Producer ☆ understand concept

Topic 1 : Consumer & surplus calculation of CS & PS

Date . 28 . 01 . 2022 5

CONSUMER SURPLUS b) Consumer surplus for ice tea a) How the price affects producer surplus CALCULATION OF CONSUMER SURPLUS
difference between W & A
definition at & PRODUCER SURPLUS
-

:
producer surplus price p ,

Price
> consumer surplus measures the value supply consumer surplus is the area below the

between the price consumers are demand curve & above the market price
B
willing to pay ( W ) for product along producer surplus is the above the
•
a area supply
producer =
the demand curve & the price they surplus
_ curve & below the market price
•
A
_

if A is higher than W
-
I
actually pay (A) no transaction 0 a,
Quantity
W determined by demand curve
-

total surplus
CS =
W -

A > the price is P, the quantity supplied is Q >

A determined by market price
- , ,

we use the demand curve to measure the consumer receives $3 of consumer > producer surplus equals the area of the
•
> competitive
consumer surplus surplus for the first unit triangle ABC equilibrium

> consumer surplus is the area below the $1 of consumer surplus for the second unit producer surplus at price Pz ( P↑ )
Price
demand curve & above the market price _
consumer won't buy 3rd Cup supply P ↑ PS ↑
D
new producer
•
1¥
consumer surplus is the benefit that the PRODUCER SURPLUS surplus =
P ↓ PS ↓ since consumer surplus ( CS ) & producer
B
social
-

surplus ( PS )
>
buyers receive from good definition represented by triangles
• •
a c are
-

. :
welfare = =
,

initial producer = -

a) HOW the price affects consumer surplus > producer surplus measures the value -

we can use the formula of :

surplus
_
-

•
A
_
-

= '
consumer surplus at price P, between the actual selling price (A) of Quantity base height
_

✗ ✗
0 Qi z
Q2

6
price RM

so
z( height )( base ) a product & the price along the supply > when the price rises from Pi to Pz , the to calculate total surplus .
we take the

surplus =
{ (30-18) ( 20 ) curve at which sellers are willing to sell ( w ) quantity supplied rises from Qi to Qz sum of CS & PS
18 P , • •
C
B if W is higher than a
Total surplus
-

¥
CS = 1214120 the product .
> the producer surplus rises to the area = CS + PS
demand seller not willing to sell

7
no transaction
◦ a. no ,
quantity PS =
A -
W of the triangle ADF example :

> the price is P, ,

the quantity demanded we use the supply curve to measure > the increase in producer surplus is the

Producer surplus > determine the willingness BCFD

is

8
Qi area
set ,
.

to
.

> consumer surplus equals the area of > producer surplus is the area above the supply

the triangle ABC . curve & below the market price

9
consumer surplus at price Pz ( P ↓) producer surplus is the benefit that the sellers
price

•
A P↓ CS ↑ receive from a good
injnisoiimer
surplus P↑ CS ↓

10
C
P, •

B q consumer surplus

B. • EF demand

¥
☐

◦ ,
É ,
quantity

> when price falls from P , to Pz ,

the

quantity demanded rises from Qi to Qz

> consumer surplus rises to the area of

the triangle ADF

> the increase in consumer surplus is the

area BFCD
 efficient
-

deadweight loss
Price ceiling * draw diagram
allocated economic surplus not maximised charges to
resources are
o not efficient price floor
-

Date . zg . o , . zozz Cs
5
-

efficiently ? -

Ps
economic surplus are maximised ? consequences -

market
cooperate in competitive equilibrium / no deadweight loss overproduction
DEADWEIGHT LOSS
total surplus
PRICE CONTROLS > usually for necessities
as > Qd EXAMPLE OF PRICE FLOOR :
> consumer ? :

economic surplus is maximized when a price control is instituted when the government Cs to -
Government policy in Agricultural Markets
Producer ? Binding
the market is in competitive equilibrium feels the current equilibrium price is unfair
ps T
> when the market is in equilibrium , > the government intervenes & adjusts the
deadweight
loss <

there is no deadweight loss market price

deadweight loss 2 types of price controls

> the reduction of economic surplus > price ceiling

resulting from a market not being in > price floor
-

producer earning
competitive equilibrium a) Price ceiling too much
EXAMPLE OF PRICE CEILING : The economic effect of a price floor in the
,

this will cause a net loss of both the a legal maximum on the price of a good Government control policy in Housing Markets wheat market
current price
protect if wheat government
-

CS & PS resulting from underproduction used to the consumers

unfair to consumer
farmers convince the
binding
overproduction of a product price ceiling is set below the equilibrium price to impose a price floor of $3.50 per bushel
,

example :
market price :
> this will cause shortage of goods in the market > the amount of wheat sold will fall from
can be caused
>
example :
2.0 billion bushels per year to 1.8 billion
below demand curve & by price control
>
above market price

competitive
> rent control , staple food ,
face mask if we assume that farmers produce
>
equilibrium market ?
Underproduction 1.8 billion bushels
consumer ? -

shortage

6
below market price & Cs T dead weigh loss The economic effect of rent ceiling
>
underproduction a producer surplus then increases by the
-

>
above supply curve
inefficient
✗ producer ?
u

product coutput )
Without rent control red rectangle A
ps µ
> economic surplus is maximized when a > the equilibrium rent is $1,500 per month which is transferred from consumer surplus
Binding

7
market is in competitive equilibrium at that price and falls by the yellow triangle C

When a market is not in equilibrium , > 2,000,000 apartments would be rented > consumer surplus declines by the red

there is deadweight loss Qd if government imposes rent ceiling of $1000 rectangle A plus yellow triangle B

8
a > Qs shortage a

> when the price of Thai tea is $2.20 , b) Price Floor > the quantity of apartments supplied falls to there is a deadweight loss equal to the

instead of $2.00 a legal minimum on the price of a good 1,900,000 yellow triangle B & C

9
consumer surplus declines from an amount used to protect the producers sellers > the quantity of apartments demanded increases > representing the decline in economic

equal to the sum of areas A. B & C is set above the equilibrium price to 2,100,000 efficiency due to the price floor

to just area A > this will cause surplus of goods in market > resulting in a shortage of 200,000 apartments in reality

10
producer surplus increases from the example :
producers surplus equal to the area of the > a price floor of $3.50 per bushel will

sum of areas DIE to the sum of > minimum wage / agriculture blue rectangle A is transferred from cause farmers to expand production
areas B & D landlords to renters from 2.0 billion to 2.2 billion bushel

> at a price of $2.20 ,

there is a > there is a deadweight loss equal to the resulting in a surplus of wheat

deadweight loss equal to the sum of areas of yellow triangles B & C

area C & E
 Date . . . 5

Calculate :
3 .

i. CS & Ps at competitive equilibrium

2. At price floor $4 ,
CS & PS
+

gloss
◦

3. At Price ceiling $2 ,
cs&ps
, •

CS
MDL
/ .
additional
as
• •
~
shortage price
ps
Qs < QD ceiling
o o
CS

CS=tz( 200 ) ( 6- 4) + ( 200/(4-2)

PS =
200-1400
=
600

ps =
± ( 200 )( 2)
( 5=21-(300716-3) =
200

=
450

PS =
É (300×3)

6
=
450

2.

7
CSI
-

)
/
PS
CS

8
•
surplus
.
~ PC
DL price
PS floor

,n
- -
2

9
a
area
atblh )
CS=É( 200/(6-4) = 'z(

10
=
200

PS =
{ ( 200 )( 2) + ( 200 )( 4- 2)
= 200-1400

=
600
 relationship ☆ utility satisfaction
Topic 2
: :
: Consumer Choice Theory -
TU ↑ MU ↓ ( + Ve ) My = OTU

Date . 11 . 02 . 2022 -
Tu ma × My = 0
☐Q
5
-
TU ↓ MU ↓ l -
Ve )
The law of diminishing My

2. 1 Utility ,
Total Utility (TU ) & Marginal Utility ( MU ) TOTAL UTILITY ( TU ) -
The Law Of Diminishing Marginal Utility -
The relationship between TU & MY

UTILITY -
the total satisfaction pleasure that a consumer states that other things being held constant when TU increases ,
① TU ↑

-
the satisfaction pleasure that a consumer receives ◦ as more and more units of a good service ◦
MU decreases MU ↓

but remain
"
consumption of all units specific is consumed , the additional satisfaction derived
"
receives from consuming a good or service from the of a as positive t

-
the hypothetical unit used to measure utility product >
Goes from the consumption of each successive unit When TU is at maximum ,
② TU Max .

util -
Total Utility (TU ) =
U ,
+ Uz + . . .
+ Un will declines .
, in a given period o MU equals to Zero .
144 = O

true
◦ to represent the amount of satisfaction -
TU increases as more goods are consumed o
example :
when TU decreases ③ TU ↓
up +o
,

a Point
a specific good service generates positive relationship > If you buy a burger you
, will get a lot o MU continue to decrease MU ↓
" "
-
the theory of utility of satisfaction from consuming it .
. but becomes negative -

based on the assumption of that individuals MARGINAL UTILITY ( MU ) > If you consume a second unit , you will

are rational -
the additional satisfaction that a consumer still get some satisfaction but is likely to

individual is rational
"
◦ in economics ,
an
"
receives be less than from the first unit

if that individual maximizes utility in from consuming an additional unit of a > A third burger will give even less

their decisions good service satisfaction .

