1. Updated by: Reham Al-Homayan Nov,2007 B200 TUTORIAL WEEK SIX

2. Updated by: Reham Al-Homayan Nov,2007 By the end of the Markets module you should be able to: Describe the role of markets and market economies as social institutions that co-ordinate economic activity. Describe the role and behaviour of various socio- economic agents such as households, firms and governments. Use the various models of the nature of market competition and of market power. Recognise the existence and nature of market competition and of market power. Describe the ways in which Governments may try to remedy market failures and the limitations of this process of state intervention. Deemonstrate the importance of the international dimension of economic activity in both current and historical contexts. Describe the diversity of market economics.

3. Updated by: Reham Al-Homayan Nov,2007 Economic Agents This area of markets is covered by your study of Chapters 3, 4 and 5 of the markets module. Chapters 3 and 4 will be studied this week, and Chapter 5 (alongside chapter 6) will be studied next week. In a market economy, there are three important agents or decision makers whose behaviour we need to understand if we wish to understand how the economy functions: households, organisations, and government. In this section, we concentrate on the behaviour of households (chapters 3 & 4) and households (chapter 5). The role of behaviour of government is covered later in the module.

4. Updated by: Reham Al-Homayan Nov,2007 Chapter 3 Household by Jane Wheelock

5. Updated by: Reham Al-Homayan Nov,2007 Household, The term refers to all individuals who live in the same house, without regard to whether they are related to each other. and is the basic unit of analysis in many microeconomic and government models Households take three sets of economic decisions: –Production –Consumption (spending) –Distribution This chapter discusses the key factors that influence the consumption decisions of households.

6. Updated by: Reham Al-Homayan Nov,2007 The structure of this chapter is looks at the (macro) behaviour of people and household in the economy as a whole to gain and understanding of the relationship between income, expenditure and savings. Also we try to understand the (micro) level and examines how these decisions and behaviours affect the supply and demand for goods and services, which determines prices, and how prices, in turn, determine the supply and demand of goods and services

7. Updated by: Reham Al-Homayan Nov,2007 Diagram 3.1 p 59 It show us the relationship between Household Firms. Household, supply factors of production to firms and are paid firms for doing so. The firms produce goods and services and sell them to household. Firms decide what to produce, how much and for whom? And this is according to household needs and demands, and by focus on their income for spending.

8. Updated by: Reham Al-Homayan Nov,2007 The personal sector of the economy: income expenditure and savings Income and expenditure account tracks where household incomes come from and what they are spent on (see table 3.1 on page 61) – the focus is on consumption. There are 3 main ways in which households use their income: consumer expenditure for day to day living, savings and tax.

9. Updated by: Reham Al-Homayan Nov,2007 Consumer expenditure, uses up to more than two thirds of income. Economically this is very important because it ensure that people are in a fit state to produce what the economy needs. Consumption behaviour affected by level of income. Saving, household put savings to provide security for the family in the future (financial assets) or they saving to provide shelter ( house). Tax, is used by government to pay for social consumption such as education, health, … and to redistribute purchasing power between households.

10. Updated by: Reham Al-Homayan Nov,2007 The consumer consider to be expenditure by spending income on buy foods, clothes, …. Also the consumer consumption or investment in people. How? In the process of consuming, the people are also consuming the environment and cause pollution, like rubbish and car pollute the air.

11. Updated by: Reham Al-Homayan Nov,2007 Household demand for particular commodities Demand and Income Income is unequally distributed between household in all countries. Income distribution means a hierarchy of patterns of consumption between poor and rich. Unequal distribution of purchasing power affect the market for individual products. If a country national income goes up, household have more purchasing power and more commodities will be bought. Ex, car Also, when income rises the household will buy different sort of things, those with high income will buy less inferior goods. Ex, buy fish, meat, … instead of wheat or rice.

12. Updated by: Reham Al-Homayan Nov,2007 Socio economic influences Example of these influences : -Influence of technology, which the technology is mediated between psychological need and economic demand. Socio technical innovation like video recorder provide entertainment, lead to change in the structure of household demand, families watch video instead going to the cinema. -Social influences, like when people feel social pressure to purchase what other have which is called ‘Demonstration effect’. - Price influence, is consider one of the most important variables. ( lower income …avoiding expensive goods)

13. Updated by: Reham Al-Homayan Nov,2007 Relationship between price and demand ‘ Law of demand’ quantity demanded of a good in inversely related to that good’s price, other things constant. As the price goes up (P), the quantity demanded goes down (Q). When price goes down, quantity demanded goes up. Also we have to keep in mind that there are other factors we have to keep on mind ( time, income, social influence,… ) ex, high income.. More meat Low income.. More vegetable L

14. Updated by: Reham Al-Homayan Nov,2007 But, the people some times prefers expensive goods like Jewellery and luxury car and this is called ‘ Veblen goods’ greater demand at higher price.

15. Updated by: Reham Al-Homayan Nov,2007 A shift of demand curve The relationship between quantity of demand (D) and price ( P) influencing by factors change! If the salary falls, every one will buy less quantity of products. The curve will shift from D to D1 Fixed price … change in factors.

16. Updated by: Reham Al-Homayan Nov,2007 Movement a long the demand curve Change in price … fixed factors.

17. Updated by: Reham Al-Homayan Nov,2007 Movements along the demand curve and shifts of the demand curve Turn to page 69 of the markets reader. Your tutor will explain to you the difference between shifts of the demand curve and movements along the demand curve.

