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- 2. Classification of Goods and Services From conventional perspective Free goods Public goods Economic goods From Islamic perspectives Al-tayyibat Al-Rizq
- 3. Conventional Perspectives Free Good Goods that have no production cost (air, sunlight, rain water). Public Goods Goods that have a common use and are benefit to everyone (public clinics, schools, hospital and others.) Economic goods Goods which supply is limited and require costs to purchase them (books, clothes, houses, movies) Price is involved in obtaining them.
- 4. IslamicPerspective Al-Tayyibat • Al-tayyibat means good things, clean and pure things, and sustenance of the best. • Bad goods are not considered as goods in Islam. Al- Rizq • Al-rizq is used to denote the following meanings; - Godly sustenance, godly provision and heavenly gifts • All these meanings denote that Allah s.w.t is the only sustainer and provider for all creatures.
- 5. Hierarchyof needs • Dharuriyah • Goods that are classified as basic needs and necessary for a living. eg: food, cloth • Hajiyat • Goods that will improve the quality of human life eg: refrigerator, radio • Kamaliat • Goods that contribute towards the perfection of human life (luxury goods). Eg: bungalow house, Mercedes cars • Tarafiat • Not permissible (haram). Bring negative impact on society. Not only extravagant and wasteful, but also cause harm to man. Eg: liquor
- 7. Definitionof demand •The quantity of various goods that people are willing and able to buy at a particular time and at a given range of prices.
- 8. DEMANDSCHEDULEANDDEMAND CURVE • Demand Schedule • The demand schedule is a table that shows the relationship between the price of the good and the quantity demanded • Demand Curve • A demand curve is a graphical representation of a demand schedule. • A graph of the relationship between the price of a good and the quantity demanded. • slopes downward and to the right.
- 9. Figure1 Siti’sDemandScheduleandDemandCurve Copyright © 2004 South-Western Price of Ice-Cream Cone 0 2.50 2.00 1.50 1.00 0.50 1 2 3 4 5 6 7 8 9 10 11 Quantity of Ice-Cream Cones $3.00 12 1. A decrease in price ... 2. ... increases quantity of cones demanded. A B
- 10. TheIndividual DemandCurveand theLawof Demand Demand Schedule for Pizza Price ($) Quantity of pizzas per month 2 13 4 10 6 7 8 4 10 1
- 11. TheIndividual DemandCurveand theLawof Demand • The individual demand curve shows the relationship between the price of a good and the quantity that a single consumer is willing to buy, or quantity demanded. • TheThe law of demandlaw of demand states thatstates that the higher the price, thethe higher the price, the smaller the quantitysmaller the quantity demanded, ceteris paribusdemanded, ceteris paribus (Other thing remain constant).(Other thing remain constant).
- 12. WHY? The Substitution Effect • consumers react to an increase in a good’s price by consuming less of that good and more of other goods. The Income Effect • a person changes his or her consumption of goods and services as a result of a change in real income.
- 13. MarketDemand • Market demand is the sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service.
- 14. • From Individual Demand to Market Demand • market demand curve A curve showing the relationship between price and quantity demanded by all consumers, ceteris paribus. Table 1.1 From Individual to Market Demand
- 15. Price Ind.1 Ind. 2 Market Demand RM 2.00 600 300 (600 + 300) = 900 RM 3.00 400 200 RM 4.00 200 100 RM 5.00 100 50 ?How to calculate market demand
- 16. 0 D Price of Ice- Cream Cones Quantity of Ice-Cream Cones A tax that raises the price of ice-cream cones results in a movement along the demand curve.A B 8 1.00 $2.00 4 ChangesinQuantityDemanded Change in Quantity Demanded Movement along the demand curve. Caused by a change in the price of the product.
- 18. SHIFTSINTHEDEMANDCURVE Tastes Income Number of buyers Expectations Prices of related goods ♥Shift factors of demand are factors that cause shifts in the demand curve
- 19. Shifts in the Demand Curve Recall our assumption • hold other things constant – ceteris paribus allow only price to change • But what if other factors do change? • change in demand • shift to a new demand curve, either to the left or right. • alters the quantity demanded at every price.