> the
-

utility is a subjective measure of pleasure -

TU
changes
my =

I
satisfaction Q
-

20

6
based on influenced by -
MU decreases with each additional increase in
15
◦
personal feelings the consumption of a good 12

9
◦ tastes negative relationship

7
5
◦
opinions -

examples :
max
-2 0
utility
varies from individual to individual units of apple Total utility ( TU ) -19 -2

according to each individual 's preferences Utils

8
◦ I 50
✗ ③
it is the psychological satisfaction as feeling 2 80 utils
①
of the consumer what is the marginal utility of the second apple ?

9
-

example :
Mu =
¥
80-50
if an individual 's choices for a Saturday =

2- I

watch TV ②
evening are to , go out for dinner , = 30 utils

10
✗
or go to a movie

◦
they will attribute different levels of

utility to each of these 3 activities

-
Utility cannot be measured in terms of number

can only be ranked compared ordered

◦ in terms of preference pattern
 ☆ consumer equilibrium
consumer achieve
Date . 11 . 02 . 2022 Max satisfaction 5
① MU / Pgood is equal
for all
② entire budget is spent
2. 2 Maximizing Total Utility EXAMPLE 2.3 Maximizing Total Utility : Consumer Equilibrium -
What must the consumer do in order to

-
the utility maximizing
-
rule -

given the price of Big Mac & Milkshake is CONSUMER EQUILIBRIUM restore maximum total utility ?
states that total utility from the consumption RMZ each and budget is RM 8 -
the objective of a consumer to restore maximum total utility ,

condition maximizing utility

>

of 2 Or more goods is maximized when to maximize total satisfaction ◦ the consumer must rearrange his

a) Marginal utility per dollar of each good is equal -

when this objective is achieved expenditure
nnnnnnrnmurnn
-

example : the consumer is said to be in equilibrium the consumer needs to spend more on
p

a consumer consume Good A & B ① ① -

consumer equilibrium Big Mac
◦ the consumer is said to be in equilibrium
① the condition of reaching the maximum level ◦
spend less

of
on Milkshake

when of satisfaction quantity Big Mac increases

①
:
as ,
TU
MU consumer cannot increase the total utility by marginal utility of Big Mac falls

p
(A) =

Mph (B)
I. Marginal utility per dollar of each good is equal spending more of a given budget on one good as quantity of Milkshake falls ,

-
the possible combinations are :
& spending less on another good .
marginal utility for Milkshake rises .

b) The entire budget is spent 2 Big Mac & 2 Milkshake -

based on earlier example , eventually equilibrium is achieved .

example : 4 Big Mac & 3 Milkshake the consumer achieve his consumer equilibrium

the consumer has a budget of RMIO when he consumes 2 Big Mac & 2 Milkshake
Rmg
◦
spend all of the budget on Good A & B 2. The entire budget is spent My of Big Mac MU Of Milkshake
=

6
2. ( RM 2) 1- 2 ( RM 2) =
RM 8 ✓ Price of Big Mac Price of Milkshake

4 ( RM 2) -13 CRM 2) = RMIZ 4 4

=

2 2

7
-
the consumer will consume 2 Big Mac & 2 Milkshake 2 = 2

because the marginal utility per dollar for

Big Mac & Milkshake is equal to 2 The consumer achieve his consumer

8
◦

the entire budget of RMS is spent equilibrium

◦ RM 4 on Big Mac What happens if the price of Big Mac falls to

9
◦ RM 4 On Milkshake RMI and upsets the previous equilibrium ?

MU Of Big Mac MU Of Milkshake

>
price of Big Mac Price of Milkshake

10
4 4
>
I 2

4 ≠ 2

◦ The consumer does not achieve his

consumer equilibrium
 opportunity cost
☆ Calculation relationship Eco Ti :
Topic 3 Production & Cost
€
:
: :
SR LR
Atc
-

Mc ±,
to [ +
-

%
-

TP Vs MP
.

Date . 18 . 02 . 2022 -
TFC -

AFC FC + VC Only VC 5
µ, , :

for
TVC Abc decision making
-
-

-112 -
Ex

( 3. 1) Cost concepts -
economist believe businesses & individuals -
a business doesn't record implicit cost transactions b) Economic profit vs Accounting profit

Total Revenue ( TR) need to include both the explicit & implicit cost for accounting purposes -
economists measure a firm 's economic profit as

the amount a firm receives for the sales to reach optimal decision because no money is changing hands total revenue minus total cost

of its output because some value needs to be placed ◦

implicit cost transactions only represent the including the implicit & explicit cost
TR =P ✗ Q On the benefits given up loss of potential income Economic profit =
TR -

( Implicit + Explicit cost )

☆
PAY $$$ ( to run business)
CTC) explicit cost ( accounting costs) accountants
-

-
Total cost -

-
direct payment
no not the actual loss of profits _
measure a firm 's accounting
the market value of the inputs a firm opportunity costs when producers make direct -
the measurement of Explicit cost is objective profit as > for financial recording
land
uses in production payments to others in nature total revenue minus the firm 's explicit cost
capital
entrepreneurship because it is
-

profit labour
◦ in exchange for tangible resource asset actually incurred Accounting profit = TR -

Explicit cost

for any business firm owned by them -

Implicit cost occurs indirectly
used
TR = Tc ( 1- c. + E- c- )
◦ the main goal objective is to in production activities that's why its measurement is subjective c) Normal Profit
( not EC & ' c)
maximize profit & minimize cost includes the expenses on hiring labour input -

example : ^
_
also known as
>
forgone salary > capital
profit is the firm 's total revenue minus & on buying non factor inputs zero economic profit
( )

1
its total cost ◦ services of breakeven

profit =
TR -
Ti land ( rent ) hiring is define as

)f
_

factor input
(
a) Implicit & Explicit cost a labour ( wages l ) ( ) the minimum profit to keep a firm
, ,

6
-

every economic decision carries a cost ,

a capital ( interest in operation

a price that must be paid in order to ◦ raw materials 2 buying -

a firm that earns normal profit
non factor

acquire produce anything ◦

power / inputs
earns total revenue equals to its

7
☆ -

give UP $$ ( to start business )

( implicit explicit cost )
◦ costs can come in terms of -

implicit cost Explicit cost : total cost cost +

MIKEY represent opportunity costs equal to 121420000 + RM 15000 + RM 12000

profit = TR -

TC

the cost that a firm must give up implicit cost accounting profit TR explicit cost

8
time : = -

• labor ◦ to use firm 's internal resources RM 12000 t RM 15000 economics profit =
TR -

( explicit -1
implicit) cost
^
the trouble it takes on without any explicit compensation for = 0 -

normal profit

9
-
in economics , utilizing those resources ( RM 300000×5%7 TR =
implicit +
explicit cost
cost is often viewed in terms of the also known as :
explicit cost
opportunity that is given up when a decision ◦ notional cost

10
✓

is made ◦
implied cost direct payment $
◦ this is called opportunity cost ◦
imputed cost ✓

-
a firm 's opportunity cost of production examples : -

accountants

=
explicit cost + implicit cost ◦
working in the business while not getting a
agree the cost
formal salary -

economist also

◦
using ground floor of a home as a retail store agree
◦ interest rates toss through purchases
◦ income forgone from making a choice
 short run long run
-
at least one fixed input all inputs are variable
Date . 18 . 022022
. 5
-

building building can sell

-
variable inputs
materials

( 3. 2) Short Run Production variable Input c) The Law Of Diminishing Marginal Returns -

example :

a) Short Run & Long Run o an input whose quantity can change as -
this law explains the behavior of production
increasing
in economics the level of output changes functions in short run

} Iff???
-

,
.

returns to

short run & long run is not referring to o

example : -
states that beyond some point ,

the length on time labours the marginal product ( NP ) decreases as

/ diminishing
marginal

futility
o
example on raw materials additional units of variable factor ( labor )
to
labour
• short run refer to a short period of -
short run are added to a fixed factor

time ( 1 year) the period of time in which at least one -

in other words ,
-
total product & marginal product
☐
long run refer to a long period of input is fixed as more labours are being employed ,

time 110 years ) o but the other inputs are varied MP will firstly increase then it starts to decrease

at begin
& long
-

-
instead short run run depends on -

long run i. Increasing Marginal Returns to Labour

of business
,

the inputs the period of time in which all inputs are -

increasing marginal returns to labour occurs when

which can be varied in production variable marginal product of labour increases as

-
in short run , employment rises ( specialisation can happen )
there must be at least one fixed input b) Total Product ( TP ) & Marginal Product ( NP ) o
positive relationship
^ ^
-

there is nothing the firm can do about -

definition L MP ,

6
their fixed input Total Product ( TP ) ii. Diminishing Marginal Returns to Labour

because they are stuck with whatever o the maximum quantity of output that can -

diminishing marginal returns to labour occurs when

quantity they have be produced from a given combinations of marginal product of labour decreases as

7
however , the firm can make choices about inputs employment rises ( limitation of fixed input) (i ) I ✗ 4.8 ×
(20-10) =
24
their variable inputs Marginal Product ( MD ) o
negative relationship I ✗ 4.8×(10-0) =
24
output can only be increased by the additional total product that can be LT MP it

8
-
o

adding variable factors to the fixed factors produced when an additional unit of the lii ) I ✗ (20-15)×2.4=6
-
there are 2 types of factor inputs : variable input ( labor) is employed .

