AC 15, 19.00 21.00


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DEMAND AND SUPPLY

The learning objectives:

Describe a competitive market and think about a

price as an opportunity cost;

Explain the influences on demand;

Explain the influences on supply;

Explain how demand and supply determine

prices and quantities bought and sold; Use demand and supply to make predictions

about changes in prices and quantities.


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Markets and Prices

A market is any arrangement that enables buyers and sellers to get

information and to do business with each other. An example is the

world oil market in which oil is bought and sold. The world oil market is

not a place; but the network of oil producers, oil users, wholesalers,

and brokers who buy and sell oil. A stock exchange is also an

organised market for trading in stocks and bonds.

The price of a product is the amount of money that must be given up in

exchange for it. This is referred to as the money price. The opportunity

cost of an action is the highestvalued alternative forgone.

The ratio of one price to another is called a relative price, and a

relative price is an opportunity cost.


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Competitive Market

A competitive market is a market that has many

buyers and sellers with no single buyer or seller

having the capacity to influence the price. Here,

producers offer their goods for sale only if the price

is high enough to cover their opportunity cost.

Consumers on the other hand also react to

changing opportunity cost by looking for cheaper

alternatives to expensive items.


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RELATIVE PRICE

If the price of a can of malt drink is GH 2.00 and that of a cup of chocolate drink is GH 1.00, then the opportunity cost of onecan of malt drink is two cups of chocolate drinks. The normal way of expressing a relative price is in terms of a basket of allgoods and services. That is, comparing the price of a commodity against the average price ofall other goods and services.

Example of relative price (Px):

Average price of banana, orange, pineapple, and rasta /corn roll = GH 20.00Therefore, relative price = 60 20 = 2.4.

Commodity Price (Px)

GH

Dates 60

Banana 30

Orange 10

Pineapple 20

Rasta / Corn roll 40


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Demand

Demand is the relationship between the price of goods and services and the amount

that buyers want to purchase (quantity demanded) during a specific period of time. The

law of demand states that there is an inverse relationship between the price of a

commodity and the quantity demanded. If you demand something, then you

1. Want it,

2. Can afford it, and

3. Plan to buy it.

Wants are the unlimited desires or wishes that people have for goods and services.

Scarcity guarantees that many/most of our wants will never be satisfied. Demand reflects

a decision about what which wants to satisfy.

The quantity demanded of a good or service is the amount that consumers plan to buy

during a given time period at a particular price. However, it should be noted here that the

quantity demanded is not necessary the same as the quantity actually purchased.

Occasionally, the quantity demanded exceeds the amount of goods and services

available. With this, the resultant effect is that the quantity actually purchased is less than

the quantity demanded. The quantity demanded is therefore measured as an amount per

unit of time.


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Demand Continued

Many factors influence the buying plans of individuals,

households, and businesses. One of such factors is price.

If all other factors remain constant, the law of demand

states that Other things remaining the same, the higher

the price of a good, the smaller is the quantity demanded;

and the lower the price of a good, the greater is the

quantity demanded. Why does a higher price reduce the

quantity demanded?

Substitution effect

Income effect


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Substitution Effect and Income Effect

Substitution Effect

If the price of a good rises, and all other factors remaining constant, the

relative price, i.e., it opportunity cost rises. Consumers tend to be

swayed towards its substitutes and buy less of that good.

Income Effect

When a price rises and all other factors on buying plans remain

unchanged, the price rises relative to peoples income. Realistically, a

higher price without a corresponding upward change in income, peoplecant afford what they previously bought, and will naturally reduce the

quantity demanded of goods and services whose price have gone up.


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Substitution Effect and Income Effect

continued

Examples of goods with close substitutes: Energy bar and energy drink.

As indicated above, suppose an energy bar initially sells for GH3.00 and then its price falls to

GH1.50; consumers will now substitute energy drink for energy bar the substitution effect. As a

result of budget surplus due to the fall in price of energy bar, people will buy more energy drink the

income effect.

Alternatively, if an energy bar initially sells for GH3.00 and the price rockets to GH6.00, consumers

will shift towards energy drink and buy fewer energy bars the substitution effect. The increase in the

price of energy bar will create tight budget, and therefore, fewer energy bars income effect.

Substitute Goods Initial price

GH

Current Price

GH

Future Price

GH

Energy bar 3.00 1.50 6.00

Energy drink 2.00 2.00 2.00


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Demand Curve and Demand Schedule

Demand is illustrated by the demand curve and the demand schedule. The term quantity

demanded refers to a point on a demand curve, i.e., the quantity demanded at a particular price.

A demand curve shows the relationship between the quantity demanded of a good and its price

when all other influences on consumers planned purchases remain the same.

Demand Schedule

Price

GH

Quantity

Demanded

A 0.5 22

B 1.00 15

C 1.50 10D 2.00 7

E 2.50 5


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Demand Curve and Demand Schedule

FIGURE 1: Demand Curve


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Willingness and Ability to Pay

Another way of looking at the demand curve is as a

willingness-and-ability-to-pay curve. The willingness and

the ability to pay is a measure ofmarginal benefit. If a

small quantity is available, the highest price that someone

is willing and able to pay for one more unit is high. As the

quantity available increases, the marginal benefit of each

additional unit falls and the highest price that someone is

willing and able to pay also falls along the demand curve.


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A Change in Demand (dd)

Price is not the only factor that influences demand. Any

change in other factors will bring a change in demand.

Original Demand Schedule New Demand Schedule

Price/bar

GH

Qty dd Price/bar

GH

Qty dd

A 0.50 22 A 0.50 32

B 1.00 15 B 1.00 25

C 1.50 10 C 1.50 20

D 2.00 7 D 2.00 17

E 2.50 5 E 2.50 15


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An Increase in Demand

FIGURE 2


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Factors Influencing Change in Demand

1. The price of related goods A substitute is a commodity that

can be used in place of another good. A complement is a

commodity that is used in conjunction with another good.

2. Expected future prices

3. Income Increase in income will result in increase normal goodand a fall in demand forinferior good.

4. Expected future income When income is expected to increase

in the future, demand might increase now.

5. Population

6. Preferences Demand depends on preferences. Preferencesdetermine the value that people place on each good and service.

Preferences depend on such things as the weather, information,

and fashion.


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A Change in the Quantity Demanded

Versus a Change in Demand

Changes in the factors that influence buyers plans cause either a

change in the quantity demanded or a change in demand. A point on

the demand curve shows the quantity demanded at a given price.

Therefore, a movement along the demand curve shows a change in the

quantity demanded. A shift of the demand curve shows a change in

demand.

Price

Quantity

Increase in

demand

DeDecrease in

demand

ghana telecom university college 3rd lecture presentation bsc ict bte

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