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Basics

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Definition of Demand
The different quantities of a good or
service that consumers are willing and
able to buy at various prices over a given
period of time, ceteris paribus.
Demand Factors
Price
of
related
goods
(Substitutes/Complements/Derived
Demand)
Taste
and
Preferences
(Advertisements/Fashionable/Promotions
)
Changes
in
Consumer
Income
(Normal/Inferior Good)
Demographics (Population/Age/Gender)
Changes in Expectations (Expected
income/prices/speculative demand)
Definition of Supply
The different quantities of a good or
service that producers are willing and
able to OFFER FOR SALE at various
prices over a period of time, ceteris
paribus.
Supply Factors
Cost of Production (raw materials, factor
of production, technology, efficiency)
Prices of related goods (Competitive
Supply, substitutes in production, joint
supply)
Number of Producers
Supply Shocks (Natural disasters, Climate
Change, Strikes)
Expectation Change by Producer (expect
price to rise, hold on to stocks)
PED Definition
Measures the degree of responsiveness
of quantity demanded to a change in pits
own price, ceteris paribus. (>1=price
elastic, <1=price inelastic)
PED Factors
Availability of Substitutes (number and
closeness, the more substitutes, more
price elastic)
Degree of Necessity (Basic/habit good,
more price inelastic)
Proportion of Income (Larger the
proportion, more price elastic. Smaller

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income proportion means consumers

shouldnt have much problem paying for
it. )
Time Period (Price inelastic in short run
and elastic in long run, alternatives may
pop up)
PES Definition
Measures the degree of responsiveness
of quantity supplied to a change in its
own price, ceteris paribus. (>1=elastic,
<1=inelastic)
PES Factors
Spare Capacity (Possible to increase
production quickly with spare capacity.
The more spare capacity available, the
more elastic is its supply.)
Nature of Production (factor substitution,
length of production period) (If it easy to
switch to another product, degree of
mobility of product, and does the product
take very long to produce? Goods can be
produced at short notice.)
Ease of accumulating Inventory/stocks
(when
demand
drop,
firms
can
immediately put them into reserves, the
easier it is to do so, the more price
elastic.)
Time (price inelastic in short run, price
elastic in long run. Since firms have more
time to rectify supply problems.)
YED Definition
Degree of responsiveness of demand to a
change in the income of consumers,
ceteris
paribus.
(>0<1=inelastic,
>1=elastic, <0=inferior goods , >1=luxury
goods)
YED Factors
Nature of the good (Necessities/Luxury)
Level of income of consumers (Some
basic goods may be considered luxury
goods to different people vice versa.)
CED Definition
Degree of responsiveness of demand for
one good to a change in the price of
another good, ceteris paribus.
What should you have in a market style queston? (15/25marks)

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Introduction

Identify Market 1

ECONS DD SS ELASTICITY

-Market is determined by the interaction

between DD SS
-State the 3 MARKETS you identified
-State the concepts that you are using (E.G
PED/PES)
-Define Demand
-State Demand Change
-Explain Demand Change using P-TIDE
-Define PES
-State PES
-Explain PES using SNIT
-State price increase/decrease with a more
than/less than proportionate
increase/decrease in quantity
-Define Supply
-State Supply Change
-Explain Supply Change using CPPSE
-Define PED
-State PED
-Explain PED using SNIT
-State price increase/decrease with more
than/less than proportionate
increase/decrease in quantity
-Combine Simultaneous Shifts of both DD
SS
-State equilibrium price
increase/decrease/indeterminate(dependen
t on relative shifts) and equilibrium quantity
increase/decrease/indeterminate
-Give judgement on whether
supply/demand shift more
-Explain judgement
-State equilibrium price
increases/decreases and quantity
increases/decreases based on judgement
* Always remember to link to your FIGURE
(E.g Price increases from P0 To P1)

Identify Market 2
(Complement/Substitute factors)

Similar to structure above, but add in CED

(ADDITIONAL TO ADD) -Define CED
-State CED value
-Explain CED value (weak/strong
substitute/complement using judgement)
-Deduce with price increase/decrease of
_____, demand for ______ will increase

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more than/less than proportionately.

Identify Market 3
(Complement/Substitute factors)
Evaluation/Limitation (4 marks)

Similar to Above
-Ceteris Paribus Assumption (Assumes no
other factors except own price, income and
price of related good changes when PED,
YED AND CED used. In real life, many
factors may be changing simultaneously.
For example when price of non-3G phones
fall, demand for non-3G subscription plans
unlikely to rise as phone users may be
changing to 4G smart phones)

-Short term VS Long term difference (Since

elasticity might change in the long term as
taste and preferences change over time.
E.G fashionable iphone 6 may not always
be attractive when Samsung7 comes out!)
* Usually 2 markets required for 15 marks and 3 markets for 25 marks.