I ✗ (5-0)×2.4 +
2.4×(15-5)

9
Fixed Input TP = 30
µ p =

o
an input whose quantity must remain L
Civ ) I ✗ (4.8-2.4)×(15-5)=12
constant

10
regardless of QL (a) M¥( pie ) 2 Util
=
• how much output is =

util
produced
Mpd (tea ) =
# =3
o
example :

Buy more tea & lesser pie

factory
☒ machines
 total < SR cost > average

}
-
TFC : constant -
MCCU shape )
when QT
Date . 18 . 022022
. TVC : increasing ATC ( u shape ) behaviour 5
medium
- -

TFC TVC big small

-
TO = -1 -
AVC ( u shape )
i.
increasing AFC ( constantly b)
-

apply +09 " firms

TOTAL CTC ) ( ATC )
-

( 3- 3) Short Run cost • COST ,

MARGINAL COST ( NC ) & e) Average Total Cost SHORT RUN COST CURVE

FIXED COST ( FC ) & VARIABLE COST CVC ) AVERAGE COST ( AC ) -

total cost per unit of output produced

shape J shape
f- )
u
a) Fixed cost a) Total cost CTC ) TC AFC + AVC -

first + then T
Aye
=
or
-
costs of a firm 's fixed input -
the sum of cost of all inputs used to produce Q Q

-
fixed cost are those cost that do not change goods & services

as level of output changes TC =

TFC + TVC EXERCISE
•

example : -
firm 's total cost curve in short run -

complete the table below TVC TC

TFC
TFCTTVC Q Q
Q
fixed cost must be paid although-1 Q :O ; TFC + Tvc
output 7

-1¥ ( constantly decrease )

TFC always same
is zero
TFC =
1214130 ( remain ) (t) zo
=

TVC =
RMO
(f) 20 15 15
v
20 35 35
o remains constant throughout the TC =
Tfc approaching
zero
20 45 10 12.5 22.5 10
production -
relationship between Marginal cost CMC ) &
20 50 6-67 10 16.67 5
remain
regardless of any output produced constant Average Total Cost ( ATC )
,
zo 55 5 g. [Link] g
whenever marginal cost is less than
20 65 4 9 13 to

b) Variable cost 20 85 3.33 10.83 14.16 20 average total cost

> > >
costs of 20 110 2.86 12.86 15-72 25
-

obtaining the firm 's variable input QT o

average total cost is falling
-
variable costs are those costs that change b) Marginal cost ( NC ) whenever marginal cost is greater than

6
as output changes -
the additional total cost average total cost

-
example : as a result from producing an additional unit o
average total cost is rising
minimum
variable costs are zero when output is zero of output is produced the marginal cost curve crosses
ATC r

7
& rise directly with output TC TVC average total curve at efficient scale
MC =
or
Q Q o efficient scale is the quantity that

c) Total Fixed Cost ( TFC ) minimizes average total cost

8
-
cost of all inputs that are fixed c) Average Fixed Cost ( AFC )

in short run -
total fixed cost per unit of output produced

9
TFC
AFC =

d) Total Variable cost CTVC ) Q

-
cost of all variable inputs used

10
in producing a particular level of output d) Average variable cost ( Arc )
-
total variable cost per unit of output produced

TVC
AVC =

Q
 Date . 25 . 02 . 2022 5

why ?

( 3. 4) Long Run cost -

reasons a firm experience economies of scale downsize > split to 2 company
scale of production refer to gains from specialization >
improve productivity >
change management
-

Mmm

the use of factors of production to o

examples :
method

produce goods & services 0 labour

in long run ,
a managerial

0
all inputs are variable efficiency of capital

☐ therefore the firm can alter its o

examples
:

Fu 's,ffe% scale of operation that gives them the use of machines

the lowest cost for every level of a technological improvements in production

output produced buying raw materials in bulk

average total ( LRATC ) buy bulks

-

long run curve o more bargaining power >

with lower p

the curve that shows the minimum b) Constant Economies of scale a

ATC constant

average cost of producing any given -

constant return of scale exist

level of output when the expansion of the firm industry

derived by a series of short run average allowed the product to be produced at a

total cost curves constant cost per unit

6
typically U -

shaped -
the more output is produced ,

shape of LRATC the cost per unit remain unchanged

-
LRATC curve remains flat .

7
## series of SR
c) Dis economies of scale •
ATCT

dis economies of scale are

8
-

the problems & dis vantages faced by a firm

as it grows larger
firm start to QT ATCT

9
-

expand scale of
-
the more output is produced
①p
,

production
Qt AT Ct a constant
the higher the cost per unit

a) Economies of scale a
ATC t -
LRATC curve slopes upwards

10
-
the benefits & advantages a firm enjoys -
reasons a firm experience disecomies of
> SOP
as it grow larger scale -

rules

the more increasing

-

regulation
-
output is produced ,
bureaucratic & red tape
red tape T price T
,

yeasty
the lower the cost per unit management coordination problems

-
LRATC curve slopes downwards out of control situations
Topic 4 Market structure perfect * Barrier to entry advertisement because
:
competition no
-

i. Flower ( no barrier ) -

perfect cost T
Date . 25 . 02 . 2022 competition increase in demand 5
no
o consumer view products homogeneous

( 4. 1) Introduction to Market structures (4. 2) Perfect competition d) Revenues for a Perfectycompeitivefirmmmnmmn

-
market structure refers to a) Characteristics

the number & distribution size of buyers -

large number of sellers & buyers =

Y =

no power / no power to
market 2×10 = ¥ =
2oz =

& seller in the market -

price takers ( determine price / follow market price )

-

identical / standardised
o for particular goods & services -

product is homogeneous (consumer view the products

have no different)
-
the classification of market structure -
free entry & exit -
no barrier

can be in the form of -

no advertising > t sales t demand with T cost -
from the table above ,

EXAMPLES PRODUCTS near Perfect competition

Marginal Revenue CMR ) is
-

number of buyers & sellers OF the value of

nature of the product -

eggs -
at the market price for wheat $5 .
the same as Price ( P ) &

control over prices -

gold the individual farmer can sell all the wheat Average Revenue ( AR )

conditions of entry -
Nasi Lemak -

because each producer provides only small fraction o

because each additional output will

-
it is important to note that b) Price & Output Decisions of industry output yield additional revenue on the same
large no . of sellers
> -
each own little
not all of these market structures -
under perfect competition market any additional output will have an insignificant output
,
snare

actually exist in reality individual firm cannot influence the market price impact on market price -
therefore

o some of them are just theoretical o market price is determined by the -

the firm 's demand curve is perfectly elastic D= P =
AR = MR
h

constructs demand & supply forces at the market price

6
-
4 types of market structures : -
as a price taker ,
c) A change in Market Price & Firm 's Demand curve

individual firms in perfect competition will -

all sellers & buyers will have perfect knowledge

take & sell the goods at the market about the market

7
determined price -
sellers are provided with current information

o
therefore ,
market price will be constant about the market demand & supply conditions

without any changes due to the changes result of price change

8
as a

in units sold o
buyers will know the new price being
-
if any seller charges a higher price , charged by sellers

9
the buyer will buy from different sellers

o since the products are identical with many > new market
Price
sellers in the market >

10
increase
in other demand
-
words ,

the demand curve in perfect competition is

perfectly elastic .

-
the position of the firm 's demand curve will

vary with every change in the market price

 1. Total Approach short run losses run
< >
long
-
dif .
output level ①
continue
shut down exit the market
Date . 25 . 02 . 2022 TR TC profit 5
-
=

(temporary , p gave
-

-
PCAVC TRY TVC
economics profit maximize profit Q? TR < TVC
long
-

short run run

total approach
e) Profit Maximizing Output Decision -
average
f) Short Run & Long Run Profit Maximization ii.
Long Run Profit Maximization g) (continue ,
shut Down
)&(Exit ) Decision
Pr" "
-
firms should produce output when : i. Short Run Profit Maximization -
in long run ,
-
a firm generating economic losses in

MC =
MR -
all firm 's objective is to perfect competitive firms will only earn short run faced a tough choice

-
When MC =
MR maximize profits zero economic profit -
2 possibilities for a firm :

firm maximize profit -3 types of possibilities -

this is due to the effect of free entry & whether to continue to produce
firm minimize cost a perfect competitive firm can faced in free exit whether to shut down its operation
-

example : profit short run : -

since there is no barriers to entry to the market -
continue :

Ti o Economic Profit if profit the firm can continue operating the

average total
-60 0 P > ATC TR > TC 0
entry of new players ,
ST ( market supply ) business

-40 0 Economic Loss 0

price to -
Shut down :

-10 o p < ATC TRSTC 0

TRW ( individual firm revenue ) a short run decision not to produce
10 0 Zero economic profit or
profit to anything during a specific period of time
10 P = ATC if loss 0
because the firm cannot cover its

0 variable
-
short run profits losses , , & zero economic profits o exit players . St cost

in this case ,
o
price t however , the firm still needs to
pay
o the firm should produce their output o TRT its total fixed cost

6
at 4 units o profit T -

Exit :

• in order to maximize the profits the firm 's decision to leave

long run

since MC =
MR the market

7
when MR > MC -
to make this decision

-
additional revenue in (a) Economic profit ,
the firm needs to consider the

cont TQ the firm is earning short Average variable cost CAVC )