- 20. Figure3ShiftsintheDemandCurve Copyright©2003 Southwestern/Thomson Learning Price of Ice-Cream Cone Quantity of Ice-Cream Cones Increase in demand Decrease in demand Demand curve, D3 Demand curve, D1 Demand curve, D2 0
- 21. DD11 DD22 PP QDQD11 QDQD22 More incomeMore income results inresults in more demandmore demand for new cars;for new cars; less demandless demand for used cars.for used cars. New CarsNew Cars Used CarsUsed Cars Less incomeLess income results inresults in more demandmore demand for used cars;for used cars; less demandless demand for new cars.for new cars.
- 22. TheImpactof aChangein Income • Higher income decreases the demand for an inferior good • Higher income increases the demand for a normal good
- 23. ChangeinIncome • An increase in income will lead to an increase in demand for most goods & services because the amount of purchasing power increases, vice versa • As consumer’s income rises, the demand for higher quality goods will certainly increase (shown by the shift of dd curve to right) normal good • Products for which demand declines as income rises inferior good
- 24. ComplementComplement [[InverseInverse]] SubstituteSubstitute [[DirectDirect]] MilkMilk CerealCereal Pop TartsPop Tarts DD11 DD22 PP PP11 QDQD11 P2 DD11 DD22 DD PP QDQD22
- 25. Pricesof RelatedGoods • Changes in the price of substitutes • Rise in prices of one good lead to a contraction in the quantity of the good demanded & increase in the demand for its substitutes • Changes in the price of complements • Goods that are consumed together. When demand for one good rises, so does demand for the other.
- 26. DD11 DD22 PP QDQD11 QDQD22 An increase in tasteincrease in taste for DVDs results in an increase in demandincrease in demand. A decrease in tastedecrease in taste for videos results in a decreasedecrease inin demanddemand. DD33 QDQD33
- 27. DD11 DD22 PP QDQD11 QDQD22 iPhoneiPhone $399$399 Buy it now to save money.Buy it now to save money.
- 28. DD11 DD22 PP QDQD11 QDQD22 If there is expected to be a major shortage of toilet tissuemajor shortage of toilet tissue, then consumers will stock up now or risk not getting any.
- 29. DD11 DD22 PP QDQD11 QDQD22 Let’s say that we are coming out of recessioncoming out of recession & consumers feel secure about their jobs. [Positive future incomePositive future income]
- 30. DD11 DD22 PP QDQD11QDQD22 Let’s say that we are going into a recessiongoing into a recession and consumers don’t feel secure about their jobs. [NegativeNegative future incomefuture income]
- 31. DD11 DD22 PP QDQD11 QDQD22 More demandMore demand for both normalfor both normal && inferior goodsinferior goods New CarsNew Cars Used CarsUsed Cars
- 32. Whenpricechanges, whathappens? •The curve does not shift. •There is a change in the quantity demanded
- 33. $20 $15 $10 $5 10 20 30 40 A B A change in price causes a change in the quantity demanded D P Q 50
- 34. Whensomethingchanges otherthanprice,what happens? The whole curve shifts,there is a change in demand
- 35. ChangeinQuantityDemandedvs.Changein Demand Change in quantity demanded Change in demand Refer to a movement along a given demand curve As a result of a change in the commodity price (price of the good itself whereas other factors influencing demand remains unchanged) Refer to a shift in the demand curve (left / right) As a result of a change in the economics variable and not the price of the good itself
- 36. A ChangeinDemandVersusaChangein QuantityDemanded To summarize: Change in price of a good or service leads to Change in quantity demanded (Movement along the curve). Change in income, preferences, or prices of other goods or services leads to Change in demand (Shift of curve).
- 37. TheExceptional DemandCurve • Normal dd curve is always downward sloping showing inverse relationship between price of a good and quantity demanded • However, there is a possibility that price increases, the quantity demanded also increases @ quantity demanded of a good decreases when its price falls • Divided into 2 • Regressive at high prices • Happens to luxury goods like antique and jewellery items • Bought by the rich to show off their status • Higher price more goods would be demanded • Regressive at low price • Happens to inferior goods like broken rice and salted fish • Lower the price offered, fewer would be demanded by the poor substitute the existing goods to better quality goods
- 38. Luxuriesgoods • Those products that have an income elasticity of demand greater than 1. • The more expensive the goods, the greater will be the demand. • Jewellery, antique furniture, picture of Mona Lisa etc Q P d Exceptional dd curve regressive at high price
- 39. Exceptional Demand • Doesn't follow the law of demand • Giffen goods • The demand curve for giffen goods is normally upward sloping. • Purchasing power has increase, which allowed people to replace with better quality goods P Q d Exceptional dd curve regressive at low price
- 40. ELASTICITY OF DEMAND • Definition: Elasticity means responsiveness or sensitivity. Therefore elasticity of demand means the responsiveness of demand due to the changes of the factors that influence demand.