YED question? (and mixture of PED, DD, SS)

Discuss whether the combined effect of the rise in incomes and the rise in GST is
likely to cause the quantities of different types of goods sold to rise or fall. [15]
Introduction

-Link Rise in Income to change in DD

(since Income is DD factor)
-Link rise in GST to fall in supply (since
GST is ad valorem tax)
-Identify the 3 different types of goods
with differing Income Elasticity (YED<0,
0 <YED<1, YED>1)
-Identify also that the goods can be split
up into |PED|<1 OR |PED|>1

Good 1 (Para 1)

-State you are talking about inferior

goods (YED<0)
-State what happens to demand when
income increases for inferior goods
(decrease)
-State quantity increases
-Explain
-Go to supply side, state supply
decreases due to TAX
-Link to PED>1

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Good 2 (Para 2)

Good 3 (Para 3)

Conclusion/Evaluation/Limitation

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-Justify PED
-State final quantity drop
-Compare DD and SS and judge
equilibrium quantity change
-State you are talking about Income
Inelastic Goods (necessities)
-State what happens to demand when
income increases (increases less than
proportionately)
-Explain
-State quantity increases
-State what happens to supply when
GST increases
-Explain
-PED Statement
-PED explanation
-State quantity change
-State equilibrium quantity change
-State you are talking about luxury
goods (Income elastic)
-State what happens to demand when
income increases (increases more than
proportionately)
-Explain
-State quantity increases.
-State what happens to supply when
GST increases.
-PED STATEMENT
-PED explanation
-State quantity change
-State equilibrium quantity change
-Make a stand that Q definitelyfor
inferior goods, likelyfor necessities and
likelyfor luxury goods.
-One persons inferior good might be
anothers luxury.
-Ceteris Paribus might not hold. Multiple
factors affecting DD SS, Demographics
might have changed as well.

How to write policy making/Strategy questions? (Firms)

Discuss how a supplier of a product that is currently fashionable might use both of
these concepts in making price and output decisions.
Determine the AIM of Suppliers
Identify concepts needed

-Maximise Profit, with given costs

-Achieved through increasing sales

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revenues
-Increased profits if COST remains
constant
-Suppliers need to look at YED (output)
and PED (price)
Apply PED (Para 1)

-State product fashionable means

PED<1
-Demand inelastic explanation (few
close substitutes)
-Explain in Short run, supplier should
raise price, since loss in revenue from
fall in QD is less proportionate than the
gain in revenue from rise in price.
-In long run, supplier should decrease
price, since monopoly profits might
attract other suppliers.
-More substitutes, dd more price elastic.
-Firm should lower price as.to remain
competitive
-Other possible strategies (introduce
different designs, differentiate product)
(Explain PED, LINK To strategy, propose
new strategies, evaluate SR VS LR)

Application of YED (output)

-YED depends on Income (define YED)

-Company will have to gauge future
economy, whether economy will be
good or bad. (good-consumer income
will rise, bad-consumer income will fall)
-Fashionable goods likely normal good.
(determine type of good since it affects
YED)
-Therefore income is elastic (YED>1)
-If income likely rise, demand will
increase more than proportionately.
-Output decision (Ensure enough stocks
to meet demand)
-Order more early
-Increase production capacity by buying
more machines, employing more
workers.
-Determine which part of the country to
open more retail stores (places where
income most expected to increase)
-CED measures the closeness of
complements/substitutes

Application of CED (How to react to a

change)

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Limitations/Evaluation

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-Determine CED value to rival products

(since it is fashionable, probably very
poor substitutes, since very few similar
products)
- can exercise rival consciousness in his
pricing policy or conduct joint
promotions with suppliers of
complementary goods
-When rivals raise price, no need to
follow suit as product is differentiated in
the short run.
- Determination of elasticity values
is an informational problem. Firms
may not have perfect information.
-Ceteris Paribus
-Market demand cannot be used
to analyze an individual firms
output/pricing policies
-Time to acquire and act on
information

Another Simple Essay structure example(without elaboration) on TAX and elasticity

The government proposes to increase tax on petrol. Assess relevance of PED
and YED for success of proposal. [15m]
PED: directly relevant
Tax on petrol COP increase supply decrease vertically upwards by
amount of specific tax price of petrol increase (draw diagram to
show shift in supply)
Demand for petrol price inelastic no close substitutes
YED: not directly relevant because tax on petrol affects price
YED: changes on income
Government likely to be less successful if they increase tax on petrol
in period of economic boom
Boom: incomes rise demand for cars (luxury good) increase by more than
proportionately derived demand increase demand for petrol