8
.
o -
run economic

when MR < MC profits of $120 0

if ,

-
v1 Q in (b) Economic Loss ,
P > min AVC

9
o the firm is suffering losses of $80 continue the operation

in (c) Zero Economic Profits ,

0 P = min AVC

o the firm is making zero economic profits continue the operation

10
☐ with the price just equals to the • P < min AVC

average total cost in the short run .

shut down the operation
 Date . 25 . 02 . 2022 5

> profit / loss / breakeven

EXERCISE D > ATC ① MC =
MR
( compare p & Atc ,

-
Determine the status of the firm when ① MC= MR ② Q*= 80
*
price is at :
② of ( profit maximising output ) ③ P =
$4
const = 120 unit ④ ATC =
$5
③
*
P ( profit maximising price )
+ =
$6

④ $5
• =
ATC

TR =p ✗ Q =
$6 ✗ 120 =
$720
TC =
ATC ✗
Q

Pu : profit

P > ATC

Ps : break even-

p =
ATC

Pz : loss

P < ATL

6
p ,
:
loss

P < ATC

7
8
9
10
 Structure differences of market structures
Topic 5 :
Market Monopoly
Date . 04 . 032022
. Perfect comp .
monopoly 5
barriers to
nd i >
barrier nigh barrier / entry / exit
blocked
( 5. 1) Monopoly c) Control Of Important Inputs PRICE & OUTPUT DECISIONS * ② -
demand curve for a monopolist

CHARACTERISTICS ① -
a monopoly can exist a) Price Decision downward sloping
because the firm if the monopolist wants to expand output
-
one seller the firm has managed to -

price is set at can charge for ☐

,

price maker ( high market power) control owns an essential resources the profit maximizing quantity it must accept a lower price

-
product has no close substitutes unique -
example : -
the price is determined from the demand on the monopolist is a price maker

high barriers to entry DeBeers Company curve of the firm 's product 0 because a monopoly has no close

blocked o a company in South Africa -

the demand curve for a monopolist competitors ,

-
have advertisement ☐ controls more than 80% of the world 's downward sloping it can change the product price

BARRIERS TO ENTRY production of raw diamonds ( up to 1980 's) inelastic by adjusting its output
sport league
a) Legal Barriers
-
the government undertakes EXAMPLES OF MONOPOLY FIRM IN MSIA b) Profit maximizing output decision *
-

law

\
rules & regulations -

Tenaga National Berhad -

firms should produce output when :
c) Revenue for a Monopoly Firm
to restrict competition in certain -
Astro economies of MC =
MR *
"" e

)
industries -
TM -
when MC =
MR

o in the form of -
KTM firm maximize profit
example : Indah water firm minimize cost
•
franchising -
pos Malaysia
-

6
•
licensing
example :
-
casino (
genting )
-

Genting } legal barrier

example :
• patents & copyrights -
movie , song ,
tech COMPARING DEMAND CURVES : -

from the table above ,

we can see that :

easy to get license ?

competition Monopoly AR
>

barrier hard : high barrier

Perfect V5 D= p =
AR > MR
easy low

7
- : -

b) Economies of scale ( natural monopolist ) prince prince

-
economies of scale can be a barrier D= AR =
p > MR

because the existing large producers

8
at a DD
are able to produce goods
> >
0 quantity of output 0 quantity of output
lower average cost

9
o
compared to those new firms just -

demand curve for a perfect competitive firm

starting up in the industry perfectly elastic

these industry have high sunk / startup cost

Competitive firms can sell all they want
-

0
cannot

10
start from small
-
new company high AVC need to pay
at the market price
compared to old company
-
example :
the firm is a price taker
highway
 Date . 04 . 032022
. 5

DEMAND & MARGINAL REVENUE SHORT RUN & LONG RUN A MONOPOLIST 'S LOSSES A MONOPOLIST 'S ZERO ECONOMIC PROFIT

FOR THE MONOPOLIST PROFIT MAXIMIZATION ③

a) Short Run Profit Maximization
sell at this
-
all firm 's objective 7

\
profits ( MC MR )
•
to maximize -
-

-
3 types of possibilities a monopoly firm ✗

can faced in short run :

if sell different Q&P *

loss
economic profit more

o P > ATC -
total loss

-
to sell more output . economic loss CBAD

the monopolist must accept a lower o p < ATC 0

the differences between

price on all units sold zero economic profit total cost CCAQMO ) &

-
this means that the monopolist receives o p = ATC total revenue ( DAQMO )

additional revenue from the new unit sold

but less revenue on all the units it was A MONOPOLIST 'S PROFITS ① MC = MR -
losses for the monopolist
=/ 00
previously selling ② Qm being a sole supplier does not guarantee
DD )
③ p( refer

6
thus the marginal revenue curve for the that customers will demand your product
$6
-
, =

④ ATC =
$4 will incur
monopolist always lies below monopolist a loss

the demand curve 0

if there is insufficient demand to

7
*-
Mc=MR cover average total costs
• at any price & output combination

the demand

8
along curve

-
the intersection of MR & MC

QM

9
o the profit maximizing
-

output
-
the demand curve

the price that can be charge for Qm

10
-
total profits

the area DABC

o
the difference between

total revenues ( DAQMO ) &

total costs CCBQMO )

 SR < loss > LR concert ticket :

}
stage
Price discrimination
Date . 04032022
. . continue
shut exit the market expensive 5
Pz min AVC down
to
pcmin AVC ④ cheap

b) Long Run Profit Maximization CONTINUE SHUT ,

DOWN & EXIT DECISIONS PRICE DISCRIMINATION ⑤ c) NO Resale

-
in long run ,
-
a firm generating economic losses in -
definition : -
for price discrimination to work ,

monopoly firm will only earn short run faced a tough choice sometimes sellers will charge the purchaser buying the product at

economic profit -
2 possibilities for a firm : > short run different customers with different prices a discount must have difficulty
-
this is due to whether to continue to produce for the same goods service too costly in reselling the product
the effect of high barriers to entry whether to shut down its operation o when the cost of providing that goods to customers being charged more

( blocked ) -
to make this decision service does not differ among customers -
otherwise ,

Objective :
o other firms cannot enter so the firm needs to consider the consumers would buy extra product at
,
to reap a higher revenue

economic profit can persist in the Average variable cost ( Arc ) CONDITIONS FOR PRICE DISCRIMINATION discounted price

long run -
if : -
in order to price discriminate , o & sell it at a profit to others

-
if long run still having loss P > min AVC a monopoly must be able to have : ☒
reducing the number of customers

needed continue
>
Oligopoly
product not o the operation 0
Monopoly power
monopolistic competition paying the higher price .

( not only monopoly )

0
exit market p =
min AVC o market segregation
o continue the operation o no resale

P < min AVC

0
Shut down the operation a) Monopoly power

6
-

price discrimination is possible

only with monopoly

OR

7
where members of a small group of firms

follow identical pricing policies

}
A B charge group A child cheap exp :
}
: >
firm CD

8
adult expensive theme park
charge group B : >

b) Market segregation
-

price discrimination can only occur

9
if the demand curve for markets

groups individuals are different

-
if the demand curve are not different

10
a profit maximizing monopolist would

charge the same price in both markets

-
in short ,

price discrimination requires the ability

-

age
to separate customers
o
according to their willingness to pay
Topic 6 : Market Structure Monopolistic Competition & Oligopoly
Date . . . 5

( 6. 1) Monopolistic competition PRICE & OUTPUT DECISIONS SHORT RUN & LONG RUN ii. Economic LOSS

CHARACTERISTICS a) Price Decision PROFIT MAXIMIZATION

price is set at the firm for Profit Maximization

-

many sellers _
can charge a) Short Run
-
price maker the profit maximizing quantity -
all firm 's objective
-
product differentiation -
the price is determined from the to maximize profits
-

easy market entry & exit demand curve of the firm 's product -3 types of possibilities a monopolistic
-
need for advertising -
the demand curve for competitive firm can faced in short run :

a monopolistic competitive firm is economic profit

EXAMPLES OF PRODUCTS downward sloping ◦ P > ATC -

the firm produces the quantity at which

shampoos elastic economic loss marginal revenue equals marginal cost

-
tidbits ◦ P < ATC minimize loss

diapers b) Profit maximizing output decision zero economic profit -

it makes an economic loss

toothpastes -
firms should produce output when : ◦ P =
ATC when P < ATC

-
instant noodles MC =
MR

-
When MC =
MR : i. Economic profit iii. Zero Economic Profit

firm maximize profit

6
firm minimize cost

7
8
-
the firm produces the quantity at which -
the firm produces the quantity at which

marginal revenue equals marginal costs marginal revenue equals marginal cost

9
maximize profit -
it makes zero economic profit
-
it makes an economic profit when D= ATC

when P > ATC

10
 Date . . . 5

b) Long Run Profit Maximization CONTINUE , SHUT DOWN & EXIT DECISIONS ( 6. 2) Oligopoly SUMMARY
-
in long run ,
-
a firm generating economic losses in CHARACTERISTICS -

comparison of the 4 market structures

monopolistic competitive firm will only short run faced a tough choice -

few sellers

earn zero economic profit -

2 possibilities for a firm : _

relatively few firms control all most of

◦
this is due to the effect of whether to continue to produce the market

easy entry & easy exit whether to shut down its operation _

products may be homogeneous differentiated

-
if firms are making profit in short run -
to make this decision ,
-

high barriers to entry

new firms the firm needs to consider the

◦ incentive to enter the market Average variable cost CAVC ) a) Mutual Interdependence
increase number of products -
if : -
each firm shapes its policy with an eye

reduces demand faced by each firm P > min AVC to the policies of competing firms

each firm 's profit ◦

continue the operation -

Oligopolist must strategize

◦
declines until : Zero economic profit D= min AVC constantly observing & anticipating the moves