18. Updated by: Reham Al-Homayan Nov,2007 Chapter 4 More on Consumer Demand by Atkinson and Miller

19. Updated by: Reham Al-Homayan Nov,2007 The concept of elasticity Your tutor will explain the following concepts with reference to pages 73-82 of the Markets reader: Elasticity of demand Price elasticity of demand Measurement of price elasticity of demand Factors influencing price elasticity of demand The relationship between price elasticity of demand and revenue Income elasticity of demand Cross-elasticity of demand

20. Updated by: Reham Al-Homayan Nov,2007 The concept of elasticity Elasticity is is a measure of the responsiveness of one variable to another. It tells you: If you change this variable a little bit, how much will another variable change? elasticity is a general concept that describes the proportional change in quantity relative to a proportional change in the price of a good, or the proportional change in a shift factor such as income or price of another good. Ex Ex, The price of CDs goes up 10 percent and you decide: No more CDs for you – they are too expensive; and you stop buying any. Your demand for CDs is very price elastic – you respond a lot in terms of quantity demanded to a change in price. change in price causes change in quantity demanded.

21. Updated by: Reham Al-Homayan Nov,2007 There are numerous factors which can affect the level of demand: Price elasticity of demand Income elasticity of demand Cross elasticity of demand

22. Updated by: Reham Al-Homayan Nov,2007 Price elasticity of demand This is the most common elasticity concept. It’s measure the general responsiveness of quantity to change in price. Can be measured through this formula : Percentage change in quantity demand _________________________________________________________________ where, Percentage change in price If the value for price elasticity greater that 1, the demand is price elastic. If the value is less than 1, the demand is price inelastic. The higher the value of price elasticity, the more elastic demand is said to be. Figure 4.1 – 4.2 – 4.3 – 4.4 p 75,76

23. Updated by: Reham Al-Homayan Nov,2007 Relationship between price elasticity of demand and revenue The effect on firm’s revenue of a change in price depends on the price elasticity of demand for its product. Knowledge of the price elasticity of demand for products is important for firms when considering their pricing policy. When demand is elastic (for product we can replace it like chocolate) …… increase in price will lead to fall in firms revenue, while reduction in price will lead to an increase in revenue. When demand is inelastic (for important product like salt, milk, bread) ….. increase in price results in an increase in the firms revenue, while decrease in price results in a fall in revenue. Figure 4.5 – 4.6 – 4.7 – 4.8 p 78, 79

24. Updated by: Reham Al-Homayan Nov,2007 Factors influencing price elasticity of demand Availability of substitute, if there are many close substitutes or alternative Product available, then the demand is likely to be price elastic. But if there few Alternative products then demand is likely to be price inelastic. Ex, the demand for petrol is price inelastic, but the demand for petrol products Is elastic. Necessity or luxury product, also have an influence on price elasticity of Demand. If product is luxury consumer may decide to forgo the product as Increase in price. But if the product is necessity still continue to demand For the product even if the price increase. Time, time give consumers with time to search for alternative products. The passing of time has made demand more price elastic. Ex, if the price of petrol rises, the people still buy it and use it because they need It, but over time the people are looking for alternative products. In this example

25. Updated by: Reham Al-Homayan Nov,2007 Income elasticity of demand Is defined as the percentage change in demand divided by the percentage change in income. It tell us how much demand will change with a change in income. The measurement formulas as following: = % Change in Demand % Change in Income If the value is more than 1, the demand will be income elastic. If the value between Zero and 1 demand will be income inelastic. Luxury products have high income inelasticity, while necessities Have low income inelasticity. Knowledge of the income elasticity of demand is important as it can help Us to predict what will happen to demand as income level change.

26. Updated by: Reham Al-Homayan Nov,2007 Cross-elasticity of demand Is defined as the percentage change in demand divided by the percentage change in the price of another good. It tell us the responsiveness of demand to change in prices of other goods. ___% Change in Demand for X % Change in Price of a related good Y Ex, if the price of Toyota rises ! What will happen to the demand of Honda? Of course it will rises, so the cross-elasticity between the two is positive. Positive cross-elasticity of demand mean the goods are substitutes. A good that can be place of another. When the price of a substitutes goes up, the demand for other good goes up.

27. Updated by: Reham Al-Homayan Nov,2007 Another example, if the price of burger sandwich rises, what will happen to the quantity of ketchup demand? If you always add ketchup to your sandwich …. Cut consumption of burger will also cut consumption of ketchup. Ketchup and burger sandwich are complements. Complements are goods that are used in conjunction with other goods. A fall in price of a good will increase the demand for its complement. The cross-price elasticity of complement is negative.

28. Updated by: Reham Al-Homayan Nov,2007 Small Group Work based on chapters 3 and 4 In small groups, consider what other things besides price may not remain equal in the market for the following goods: Luggage Ice cream Dates Chicken Use the material on pages 70-71 to help you. What causes shifts in the demand curve? What causes movements along the demand curve? Use the material on pages 69-70 to help you.

29. Updated by: Reham Al-Homayan Nov,2007 Activities Activity 1 (page 14 of the Markets Study Guide) Skills (page 16 of the Markets Study Guide) Activity 2 (page 19 of the Markets Study Guide) Activity 3 (page 20 of the Markets Study Guide)

30. Updated by: Reham Al-Homayan Nov,2007 READING TO BE COMPLETED BY NEXT WEEK Please read pages 5 – 9 and 13 – 20 of the Markets study guide to refresh your study of Chapters (don’t read Chapters 1 and 2 as it is optional). Please read Chapters 5 and 6 of the Markets Text book (the red one) before the next tutorial.