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Published by odllab, 2019-12-20 03:11:57

BBM102/03 Microeconomics

COURSE MODULE
Microeconomics
Course code:BBM102/03
Course adapter by: Mr. Prakash V. Arumugam School of Business and Administration (SBA)


PROJECT ADVISOR
Professor Dr Zoraini Wati Abas
COURSE MODULE DEVELOPMENT TEAM
Content Adapter: Prakash V. Arumugam
Lead Instructional and Visual Designer: Fauziyah Md Aris Instructional and Visual Designers: Norliza Mhd Rodzi and Nurain Mohd Hassan Language Editor: Arathai Din Eak
Margin Setting: Norliza Mhd Rodzi
Cover Page and Content Design: Norliza Mhd Rodzi
COURSE COORDINATOR
Prakash V. Arumugam
DESIGNED AND DEVELOPED BY
Online Digital Learning Lab (ODL Lab)
PRODUCED BY
Instructional Design for Engaging Experiences (IDeX) Wawasan Open University
Acknowledgement: This course module has been adapted by the
School of Business and Administration (SBA) from the Online Course Materials for the Microeconomics (BBM102/05) developed by Wawasan Open University.
First edition, December 2019
This course material was published to support the learning of students registered with Wawasan Open University. Wawasan Open University does not grant any degree, certification or credits based solely on your completion of this course material.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise,
without prior written permission from Wawasan Open University.
Wawasan Open University - DU013 (P)
Wholly owned by Wawasan Open University Sdn. Bhd. (700364-W)
54 Jalan Sultan Ahmad Shah, 10050 Penang, Malaysia
Tel: (604) 2180 333 Fax: (604) 226 9323 Email: [email protected] Website: www.wou.edu.my
© 2019 Wawasan Open University
Wawasan Open University is Malaysia’s first private not-for-profit tertiary institution dedicated to adult learners.


01
02
03
TABLE OF CONTENTS
Part 1 | About the Course
Part 2 | Course Overview
Course Synopsis
Course Contents
Course Learning Outcomes Study Schedule Assessment Methods
Part 3 | Study Guide
Unit 1: Introduction to Economics
Unit 2: Market equilibrium
Unit 3: Government Intervention in market Unit 4: Production and Costs
Unit 5: Market Structure
04 05
Part 4 | References
Part 5 | Feedback Form


Part 1
ABOUT THE COURSE
(Course Details & Allocation of Student Learning Time)
COURSE DETAILS
School
Course Type
Credit Hours
Learning Hours : 120 hours
: School of Business Administration (SBA) : Core Course
: 3 hours
Course Title : Microeconomics Course Code : BBM 102/03
Course Coordinator Email
Contact No
: Mr Prakash V. Arumugam : [email protected] : 04-2180388
Core Reading Materials : BBM102/05 Microeconomics
ALLOCATION OF STUDENT LEARNING TIME
No
Activities
No. of Hours
60
10 10
30
8 2
1 Study Learning Materials, Learning Activities and Self- Tests
2 Attending 5 Tutorial Classes (2 Hours per class)
3 Participation in Online Forum Discussions
4 Completing the Course Assignments (CA1 & CA2)
5 Exam Revision
6 Examination
BBM103/03 Microeconomics
1
Total
120


Part 2 COURSE OVERVIEW
(Course Synopsis, Course Content, Course Learning Outcomes, Study Schedule & Assessment Methods)
Course Synopsis
Have you ever thought of what causes the prices of some goods to rise while the prices of some other goods to fall? Price determination is one of the elements that we will study in this course.
We will also consider factors that lead an economy to fall into a recession - and the attempts to limit it.
While the investigation of these problems surely falls within the province of economics, economics encompasses a far broader range of issues. Ultimately, economics is the study of choice. Choices range over every imaginable aspect
of human experience, so does economics. Economists have investigated the nature of family life, the arts, education, crime, sports, job creation - the list is virtually endless because so much of our lives involve making choices.
How do individuals make choices: Would you like better grades? More time to
relax? More time watching movies? Getting better grades probably require more
time studying, and perhaps less relaxation and entertainment. Not only must we
make choices as individuals, we must make choices as a society as well. Do we want
a cleaner environment or faster economic growth? Both may be desirable, but efforts
to clean up the environment may conflict with faster economic growth. Therefore, society must make choices.
Economics is defined less by the subjects’ economists investigate than by the way in which economists investigate them. Economists have a way of looking at the world that differs from the way scholars in other disciplines look at the world. It is the economic way of thinking; this unit introduces you to “that way” of thinking.
BBM103/03 Microeconomics 2