New firms ↑ . S ↑ .
Price ↓ ,
TR ↓ ,
Profit ↓ ◦ continue the operation of their rival

-
if firms are making losses in short run P < min AVC ◦
just like playing chess

existing firms ◦ shut down the operation

6
◦ incentive to exit the market b) Role of strategic Interaction
decrease number of products -

your action affect the profits of your rivals

increase demand faced by each firm -

your rivals '

actions affects your profits

7
each firm 's loss

◦ declines until : zero economic loss c) Additional Info

Existing firms ↓ is ↓ Price ↑ TR ↑ Profit ↑ i. Short Run Profit Maximization

8
. ,
,

firms may earn

profit
I

9
loss in short run

zero economic prop ,, /

10
ii. Long Run Profit Maximization

-
firms will earn economic profits
because there is a high barriers of entry
 ☆ Unemployment > full employment ? Inflation
Topic 7 : Macroeconomics Problems part 2 -
CPI (fixed basket )☆ Calculation
natural rate
Date . 11 . 03 . 2021 f Zero cyclical unemployment 5
< NGDP
-

Gpp deflator " " ' ""

no Of Unemployment fluctuation in economic condition / RGDP
unemployment =
.

✗ 100% frictional structural > continues ↑ in PL of all Goes inflation rate =

% Ll in price
rate labour force poor economy
1) Unemployment
-

impact to ( 7. 2) Inflation
( 7. b) Actual & Natural Rate Of Unemployment EFFECTS OF UNEMPLOYMENT the
economy
child population 1340 -

ppl under poverty line

definition Natural rate inflation refers situation
-

-
:
-
not in labour force
-
of unemployment a) Poverty Mao increase
-
to a where

unemployment
-
employed Frictional rate structural rate loss of loss of power there is continuous trend in the
= + -

money a

◦ a person 16 years old & above who -

Actual rate of unemployment to buy have goods & services rising average price level in the economy

is not working = Natural rate + Cyclical rate -

not high prices
of Production is 10W
but is available for work natural
-

0 & has -
during recession ,
actual > b) Low rate economy but it is the process of rising prices

made specific efforts to find work the actual unemployment rate rises above -
as fewer people have jobs ,
of goods & services

over the past 4 weeks the natural rate (cyclical firms would not be able to produce -
the inflation rate measures average

during boom , natural > actual as many goods & services not individual price changes
FULL EMPLOYMENT the actual unemployment rate falls below -
as a result , -
inflation takes place when

-
definition : the natural rate the output in the economy will decrease a basket of goods & services cost more

full employment means a situation in -

when GDP ↓ , national income also ↓ to purchase
which all of the people who are through -
inflation lowers the value of money

willing and able to work are able to trees c) Expanding

-

divisions in the society where the same amount of money

f-
Sion
does not mean 0%
find jobs ( of unemployment rate ) -

increasing the discrimination level in can buy smaller amount of

more discrimination for
the
-

implies an economy operates at community goods & services

{
ppl under poverty line

6
natural rate of unemployment boom because they are unemployed -

example :

frictional rate peak big gap between poor & rich

-

◦
the sum of +

structural rate d) Increasing illiteracy rate

7
the cyclical unemployment is zero UNEMPLOYMENT BENEFIT -
unable to provide the people with the
voluntarily not working : frictional Unemployment -

money give by government for best education unable to sharpen the

mismatch of skills : structural unemployment

a) what percent of unemployment is unemployed people knowledge & skills through training &

8
considered as Full Employment ? development
-
the natural rate of unemployment changes due to unavailable funds & lack of money -
the percentage rate of change of price

9
over time level in the economy

usually between 4- 6% Unemployment e) Crime rate level increase inflation rate

given natural rate is 4% -

problems will increase ◦

2 methods to measure inflation :

10
actual rate vs natural rate pickpocketing •
Consumer Price Index (( PI )
◦ actual rate < natural rate ( 4% ) snatching a GDP Deflator

• full employment kidnapping

◦
actual rate > natural rate smuggling
do not achieve full employment
PLE I C
 CPI = Current value > to buy same basket :
✗ '◦°
base yr value Base yr :
1214100
Date . 11 . 03 . 2022
current : RM 100 + 21 8% 5
121 g
-

= .

=
RM 121.8
( compared with base year , prices increase by 21.8 %)
CONSUMER PRICE INDEX ( ( PI ) b) Constructing the CPI index -
the inflation rate c) Uses of the CPI
year I
a) definition of CPI :
Step 1 :
fix the basket is calculated as follows : it is used to monitor changes in the
¥, ¥§gcpI
- -

CPI measures changes in the average The Department Of Statistic Malaysia Inflation CPI year ,
-
CPI year ,
cost of living over time
= × ,◦◦ %
level of prices identifies a market basket of Rate CPI year ,
When CPI rises ,
the typical family has to

◦ of some fixed basket of consumer goods & services the typical customer _
example :
calculating CPI & inflation rate spend more money

goods & services buys step 1 :

Survey consumers to determine ◦ to maintain the same standard of

•
typically purchased by households -

Step 2 : find the prices a fixed basket of goods living

is in the CPI 's basket ?

in turban / find the of each of the hot dogs
-
what
town area
prices °
4 ,
2 hamburgers

goods & services in the basket find the price d) Problems in the CPI index
40% step 2 : of each good in
constructing
16%
for each point in time each year -
while CPI is a convenient way to
1) %

6% compute the cost

step 3 basket 's compute the cost of living &
- :

5%
6% use the data on prices the relative price level across time
5% ◦ to calculate the cost of the basket but it is not a perfect measure of
5%
of goods & services at different time the cost of living
-

Step 4 : choose a base year step 3 :

compute the cost of the basket -
3 problems with the CPI are

designate one year as the base year of goods in each year substitution bias s

6
◦
making it the benchmark against introduction of new items 2

which other years are compared unmeasured quality changes U

the base year selected is a normal year step 4 :

one year as the base year ( 2001 )

7
when the economy & prices are stable & compute the CPI in each year

CPI for base year is at 100

Step 5 compute the index

8
- :

by dividing the price of the basket in

current value
one year by the price in the base year CPI =
base year value
✗ 100 novunit : for comparing

9
◦ and multiplying by 100 step 5 : use the CPI to compute the

current period value of goods & services inflation rate from previous year
CPI =
✗ 100
base period value of goods & services

10
-

example :

inflation CPI -
CPI °
=
,
✗ 100%
rate
per unit CPI ◦

=
~ %
7

800 1000
CPI ( 2006 )
255 285 1285
y
=
✗ 100%
1055

(1%1%1) 1055 1285 = 121.8

 ( Iii ) 6% = CPI 2021
-

111.66 NGDP =
CYP ✗
CYQ
✗ 100%
"" 60
Date . 11 . 03 . 2022 RGDP =
BYP ✗ CYQ 5
0.061111 -66 ) = CPI 2021
-

111.66
CPI 2021
=
118.36
i. Substitution Bias iii. Unmeasured Quality Changes GDP DEFLATOR -

example :
-
the basket does not reflect consumer 's _

quality improvements increase the value of a) Definition of GDP Deflator

reaction to changes in relative prices the dollar -

GDP deflator 100-0

will substitute towards but often not fully measured reflects the prices of all goods & services 114.6
} 14.6%
-
consumers goods are

128.6 } 12.2%
that have become relatively less expensive -

example :
produced domestically
the index overstates the in if smartphones increase in the of compute the GDP deflator in each year for:
-
increase price over time , compares price currently
cost of living ◦
but that increase in price is due to produced goods & services 2011 :

by not considering consumer improved technology ◦ to the price of the same goods & 100×(6000/6000)=100-0
substitution not due to average prices
• then this change in price is services in the base year 2012 :
increase
a
by
14.6% compared
-

example : inflation 100×(8250/7200)=114.6 to base year

if product A is purchased by consumer however ,

the CPI would treat this b) Calculating the GDP Deflator 2013 :

& product B has a sale making it as inflation CPI overstate -

nominal GDP 100×(10800/8400)=128-6 average prices

> increase by
cheaper measures all final goods & services
28.6%
compared to
◦
consumer will naturally buy more FA Oct 2021 Csec B) Produced in a given time period , of year ? base year

of product B QI -
(a) i. 2018=(180×300)+(170×250) +
valued at prices existing during time ☆ The average price level increased / decreased
,

because of its effect on consumption , (270×500) period of production by ? when compared with year ?