- 41. Typesof Elasticity: • Price elasticity of demand • Cross elasticity of demand • Income elasticity of demand • Price elasticity of supply
- 42. .i ( )Price Elasticity of Demand Ed • Ed measures the responsiveness of the quantity demanded due to the change in its price. • Ed tries to measure how much does demand has decreased when price increased
- 43. • Calculating price elasticity of demand; Formula: Ed = (% ∆ in Qd for product X) % ∆ in P of product X = % ∆ in Q % ∆ in P = (∆ Q) x P0 Q0 ∆P = (Q1 – Q0) x P0 Q0 (P1 – P0)
- 44. • Example: Price(RM) Quantity Demanded 2.00 10 3.00 5 • Calculate the price elasticity of demand when price increases from RM2.00 to RM3.00.
- 45. Ed = ∆ Q x P0 Q0 ∆ P = (Q1 – Q0) x P0 Q0 (P1 – P0) = (5 – 10) x 2 10 (3 – 2) = -1 # If price of good X increases by 1%, quantity of good X demanded will decrease by 1%
- 46. Degreesof PriceElasticityof Demand • Elastic demand (Ed > 1) Percentage change in quantity demanded is greater then the percentage change in price. • %Δ Q > %Δ P P Q D D Smooth line dd curve
- 47. ii. Inelasticdemand(0<Ed<1) or(Ed< 1) • Percentage change in quantity is less than the percentage change in price. • %Δ Q < %Δ P P Q D D Steep line dd curve
- 48. iii. Unitaryelastic(Ed= 1) • Percentage change in quantity demanded is equal to the percentage change in price. • %Δ Q = %Δ P D P X Hyperbola line dd curve
- 49. iv. PerfectlyElastic(Ed= ∞ ) • Percentage change in quantity demanded is infinite in relation to the percentage change in price small % change in price of a good would lead to infinite changes in its quantity demanded P Q DP0 Horizontal line demand curve
- 50. v. PerfectlyInelastic(Ed= 0) • Quantity demanded does not change as the price changes. P QQ0 D P1 P2
- 51. Determinants of Price Elasticity of Demand • Availability of substitutes many substitutes more elastic dd less/no substitutes less elactic/ inelastic dd Eg: petrol and detergents (liquid, soap) • Relative importance of the goods in the budget greater the income spent more elastic dd Eg: dd for house is more elastic compared to demand for detergents because money spent on houses is greater than money spent on detergents.
- 52. • Time frame In short run less elastic/ inelastic dd In the long run demand more elastic because consumers can make adjustment and find other substitutes. • The importance of goods – necessity or luxury Necessity good inelastic dd eg: rice (great increase in price will not reduce the demand for rice very much). Luxury goods/ less important goods elastic dd • The number of usage many number of usage more elastic compared to goods that have fewer usage. Eg: demand for rubber is more elastic because it can be processed into rubber hoses, tyres, gloves, & etc
- 53. • Income level higher income people inelastic dd. lower income group elastic dd (sensitive to price changes) • Habits habits inelastic dd. Eg: demand for cigarette by smokers.
- 54. Relationship between price elasticity of demand ( )and total revenue TR • Important for producers to decide whether they should increase, decrease or maintain the price of the good they sold in the market to enable them to maximize their profit • TR = price x quantity • TR increases or decreases when there is price changes depend on the price elasticity of demand. i. If demand is elastic, to increase TR, price should be decreased. ii. If demand is inelastic, to increase TR, price should be increased. iii. If demand is unitary elastic, change in price would not affect and change in TR.