COURSE LEARNING OUTCOMES (CLOS) y the end of this course, you will be able to:
1. Explain the meaning of Demand for and Supply of Goods, and discuss how Markets work.
2. Elaborate on the Cost of Production in the short-run and long-run.
3. Describe the different types of Market Structures and their implications on Economic Decisions.
B
BBM103/03 Microeconomics 3
COURSE CONTENT
Course topics include :
• Unit 1: Introduction to Economics
• Unit 2: Market Equilibrium
• Unit 3: Government Intervention in Market
• Unit 4: Production and Costs
• Unit 5: Market Structure


STUDY SCHEDULE
(Weekly topic and study activity for each unit)
Unit Week
11
Topic
Focus
Learning Activities/ Self-Assessment
Defining Economics
Scarcity, Choices, Opportunity Costs
Opportunity Cost
https://youtu.be/dw-or3GWMSo
1
2
2
3, 4
The nature and fundamental problems of Economics.
Demand, Supply and Market Equilibrium..
Labour, Capital, Natural Resources, Entrepreneurship
Theories and Factors of Demand
Factors of production
https://youtu.be/0PgP0dXAGAE
Theories of Demand
https://youtu.be/xHisU6ksWlc
2
5, 6
Demand, Supply and Market Equilibrium..
Theories and Factors of Supply, Market Equilibrium
DD & SS
https://youtu.be/2Wp-diDRVKI
2
7
Demand, Supply and Market Equilibrium..
Market Equilibrium
Quizzes, tutorial questions
3
8, 9
Elasticity and its applications.
Price Elasticity; Demand & Supply
Tutorial questions
3 10
3 11
4 12
4 13 4 14
Short-Run Costs Long-Run Costs Long-Run Costs
Tutorial questions Lecture, tutorial questions
Tutorial questions
Elasticity and its applications.
Cross Elasticity Income Elasticity
Costs of Production
Production Function
Costs of Production
Short run costs
https://youtu.be/XwZhXRKrbS8
Costs of Production
Long run costs
https://youtu.be/xnu6Jj2x3XI
Costs of Production
5
5
5
15
16, 17
18
An overview of the Market
An overview of the Market
An overview of the Market
Perfect Competition
Monopoly Monopolistic
Oligopoly
Perfect competition
https://youtu.be/nKdnOFgZlLA
Monopoly
https://youtu.be/1h3TndsKNf8
Collusion model
https://youtu.be/v4DzZ6vgusI
BBM103/03 Microeconomics 4


ASSESSMENT METHODS
COURSE ASSESSMENT 1 (CA1)
Quiz, Group Work, Presentation, Proposal, Essay, Annotated Bibliography, etc.
COURSE ASSESSMENT 2 (CA2)
The student will be assessed through the following methods:
Quiz, Group Work, Presentation, Proposal, Essay, Annotated Bibliography, etc.
TOTAL 100%
BBM103/03 Microeconomics
5
FINAL EXAM


PART 3
LIST OF CONTENTS
U1 : INTRODUCTION TO ECONOMICS
1.1 Defining Economics
1.2 The Fields of Economics
1.3 Factors of Production
U2: MARKET EQUILIBRIUM
2.1 Demand
2.2 Supply
2.3 Market Equilibrium
2.4 Elasticity of Demand and Supply
U3: GOVERNMENT INTERVENTION IN MARKET
3.1 Price Floors
3.2 Price Ceilings
3.3 Taxes and Subsidies
U4: PRODUCTION AND COSTS
4.1 Production Theory 4.2 Short-Run Costs 4.3 Long-Run Costs
U5: MARKET STRUCTURE
5.1 Perfect Competition
5.2 Monopoly
5.3 Monopolistic Competition 5.4 Oligopoly and Game Theory
BBM103/03 Microeconomics 6