6
substitution bias can cause inflation =
231500 Nominal GDP =P (C) ✗ QCC ) CPI :

current year household

☒#
C
overestimated 2019=(190×300)+(175×250)
= >
to be -1 Real GDP
consumptions
-

(300×500) measures all final goods & services current value of basket

7
× "°
ii. Introduction Of New Items = 250750 produced in a given time period ,
base yr value of basket

-
the basket does not reflect the change 2020=(195×300)+(180×250) -1 Valued at prices existing in base year
B= base Year
in purchasing power bought by the (310×500) Real GDP PCB ) Q (C) GDP deflator

8
= ✗ :

introduction of new products = 258500 -

the GDP deflator is calculated as follows :

NGDP
✗ 10°
250750
as time goes by items will enter Rapp
new CPI '◦ °
GDP É
= ✗
zoa
-

,
231500 =
✗ 100

9
into the basket of goods & services =
108.32 Deflator Real GDP
25850°
purchased by the typical consumer CPI zozo
= ✗ 100 -
the inflation rate Q( C) × 1) (C) ( =
current Yr
23,500 × 100
-
the introduction of new items makes =
111.66 is calculated as follows :
a ,,, × p ,, , B =
base yr

10
consumers better off (ii ) NGDP zag
=
(190×400)+(175×250) +
Inflation GDP deflator yz
-

GDP deflator y,
=
✗ 100%
because this increases the real value (300×500) Rate GDP deflator y,

of the dollar CPI overstate = 269750

-
the survey used to calculate the CPI is NGDP 2010=(195×500)+(180×320) -1
RGDP 2020=(180×500)-1 (170×320)+(270×550)
from the past (310×550) =
292900
269750 325600
it cannot describe monthly changes in = 325600 2019 : ✗ 100 2020 : ✗ 100
249500 292900
the market basket RGDP zola
=
(180×400)-1 (170×250)+(270×500)
16
.

=
249500
= 108.12 =
Ill -
 Date . 18 . 03 . 2022 5

worse off -
worse off / better off to some extent
THE DIFFERENCES a) Households b) firms
-

BETWEEN -

example :

GDP DEFLATOR & CPI -

inflation reduces household 's purchasing -
increase cost of resources you borrow 1214100 at an 6% interest rate
Painful for family with fixed income
G- pp Deflator in year time , you will repay 1214106
-

CPI power resources cost more to purchase o 1 .

reflects the prices of reflects the prices of goods & services cost more to purchase o
examples : the lender receives this back ,
but if they
all goods & services all goods & services o therefore , lesser amount of goods & services raw materials wanted to buy the same good you bought
produced domestically bought by consumers were purchased on fuel for RM 100 a year ago

including imported goods ☐ for the same amount of money firms will either pass the increased cost to 0
they must now pay 1214110

includes the prices of focuses on the price of example : the consumers by • due to 10% inflation rate

all final goods & a fixed basket of goods 0 assume a family has an income of o
increasing the price of the good o
so cannot afford it now

services in the & services that are 1214100 week ☐

can cause a decrease in the demand they could have afforded it at the

economy typically consumed by o

they buy 1 product worth RM5 for their product time you borrowed the money

households this means they can buy purchase o

keep the price the same the real rate of interest would be -4%

20 Units of this good 0 but this will decrease their profits o the nominal interest rate -

inflation
( unexpected )

EFFECTS OF INFLATION ☒ but if the price increase to RMIO -

increased demand for wage rises =
real interest rate

households ( losers ) they could only now purchase to units firms will feel pressure from unions therefore , making lenders worse off than

-
firms ( losers ) -
standard of living will decline o to pay higher wages borrowers
( winner ) ( loser )

6
-
borrowers vs lenders the level of .
. .
declines if inflation continue to exist

-
international trade Nxt o
wealth this will increase their cost & d) International Trade

o comfort reduce their profits -

domestic goods become relatively

7
☐
obtaining material goods more expensive compared to foreign goods
o
other necessities to a certain c) Borrowers vs lenders domestic goods will become less competitive

socioeconomic class borrowers will become better off in times in foreign market

8
-

when the inflation rate is more than the o therefore we lose out international

nominal interest rate competitiveness

9
-

lenders will become worse off in times [Link] export decrease

when the inflation rate is more than the inflation pushes costs of production up

nominal interest rate o

the increased costs will usually be

10
-

bank
Passed on to the consumers
Ppl who save money in bank
☐ which is our international trading partners
-

import now become relatively cheaper

import (M) will increase

net export ( NX ) decrease

 ① wealth effect :
purchasing power
↓ ③ the exchange rate effect /
PL ↑ C↓ if PL ↑ open economy effect
PL ,

Interest rate effect PLT Demand money ↑ pL↑ , export expensive ,

Topic 8 Aggregate Demand (AD ) & Aggregate supply ( AS ) ②
^ :
:
interest rate ↑
Date . 25 . 03 . 2022 1. Definition cost of borrowing ↑
ÉTIM '
1¥ 5
AD
2. Curve
Shift & movement > RGDP
Investments
Demand Micro:
Aggregate Demand : macro 3. o
-
increase =
right
( 8. 1) Aggregate Demand
^
REASONS THE AD CURVE SLOPES DOWNWARD c) The Exchange Rate Effect CPL & NX ) SHIFTS IN AD CURVE -
decrease =
left
total / sumation
>
investment from firms
DEFINITION -
the equation of AD : -

suppose PL rises -
because AD is comprised of Ct I + G- + NX ,
> consumption from household
government
G net export decrease in one of these
-
AD total spending AD =
C + I + + NX -
this makes Malaysian exports more expensive any increase
✓ ,
7

the sum of the demand for all the -

assume that G- is fixed by government policy to people abroad components will shift the AD curve

goods & services in the economy -

to understand the slope of AD , imports cheaper to Malaysia residents to the right to the left
TAD ( ↑ -1 I + G-
= + NX
over a
period of time we must determine how a change in thus an increase in PL causes example :
shift rightward
-

,
-

export
the quantity of & in net export
-

can also be seen as price Level affects C , I NX > a decrease any increase in C I G- NX
import
real GDP demanded at different price levels REASON why is NEG / INVERSE RELATIONSHIP which means a smaller quantity of ◦
AD curve shift rightward
↓
-
the AD curve slopes downward a) The wealth Effect ( PL & C) goods & services are demanded any decrease in C I G- NX + e. + N✗↓
( negative) -

shift
inverse relationship between the -

suppose PL rises - The Exchange Rate Effect : ◦

AD curve shift leftward leftward

price level ( PL ) & -

the dollar that people hold able to buy PL ↑ -

any increase decrease in C I G NX

real gross domestic product ( RGDP ) fewer goods & services export becomes more expensive to foreigners that is not related to changes in price level

demanded so real wealth is lower ✗ ↓ > NX ↓ , Y ↓ will shift the AD curve

any other factor

-
the aggregate demand curve -
people feel poorer ,
so they spend less Export < Import ,
NX ↓ -

shifting of the AD curve :

other than PL

downward sloping / -
thus , an increase in PL causes -
taken together ,

negatively sloped fan in then rise in the price level means that
a consumption , a

6
which means a smaller quantity of the quantities of C ,
I & NX components > increase

goods & services are demanded of AD may all decrease

-
The wealth Effect : -
since government purchases are determined decreases

7
PL ↑ > Purchasing power ↓ > C ↓ ,
Y ↓ through a political process ,

> will effect investment we assume there is no casual link between

b) The Interest Rate Effect ( PL & I ) the price level & the real volume of

8
-
the equation of AD -

suppose PL rises government purchases any event that changes C I G- NX

> Y =
GDP = AD =
AE < -

buying goods & services requires more dollars ◦ therefore , this component of GDP does not ( except a change in PL ) will shift

9
national aggregate -
bank will drives up interest rates contribute to the downward slope of the curve the AD curve
income expenditure
Microeconomics Macroeconomics :
( PL )
:
-
this will increases the cost of borrowing -
in general Movement of AD :
only 1 factor
Pln
,
Pn
to fund investment projects a change in the price level with all other % -

PL ↑ upward

10
,

thus an increase in PL causes determinants of AD unchanged PL ↓ downward

Br
-
-

Plz nooo

Eaµ•A
☐ AD
decrease in investment movement the AD curve
a causes a along
pj
◦
> a > papp
◦
◦

>decrea#gc
,

which means smaller quantity of movement along AD curve is

,↓
a a an a
-
pl ↑ , Rqpp ↓ p
,
-
PL ↓ , RGDPT goods & services are demanded change in aggregate quantity of
> RGDP
negative / inverse
The Interest Rate Effect services demanded
-

- :
goods & RGDP , RGDP RGDP }
relationship ,

PL ↑ >
Interest Rate ↑ > I ↓ ,
Y ↓

PL ↑ Demand Interest Invest

.
↑ ,
rate ↑
,
less ↓
formoney
 % As positive relationship SR ? LR ?
Ph -

RGDP fixed cost → SR

PI
-

Date . 25 . 03 . 2022 PL 5
-

-
all variable cost ( no fixed cost )
> to China , US ,
Japan . _ .
PL ↑ i RGDP ↑
LR
→
0 > RGDP PL ↓ i RGDP ↓
RGDP , RGDPZ
a) consumption Expenditure (c) d) Net Export Expenditure ( Ex ) ( 8. 2) Aggregate supply THE SHORT RUN AGGREGATE SUPPLY CURVE
normal
-
rightward shift in AD -

rightward shift in AD DEFINITION

( supply )
curve
an increase in consumers
'
confidence an economic boom in the economies of -
AS
'
an increase in consumers wealth major trading partners & etc .
the sum of supply for all the goods & services

Positive relationship
( m%¥ⁿd)
"
a decrease in personal income tax depreciation of money happens in the economy over a period of time between PL & RGDP
an increase in population & etc . ◦ where goods & services for that country -
the aggregate supply curve represents
-
leftward shift in AD become cheaper how much RGDP suppliers will be willing

a decrease in consumers
'
confidence export ↑ to produce at different price levels

an increase in personal income tax ( spend

less )
NX ↑ -
the aggregate supply curve

an increase in savings & etc . -

leftward shift in AD ( vertical :p inelastic
.