- 55. ( ) ( <1)i Inelastic demand Ed AssumepriceincreasesfromRM10toRM15 Price (RM) Quantity (units) 8 10 10 15 Steep line demand curve TR before = RM10 x 10 = RM100 TR after = RM15 x 8 = RM120 (TR increases) # If demand is inelastic, an increase in price will lead to an increase total revenue & vice versa
- 56. ) ( >1)ii Elastic demand Ed AssumethatpriceincreasesfromRm10toRM11 Smooth line demand curve P Q7 10 10 11 TR before = RM10 x 10 = RM100 TR after = RM11 x 7 = RM77 (TR decreases) # If demand is elastic, an increase in price will lead to a decrease in total revenue.
- 57. 20 10 10 20 P Q ) ( =1)iii Unitary elastic demand Ed AssumethatpriceincreasesfromRM10toRM20 TR before = RM10 x 20 = RM200 TR after = RM20 x 10 = RM200 (TR remains the same) # If demand is unitary elastic, an increase in price will make total revenue remains the same Hyperbola line dd curve
- 58. TheR/shipbetweenTR& PriceElasticityof DemandwhenPriceIncreases Elasticity Coefficient Price Elasticity of Demand Price Quantity Demanded Total Revenue Ed>1 Elastic Increases Decreases more than proportionate Decreases Ed=1 Unitary elastic Increases Decreases in exact proportion Remain the same Ed<1 Inelastic Increases Decreases less than proportionate Increases
- 59. TheR/shipbetweenTR& PriceElasticityof DemandwhenPriceDecreases Elasticity Coefficient Price Elasticity of Demand Price Quantity Demanded Total Revenue Ed>1 Elastic Decreases Increases more than proportionate Increases Ed=1 Unitary elastic Decreases Increases in exact proportion Remain the same Ed<1 Inelastic Decreases Increases less than proportionate Decreases
- 60. ( )Cross Elasticity of Demand Exy • Exy measures the responsiveness of quantity demanded for one product to a change in the price of another product. Formula: Exy = % ∆ in Qx % ∆ in Py = ∆ Qx x Py0 ∆ Py Qx0 = (Qx1 – Qx0) x Py0 (Py1 – Py0) Qx0
- 61. Exy < 0 product X is a complement of product Y Exy > 0 product X and Y are substitutes for one another Exy = 0 product X and Y are independent for one another
- 62. • Example: Price of Y Quantity x Quantity Y RM10 60 15 RM18 40 25 RM25 20 30 • Calculate the cross elasticity of demand for good x when the price of y increases from RM18 to RM25
- 63. Answer: Formula : = ∆ Qx x Py0 ∆ Py Qx0 = (Qx1 – Qx0) x Py0 Qx0 Py1 – Py0 = 20 - 40 x 18 40 25 - 18 = -1.29 • Conclusion; Goods x and y are complement
- 64. ( )Income Elasticity of Demand Ey • Ey measures the responsiveness of quantity demanded to a change in income. • Three possibilities: i. If Ey is positive = normal goods - Ey >1 - luxury Ey ≤ 1 – necessity ii. If Ey is negative = inferior goods iii. If Ey is zero = essential goods Eg. Ey = 5 if income increase 1%, quant. demanded for good X will increase by 5% Ey = 0 if income changes, quant. demanded for good B remains unchanged
- 65. • Formula: Ey = % ∆ in Q % ∆ in Y = ∆ Q x Y0 ∆ Y Q0 = (Q1 – Q0) x Y0 (Y1 – Y0) Q0 = (Q1 – Q0) x Y0 Q0 (Y1 – Y0)
- 66. • Example: Income Qty A Qty B Qty C 100 10 20 20 120 15 20 18 150 17 20 14 Calculate the income elasticity of demand for goods A, B and C when income increases from RM120 to RM150.
- 67. • Good A: Ey = (QA1 – QA0) x Y0 QA0 (Y1 – Y0) = (17 – 15) x 120 15 (150 – 120) = 0.53 • Since Ey is positive and < 1, good A is a necessity good • When Y increase by 1%, quant. demanded for good A increase by 0.53%
- 68. • Good B: Ey = (QB1 – QB0) x Y0 QB0 (Y1 – Y0) = (20 – 20) x 120 20 (150 – 120) = 0 (Good B is essential good) # if Y change, q.demanded for good B remains unchanged
- 69. • Good C: Ey = (QC1 – QC0) x Y0 QC0 (Y1 – Y0) = (14 – 18) x 120 18 (150 – 120) = - 0.89 • Good C is an inferior good • When Y increase by 1%, quantity demanded for good C decrease by 0.89%