COURSE MODULE
UNIT 1
Introduction to Economics


U1
1.1
1.2
1.3
1.4 1.5
Defining Economics
Learning Activity 1.1 Self-Check 1.1
UNIT STRUCTURE
The Fields of Economics
Learning Activity 1.2 Self-Check 1.2
Factors of Production
Learning Activity 1.3 Self-Check 1.3
Summary References
BBM103/03 Microeconomics 8
INTRODUCTION TO ECONOMICS


U1 Introduction to Economics INTRODUCTION
When you hear the word ECONOMICS, what is the first thing that crosses your mind?
Most people will say MONEY. Not surprising as media usually equates economy with money and
wealth. People, in general, are easily manipulated by what they see or hear in the media.
In actual fact, economics is the study of how societies, businesses, households and individuals allocate their resources. Money is a resource that we need to survive. In which case, it is not wrong to say economics is about money. Though in reality, money is only one form of resource that we need to survive in this world.
This course will teach you what economics is all about. Economics is divided into Microeconomics and Macroeconomics. For this course,we will discuss about microeconomics in this course.
Economics is a Social Science that examines how people choose among the alternatives available to them. It is social because it involves people and their behaviour. It is also a science because it uses, as much as possible, a scientific approach in its investigation of choices.
All choices mean that one alternative is selected over another. Selecting among alternatives involves three (3) ideas central to Economics: Scarcity, Choice and Opportunity cost.
BBM103/03 Microeconomics 9


U
NIT LEARNING OUTCOMES (CLOS)
By the end of this course, you will be able to:
1. Explain the Concept of Economics.
2. Distinguish between Microeconomics and Macroeconomics.
3. Explain the difference between Positive and Normative Statements.
4. Describe the Economic Way of Thinking.
5. Examine Opportunity Costs and the Trade-offs in economics that people face.
1.1 DEFINING ECONOMICS
Definition
Economics is a social science that examines how people choose among the alternatives available to them. It is social because it involves people and their behaviour. It is a science because it uses, as much as possible, a scientific approach in its investigation of choices.
All choices mean that one alternative is selected over another. Selecting among alternatives involves three ideas central to economics: scarcity, choice and opportunity cost.
BBM103/03 Microeconomics 10


Now, let’s us look at these three ideas central to economics
Scarcity
Our resources are limited. At any one time, we have only so much land, so many factories, so much oil, so many people. But our wants, our desires for the things that we can produce with those resources, are unlimited. We would always like more and better housing, more and better education more and better of practically everything.
If our resources were also unlimited, we could say yes to each of our wants and there would be no economics. Because our resources are limited, we cannot say yes to everything. To say yes to one thing requires that we say no to another. Whether we like it or not, we must make
Choices
Since resources are limited, we have to make choices. We cannot have everything we desire. We need to decide what is more important and what is less important. We choose the best and sacrifice the second best. This leads to Opportunity Costs.
Opportunity cost
The Opportunity Cost to you of reading the remainder of this section will be the value of the best other use to which you could have put your time. If you choose to spend RM20 on a potted plant, you have simultaneously chosen to give up the benefits of spending the RM20 on pizzas or a paperback book or a night at the movies. If the book is the most valuable of those alternatives, then the opportunity cost of the plant is the value of the enjoyment you have otherwise expected to receive from the book.
Learning Activity 1.1
Read Unit 1, pg 5-7 for a comprehensive explanation of scarcity, choices and opportunity costs.
BBM103/03 Microeconomics 11


For a better understanding of Opportunity Cost, watch the following video .
Title : Tyler Cowen's Idea #4: Opportunity Cost Duration : 3.51 minutes
Source: https://youtu.be/dw-or3GWMSo
Self-Check 1.1
Identify the Elements of Scarcity, Choice and Opportunity Cost in each of the following statements::
1.
2. 3.
The Department of Environment is considering an order that a 500-acre area on the outskirts of a large city be preserved in its natural state. This is because the area is home to a rodent that is considered an endangered species. Developers had planned to build
a housing development on the land.
The manager of an automobile assembly plant is considering whether to produce cars or sport utility vehicles (SUVs) next month. Assume that the quantities of labour and other materials required would be the same for either type of production.
A young man who went to work as a nurses’ aide after graduating from high school leaves his job to go to college, where he will obtain training as a registered nurse
BBM103/03 Microeconomics 12