) -

why is the SRAS curve upward sloping ?

an economic slowdown in the economies of in short run
, input cost are fixed

b) Investment Expenditure (1) major trading partners & etc .

◦
example of input cost that are fixed

rightward shift in AD appreciation of money happens wages

( investment )
increase
business confidence increases ◦ where goods & services becomes expensive rental

a fall in interest rate export ↓ nominal wages & salaries remain fixed

a reduction in business tax & etc .

import ↑ in SR due to 2 reasons :

6
- leftward shift in AD NX ↓ in the short run ,
◦ workers have incomplete knowledge
decrease
a decrease in business confidence ( investment ) ◦ As curve is upward sloping of change in their real income

a rise in interest rate in the long run ,

when price level changes

7
a rise in business taxes & etc . ◦ AS curve is perfectly inelastic ◦
fixed -

wage contracts

the As curve plots the relationship between when price level rises ,

c) Government Expenditure (G) the total amount of goods & services firm react by hiring resources &

8
◦
more

-
rightward shift in AD the firms produce & sell at any given producing & supplying more G- IS

when government spending increases price level therefore ,

9
-
leftward shift in AD o
RGDP will increase

when government spending decreases ◦ firm will make higher profit since

the input cost is fixed

10
 Date . 25 . 03 . 2022 5

leftward
THE LONG RUN AGGREGATE SUPPLY CURVE SHIFTS IN AS CURVE -
a decrease in aggregate supply ( shift ) C) Shifting of the LRAS Curve

✗ no effect from
-

any change in the quantity of any factors higher costs

price level
-
be is producing
of production ◦
higher wages
at optimum level shift in both the short other input
can cause a run ◦
prices rise
-

fully utilised all

resources & long-run aggregate supply curve government policy
-
Max level of
production -
example : ◦
overregulation
any increase in any of the factors of ◦ waste & inefficiency
production ◦
higher trade barriers
fullemployment
shift SRAS & LRAS curve stagnation
rmaawteriai, can
◦
of resources ( labour ,

why is the LRAS Curve perfectly inelastic ? rightward ◦ a decline in labour productivity
in long run , any decrease in any of the factors of
◦
capital deterioration d) Why the SRAS & LRAS curve might shift
◦
input costs are free to adjust by production unfavourable weather -

example :

the same amount as the price level ◦ can shift SRAS & LRAS curve natural disasters & war historically , technology has been a

which means that firms find their leftward -

these factors can shift the short run aggregate
-

major driver to increase the population of

costs has risen as well a) Factors that may shift the aggregate supply supply curve , the long-run aggregate supply any economy

firms will not react to the changes curve or both when the first industrial revolution

6
in price level depending on whether the effects are kicked in at around 1760 ,

◦ if firms react to price level changes , temporary or permanent ◦ it took less than 100 years to double
their cost will also increase & the world output

7
leads to lower profits b) Shifting of the SRAS Curve with the computing revolution around the

so , firms do not change their supply 60s ,

" MY short run )

as the price level rises the time was reduced to less than

8
◦

rightward
in long run ,
the LRAS is perfectly inelastic -
an increase in aggregate supply ( shift ) 15 years

at the natural rate of output lower cost Industrial Revolution with the advancement

9
◦ this level of production is also referred to o lower wages in technology & knowledge

as potential output full employment ◦ other input prices fall

• where all resources are fully employed government policy

10
◦ firms will always produce at the ◦
tax cuts

maximum sustainable level ◦

deregulation
◦ lower trade barriers

economic growth
◦
improvements in human & physical capital
◦
technological advances
◦
an increase in labour
favourable weather
 Date . 25 .03 . 2022 5

( 8. 3) Long Run Macroeconomics Equilibrium -

the long run equilibrium level of real output &
-
the short run equilibrium level of real output price level are determined by the intersection of

& price level are determined by the the aggregate demand curve ( AD )

intersection of : the long run aggregate supply curve CLRAS)

the aggregate demand curve ( AD ) -

when the equilibrium occurs at potential

the short run aggregate supply curve CSRAS ) output level

-
short run macroeconomic equilibrium diagram on the long run aggregate supply curve

◦ the economy is operating at

full employment
-

long run macroeconomic equilibrium diagram

full employment

6
7
8
9
10
 Perfect / Macro Equilibrium
AD / As
r
-
market operating at optimum / Max production
Mode,
""
% SRAS ☆ Fiscal Policy budget
Topic 9 Multiplier Gov spending Multiplier
!µp
gov
Fiscal policy OG
→ .

: . = ×

,
Hpc
Recession :
'" " " " " 9 ,
Date . ◦ , . ◦ 42oz
.
pl ,
!mp @ 5
- - -
-•
,
-

T
G, , , MPC
Inflation multiplier
-

:
contraction and yay ,

,,, , I -
Mpc
0 RGDPNR / fun employ .
impact to AD =
Ct It G- + NX
-
tax influence -2+0015
( 9. 1) Introduction to Fiscal Policy b) HOW can Tax influence AD ?
( & I (9. 2) Tools of Fiscal policy e. & -1 a) How Expansionary Fiscal Policy works
government budget every year indirect C & I influence
↑ major
-

policy
-

>
FISCAL policy When Taxes -2 tools of Fiscal are :
Msia : Sept / Oct impact
-

AD
more tax direct impact
(G)
'
-
the use of government taxation & for household : Pay Government Expenditure utemployment ( recession )
-
shift left wa to AD

government expenditure ◦
↓ consumption , ↓ Aggregate Demand
overcome
to stimulate the
-

economy economic
•
AD↓=C↓+ It G- + NX
Problem
-

objectives of Fiscal Policy for firm :

-
shift leftward
recession shift
↓ Aggregate
-

to achieve full employment ↓ investment Demand

_

°
poor economy ,
rightward
inflation
to achieve price level stability AD↓= G b) HOW contraction ary Fiscal Policy works
-

a ( + I↓ -1 + NX
-
more -10 spend (T ) indirect impact
to achieve sustained economic growth -
when Taxes ↓ >
-

pay less tax

Tax

-
fiscal policy is usually carried out for household : inflation

by Federal Government ◦
↑ consumption . ↑ Aggregate Demand
-
shift
a ADF C↑t I +
G- + Nx rightward
positive relationship
a) How Can Government Expenditure for firm :
TYPES OF FISCAL POLICY
budget deficit shift
influence A- D= Ct I -1Gt NX ↑ profit ↑ Investment , Expansionary Fiscal policy
-

AD ? ◦ -

G > T leftward
. -

shift
Government Expenditure ↑ ↑ Aggregate Demand the Government will increase its
-

When
rightward
-

↑ G. total spending will increase directly • ADFC + IT -1

G + NX government expenditure and or

6
AD shift
Demand G- ↑
-

◦
↑ Aggregate ☆ negative relationship decrease in taxes 1- ↓
rightward
• AD↑= ( + I + G↑+NX this policy is used to control
bring down high
unemployment problem
-

-
When Government Expenditure ↓
unemployment rate

7
Poor economy
↓ during recession
-

G. total spending will decrease directly a

spend more
ppl no money , so gov .

AD shift budget surplus

↓ Aggregate
-

◦ Demand -
Contraction Gry Fiscal Policy
leftward _

e. < ,
AD↓= C + I +
G↓+ NX the Government will decrease its

8
•

government expenditure and or

increase in taxes E. ↓ 1- ↑ > demand Pull

right

9
' this policy is used to control inflation
left
< continuous increase
problem
-

in PL
AD '

AD o

10
AD z
 Why Msia difficult to boost economy
even though ppl spend many
&
A B -

Date . 01 . 04 . 2022
% "
RM " but we buy many imported goods 5
b¥Yn ¥ better Choc in economy ◦
money flow outside
RMI > RMI >
EMI -
> RMI -
ppl need to buy local products

( 9. 3) Fiscal Policy & AD AS model (9. 4) Fiscal Multiplier Effect -

Question 1. Government spending Multiplier

a) Expansionary Fiscal Policy -

the multiplier effect shows us : when you have an income of 12141000 , -
when government increases its government

how much will RGDP change when what will you do with this income ? expenditure ,

there is a change in government spending ◦

spent partially on goods & services this would cause an increase in
AD =
c +
I +
GF NX do ☆ in exam
◦
Gr >
RGDP g bi ,
◦
some savings the aggregate demand ,

mpg ,µp ,
.

'
will RGDP receive an additional spending multiplier either one
how much change when When you income ◦ =
, _
Mpc

>
> " ""
ig%¥ there is a change in government taxation of RM 2500 ,
what will you do with =
hips
wi " " "

right
◦
T >
RGDP this additional income ? ◦
so , what is the total impact on AD ?