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Developments in modern technology such as faster internet connections have had

major impacts on the demand and supply of e-books and associated products such
as e-book readers and mass market paperbacks.
When the question mentions such as faster internet connections, do not
limit developments in modern technology to just that. The question was just
citing AN example.
Question mentions demand and supply, immediately it will be identifying the
3 markets
1. IDENTIFY 3 MARKETS (25MARKS)
(2 MARKETS FOR 15 MARKS)

2. Start on the general DD SS factors

(first market)

Individual Analysis of e-book

reader market
E-book and e-book readers
complement
E-book
and
mass
market
paperback substitutes
Developments
in
modern
technology results in the addition
of new features in e-books that
provides added convenience (e.g
annotation
features,
digital
bookmarks)
Modern technology has also made
e-books become fashionable as
people craze at the extreme
convenience and added features.
(faster internet connections in
accessing e-books)
As a result, there is a change in
taste
of
preferences
of
consumers, leading to an increase
in
desirability
for
e-books,
therefore resulting in an increase
in demand for e-books and a shift
in the demand curve to the right.
(Link to graph)
Demand increases against a price
elastic supply. (as length of
production period is short and
easy
to
accumulate
inventory/stock) (price increases
and
more
than
proportionate
increase in quantity.)

-Supply will also increase due to a lower

cost of production for producers. This is

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also due to the improvement in modern

technology, as new programming
languages are rolled out and websites
offering e-book services are much
easier to code. Supply therefore
increases against a price elastic demand
(availability of paperback substitutes
high) (price decreases and more than
proportionate increase in quantity.)
-Evaluative paragraph (combine shifts of
DD
and
SS),
equilibrium
price
indeterminate and equilibrium quantity
increases. Equilibrium price dependant
on relative shifts of supply and demand.
Price will decrease as supply will shift
more than demand due to the relative
few
barriers
of
entry,
whereas
consumers take time to finish reading
every single e-book as well, and the
habit of reading takes time to inculcate
as well.
Market 2 (E-book and E-book readers)
-E-book readers are complementary to
-FROM PARA 1 (MARKET 1), we already e-book since e-book readers are
deduced that price of e-book decrease.
required to load and read e-books (can
be either computers/amazon kindle style
tablets) They must be consumed jointly.
Therefore, when the price of e-books
decrease, the demand for e-book
readers will increase, demand curve
shifts to the right. Cross elasticity of
demand measures the responsiveness
of quantity demanded of a particular
good, given a change in price of another
good, ceteris paribus. Thus cross
elasticity of demand of e-book readers
that are capable to store the digital ebooks with respect to prices of e-books
is possibility of negative and of a high
value. Thus, given the fall in prices of ebooks, demand for e-book readers will
increase more than proportionately, as
e-books and e-book readers are close
complements to one another.
-Add in PES for DD (price elastic supply
as well due to _____) (Price therefore

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increases
with
a
more
than
proportionate increase in quantity)
-

(supply side) The advancement

in technology in recent years has
caused the unit cost of production
for these e-book readers to be
lowered. The advancement in
Nano-technology has enabled
producers of e-book readers to be
able to produce readers that
capable of a larger memory space
and also a lower unit cost of
production. Thus, producers of ebook readers are more willing to
produce and supply more e-book
readers as it is profitable to do so.
Thus, the supply for e-book
readers will rise.

Price elasticity of demand of ebook reader is price-elastic as

price of e-book reader could take
up quite a significant proportion
of income for average consumers.
Hence, increase in supply of ebook reader along price-elastic
demand will result in decrease in
price and more than proportionate
increase in quantity.

Compare Simultaneous effects of

DD and SS AGAIN and come to a
conclusion using JUDGEMENT
Market 3 (E-books and Paperbacks as -Demand
for
paperbacks
would
substitutes)
decrease due to a fall in price of related
goods (e-books). However, using XED,
we know that it is a negative value but
may not be very high (weak substitutes),
as there is still a significant proportion
of consumers who prefer the traditional
touch of books, and some may not want
to strain their eyes in staring at digital
screens. Thus, given the fall in prices of
e-books, demand for paperbacks will
increase less than proportionately, as
ebooks and paperbacks are weak

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substitutes to one another.