-
to understand the multiplier effect ,
◦
spent the additional income received AD =
G ✗
spending multiplier
we need to understand how likely people on goods & services -

example :

are to spend us save any extra income ◦

do some savings on the additional given the MPC = 0.8 & an increase of

b) Contraction ary Fiscal Policy they get income received RMIO billion in government spending can

◦
because this factors determines the -

Example : help to control recession problem .

multiplier effect when my income is RM 1000 a) calculate the government spending multiplier
inflationary
> gap
_
economists call these 2 concepts as :
y = C + s spending multiplier =
hips
Marginal Propensity to consume ( MPC ) RM 1000 =
1214800 -11214200 =
o !z

6
multiply
)
Monett
Marginal Propensity Save ( MPs ) when I receive additional income of = 5 time ( by 5 times
RM 2500 b) Calculate the total impact on AD
<
left a) MPC y =
C + S AD =
G ✗
Spending Multiplier

7
-
the additional consumption purchases made RM 3500 =
12143000 + RM 500 = RMIO billion ✗ 5

as a portion of the additional income MPC =

§ MPS =

☐ § = RM 50 billion

received 3000 800 500-200 " " " " Sion

8
- ◦ :
=
=

C 3500-1000 3500 -

1000 An increase of RMIO billion in

MPC =

y = 0.88 = 0-12 government spending will increase

9
◦
therefore ,
the gym of µ , , ,
mpg ,
, aggregate demand by RM 50 billion .

must ^
b) MPS be 1

-
the additional savings made as a portion of

10
the additional income received

S
MPs =

Therefore ,
the sum of MPC -1 MPS =
I
 MPs -1
MPC :|
Date . 01 . 04 . 2022 5

gov .

spending multiplier
=

Mtp ,
Expansionary Fiscal Policy contractionary Fiscal Policy
2. Tax Multiplier to overcome recession & unemployment to overcome inflation
multiplier Mpc
- -

=
tax
-

MPs
-
taxes affect a household 's -2 tools :
G- ↑ T ↓ continuous increase in PL
disposable income =↑AD=C↑+I↑t GTTNX -

G↓ ,
1- ↑ =
C. ↓ -1 I↓ -1 G- ↓ -1 NX

-
the tax multiplier is negative shift rightward = AD ↓

because higher taxes reduce ① show recession in diagram shift leftward

PL
LRAS inflationary
people 's disposable income PL ^
GAP
^ LRAS SRAS
◦
thereby reducing their consumption spas
t
on goods & services p q
-
- - - -
-
-

1
-

MPC recessionary AD ,
Tax Multiplier =

1- MPC AD draw low gap ,

<
WHY 90-1 f)
>
-

poor economy
<
-

Mpc -

1- ↑ C ↓ I ↓ AD ↓ demand less
I
= , ,
ADO
> RGDP
Mps negative relationship RGDPO
>
Rapp
• so , what is the total impact on how to overcome L

AD ? -

by implementing % LRAS
SRAS
AD =
T ✗ Tax Multiplier expansionary fiscal policy

example G ↑ AD ↑ Plo -9
- - - -

:
- -
-
-

↓ ' <
assume that Malaysia could be facing PL < ADO
Plz
- •

!
- - -

LRAS AD

6
^ ,
a serious inflation this year Given . spas
I > RGDP
that the MPC =
0.75 & a tax increase [Link] RGDPO
P" >
/full employment
- - - -
•

Of RM 5 billion can help to control >

7
AD 2
Plo •
inflation problem
-

AD
- -

T↑
-

G- ↓
-

=
AD , ,

At>
a) Calculate the tax
°
multiplier >
RGDP ADZ = multiplier effect
RGDPNR / full employment
-
MPC
Tax multiplier ADI GT 1- ↓

8
= :
MPs
0.75
multiplier effect
-

=
0.25
AD z
:

=
-3

9
b) Calculate the total impact on AD

AD =
T × Tax Multiplier
= RM 5 billion × -3

10
= -
RM 15 billion

◦ Conclusion :

An increase of RM 5 billion in

government tax will decrease

aggregate demand by 121415 billion .

 ☆
Topic 10 Monetary policy Money supply 3 -1001s surplus ↑ r ↓ →
=
:
interest rate ✗ effect Ms °M°

}
-

Date . 08 . 04 . 2022 but will effect the interest value MS 5

RRR
DR

( 10 1) Introduction
.
to Monetary policy THE DEMAND OF MONEY THE SUPPLY OF MONEY

Monetary Policy -
the demand of money curve
Bank Negara Msia :
Federal Bank
-
normal demand curve
refers to how Central Bank control the downward sloping
negative
supply of money & credit availability ◦ because there is an inverse relationship
Im

in the economy o between the interest rate & quantity of

reduce
↑
-

Objectives Of Monetary Policy Money demanded r MD ↓ r↓ MD ↑

economic prob
-

to achieve full employment

( %)
to achieve price level stability ↓ Inflation
stable
to achieve a
sustained economic growth decrease in the money supply
to maintain a continuously low structure of ◦ increase the interest rate
-

increase I the supply of is vertical

interest rate in the economy _

money curve
↑ Investment
-

Monetary Policy is usually carried out by because it does not depend on the level of

Central Bank interest rate

the ability to the supply of money is determined

-
create money gives the
-

by

central Bank the power to control -

decrease in the interest rate r ↓ ,
Q money ↑ Central Bank

monetary policy increase in the quantity of money demanded

6
-
the central bank of Malaysia -
increase in the interest rate r
↑ . Q
money ↓ a) How can the central Bank influence the -

Money supply ↑ , surplus in money

Bank Negara Malaysia decrease in the quantity of money demanded interest rate ? interest rate ↓
-
the central Bank of a country controls : -
it can increase decrease the supply of money -

Money supply ↓ , shortage in money

7
the supply of money interest rate ↑
-
make sure got money
the availability of money circulation in market

the rate of interest

8
9
10
increase in the money supply
◦ decrease the interest rate

→ to attract ppl borrow money

 $$ Deposit ↓

blond less Maybank loan out

sell Money supply ↓
BNM :
from ↑ in deposit
Maybank can loan out
but bond more
Date . 08 . 04 . 2022 >
lend , 5
( $↑ ) money supply ↑
$1s
3 tools $$
110.27 Tools Of Monetary Policy b) How Expansionary Monetary Policy works (10-3) Monetary Policy & AD / AS Model (10-4) Difference between Monetary policy &
-
3 major tools to control money supply are : a) Expansionary Monetary Policy Fiscal Policy
Open Market Operations COMO ) Monetary Policy Fiscal Policy
◦ involve the purchase & sale of
usually carried out by usually carried out by
government securities by the Central Bank Federal Government
> shift rightward
-

BUY & sell bonds

Central Bank 3 -1001s : 2 -1001s :

oeg : bonds -

Open Market Operation -

Tax (T)

Required Reserve Ratio ( RRR ) ( %) - to overcome recession unemployment COMO ) -

Government spending
◦ the percentage of money that -
Required Reserved Ratio (G)
central Bank requires ( RRR)

all commercial banks to keep in c) How contraction ary Monetary Policy works -
Discount Rate CDR )

central Bank give an direct impact give an direct impact

Discount Rate CDR ) b) Contraction ary Monetary policy on AD on AS

◦ the interest rate that central Bank

charges on loans
> shift leftwards
o when commercial banks borrows

6
from central Bank

-
to overcome inflation

TYPES OF MONETARY POLICY

7
a) Expansionary Monetary policy ☆ only investment
-
it is aimed to increase the money supply other component no impact
in the economy

8
-
this policy is used to control

unemployment problem during a recession

9
by lowering the interest rate

b) Contrationary Monetary policy

10
-
it is aimed to decrease the money supply
in the economy
- this policy is used to control inflation

problem

by increasing the interest rate

 Date . . . 5

FISCAL POLICY MONETARY POLICY

deflation unemployment Economic inflation deflation unemployment Economic inflation

( during recession ) Problem (during recession ) Problem

Expansionary Fiscal Policy Types Of Contraction ary Fiscal Policy Expansionary Monetary Policy Types of contraction ary Monetary policy
( budget deficit) Fiscal Policy ( budget surplus ) -
↑ money supply ( MS ) Monetary policy -

↓ money supply

G↑ or 1- ↓ (G > T ) How Fiscal G↓ or 1- ↑ ( GCT ) -

↓ interest rate ( r ) -
↑ interest rate

AD ↑ [ ↑ IT G- ↑ AD↓=C↓tI↓+G↓ NX ↑ ↓
/
+
Policy Buy bond bond Ms
1
= + + NX work + -
-

MS How Monetary -
sell -

AD shift rightward AD shift leftward ↓ RRR r ↓ Policy works ↑ RRR r↑

g
◦

g
◦ -
-
-
-

% LRAS AD As % " As -

↓ DR -

IT -

↑ DR -
I ↓
spas spas
inflationary
model >
gap
◦
↑AD=C+↑I + G + NX ◦
↓AD=c+↓I+G + NX

Plo - - - - - -
- - - - - shift leftward shift leftward
pl , - -
>
recessionary gap ,
Pt level
^ -

I Price / evel
LRAS Price LRAS
T
- - - - -

'
AD AS
-

SRAS
phony
" -
, ( multiplier
effect ) ,
,
ap .
imaginary
spas

µµ
°
,
ADZ u Plz - - - - -

Model
,
,
,
AD , ( G- ↓ 1- ↑ ) > gap
AD , ( G↑T↓ ) t '
( multiplier
"'
I AM
ADO effect ) #
E'
☐ > RGDP > RGDP > recessionary
RGDPO RGDPO Plo - Eo
RGDPNR RGDPNR --•Eo gap

µ
pyo
"" " "

µ
"

>
" " ^
< "'- E'

PL ↑ PL ↓ ADI
,
ADO

6
RGDP ↑ RGDP ↑ ADO AD '
> Rqpp o
> RGDP
0
RGDP° RGDPNR
RGDP , ,
RGDPO

7
Price Level ↑ Price level ↓
RGDPT RGDP ↓

8
9
10