-Add in PES and come to a conclusion
on price and quantity
-Supply of paperbacks will increase as
well as more producers will likely switch
to technologically advanced markets
(due to their expectations of a switch to
more technologically advanced society),
and due to a lower cost of production
offered by technology driven markets.
-PED (Come to a conclusion on price
and quantity)
-Combine simulataneous shifts,
make judgement once again.
Last paragraph (Limitation)

GENERAL STRUCTURE
QUESTIONS

Talk about limitations of economic

analysis (ceteris paribus, other factors,
etc) (memorise from NOTES)
GUIDELINE

STEP 1
FIND AND IDENTIFY YOUR 3 MARKETS

DD + PES

SS + PED

and

FOR

DD

SS

+ELASTICITY

MARKET

First market should always be a

single one
The
second
third
can
be
complements/substitutes/etc
DEFINE DEMAND
IDENTIFY WHETHER DEMAND
INCREASES/DECREASES
EXPLAIN
WHY
USING
DD
FACTORS (P-TIDE)
DEFINE PES
ADD IN PES, IDENTIFY WHETHER
PRODUCT
PRICE
ELASTIC/INELASTIC
EXPLAIN USING SNIT
STATE WHAT HAPPENS TO
PRICE AND QUANTITY FOR THAT
SINGLE DEMAND CHANGE
DEFINE SS
STATE
WHETHER
SUPPLY
INCREASE OR DECREASE
FACTOR EXPLANATION USING

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CPPSE
DEFINE PED
WHETHER PRODUCT DEMAND
ELASTIC OR INELASTIC
EXPLAIN USING FACTOR SNIT
STATE WHAT HAPPENS TO
PRICE AND QUANTITY FOR THAT
SINGLE SUPPLY CHANGE
END OF EVERY DD AND SS POINT
COMBINED SHIFTS OF DD AND SS,
STATE
EQUILIBRIUM PRICE AND
EQUILIBRIUM QUANTITY AND MAKE
JUDGEMENT
IF
MARKET
IS
ON
BRING IN XED IN MIDDLE OF
COMPLEMENT/SUBSTITUTE
PARAGRAPH
EXPLAIN WHETHER VALUE LOW
OR VERY LOW/HIGH/VERY HIGH
(CLOSE/WEAK
SUBSTITUTES/COMPLEMENTS)
Evaluate WHY
XED price/quantity change (use
the
words
(more/less
proportionately)
ADDITIONAL POINTS IF THERE IS TIME
SHORT RUN VERSUS LONG RUN
EVALUATION
LIMITATIONS

2ND
Example of paragraph (N2008, market for MP3 player, a complement of digital
music)
Digital recorded music and MP3 players are close complements, as a person who wants
to listen to digital music would need a gadget like MP3 player or iPods to listen to it on the
go. Cross elasticity of demand measures the responsiveness of quantity demanded of a
particular good, given a change in price of another good, ceteris paribus. Thus cross
elasticity of demand of products like iPods and MP3 players that are capable to store the
digital recorded music with respect to prices of digital recorded music is possibility of
negative and of a high value. Thus, given the fall in prices of digital recorded music,
demand for MP3 players and iPods will increase more than proportionately, as MP3 or

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iPods and digital recorded music are close complements to one another. Supply of MP3
player is price-elastic as the production period for such manufactured goods is short.
Hence, increase in demand in MP3 player along price-elastic supply will result in
increase in price and more than proportionate increase in quantity.

The advancement in technology in recent years has caused the unit cost of production for
these MP3 players to be lowered. The advancement in Nano-technology has enabled
producers of MP3 players to be able to produce players that capable of a larger memory
space and also a lower unit cost of production. Thus, producers of MP3 players are more
willing to produce and supply more MP3 players as it is profitable to do so. Thus, the
supply for music players like iPods and MP3 will rise from SS 3 to SS4. Demand of MP3
player is price-elastic as price of MP3 player could take up quite a significant proportion of
income for average consumers. Hence, increase in supply of MP3 player along priceelastic demand will result in decrease in price and more than proportionate increase in
quantity.

Therefore, with the increase in demand and increase in supply, equilibrium quantity of
MP3 players will definitely increase, but change in price is indeterminate.
The extent of shift of rise in demand for MP3 players would be smaller than that of
increase in supply of MP3 players, as there are other substitutes of storing the digital
music, like handphones. The equilibrium price will eventually fall from P3 to P4, with
equilibrium quantity rise from Q3 to Q4.

Figure 2: Market for MP3 players

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However, the magnitude of cross elasticity of demand for MP3 players or iPods with
respect to digital recorded music may decrease over time. This is because, the
sophistication of technology have made it possible for consumers to be able to listen to
these digital recorded music on various other platforms like hand phones (iPhones) or
even on their laptops (iPads). Thus, with the availability of various other platforms to enjoy
digital music, the cross elasticity for demand for complementary music players like MP3
or iPods may not be significant. Thus, a given fall in price of digital recorded music will
result in a less than proportionate rise in the quantity demanded for these music players.
However, the demand for MP3 players will still increase from DD 3 to DD4 given a lower
price for digital recorded music.