1.2 THE FIELDS OF ECONOMICS
Economists study Choices that Scarcity requires us to make. This fact is not what distinguishes economics from other social sciences; all social scientists are interested in choices. An anthropologist might study the choices of ancient people; a political scientist might study the choices of legislatures; a psychologist might study how people choose a mate; a sociologist might study the factors that have led to a rise in single parent households. Economists study such questions as well. What is it about the study of choices by economists that makes economics different from these other social sciences?
Three (3) features distinguish the economic approach to choice from the approaches taken in other social sciences:
1. Economists give special emphasis to the role of opportunity costs in their analysis of choices.
2. Economists assume that individuals make choices that seek to maximise the value of some objective, and that they define their objectives in terms of their own self-interest.
3. Individuals maximise by deciding whether to do a little more or a little less of something.
Economists study Choices that Scarcity requires us to make. This fact is not what distinguishes economics from other social sciences; all social scientists are interested in choices. An anthropologist might study the choices of ancient people; a political scientist might study the choices of legislatures; a psychologist might study how people choose a mate; a sociologist might study the factors that have led to a rise in single parent households. Economists study such questions as well. What is it about the study of choices by economists that makes economics different from these other social sciences?
BBM103/03 Microeconomics 13


OPPORTUNITY COSTS ARE IMPORTANT
If doing one thing requires giving up another, then the expected benefits of the alternatives we face will affect the ones we choose. Economists argue that an understanding of opportunity cost is crucial to the examination of choices.
As the set of available alternatives changes, we expect that the choices individuals make will change. A rainy day could change the opportunity cost of reading a good book; we might expect more reading to get done in bad than in good weather. A high income can make it very costly to take a day off; we might expect highly paid individuals to work more hours than those who are not paid as well. If individuals are maximising their level of satisfaction and firms are maximising profits, then a change in the set of alternatives they face may affect their choices in a predictable way.
The emphasis on opportunity costs is an emphasis on the examination of alternatives. One benefit of the Economic Way of Thinking is that it pushes us to think about the value of alternatives in each problem involving choice.
INDIVIDUALS MAXIMISE IN PURSUING SELF-INTEREST
What motivates people as they make choices? Perhaps more than anything else, it is the economist’s answer to this question that distinguishes economics from other fields.
Economists assume that individuals make choices that they expect will create the maximum value of some objective, given the constraints they face. Furthermore, economists assume that people’s objectives will be those that serve their own self-interest.
Economists assume, for example, that the owners of business firms seek to maximise profit. Given the assumed goal of profit maximisation, economists can predict how firms in an industry will respond to changes in the markets in which they operate. As labour costs in the United States rise, for example, economists are not surprised to see firms moving some of their manufacturing operations overseas.
BBM103/03 Microeconomics 14


Similarly, economists assume that maximising behaviour is at work when they examine the behaviour of consumers. In studying consumers, economists assume that individual consumers make choices aimed at maximising their level of satisfaction. In the next section, we will look at the results of the shift from skiing to snowboarding; that is a shift that reflects the pursuit of self-interest by consumers and by manufacturers.
In assuming that people pursue their self-interest, economists are not assuming people are selfish. People clearly gain satisfaction by helping others, as suggested by the large charitable contributions people make. Pursuing one’s own self-interest means pursuing the things that give one satisfaction. It need not imply greed or selfishness.
CHOICES ARE MADE AT THE MARGIN
Economists argue that most choices are made “at the margin”. The margin is the current level of an activity. Think of it as the edge from which a choice is to be made. A choice at the margin is a decision to do a little more or a little less of something.
Assessing choices at the margin can lead to extremely useful insights. Consider, for example, the problem of curtailing water consumption when the amount of water available falls short of the amount people now use. Economists argue that one way to induce people to conserve water is to raise its price. A common response to this recommendation is that a higher price would have no effect on water consumption, because water is a necessity. Many people assert that prices do not affect water consumption because people “need” water.
But choices in water consumption, like virtually all choices, are made at the margin. Individuals do not make choices about whether they should or should not consume water. Rather, they decide whether to consume a little more or a little less water. Household water consumption in the United States totals about 105 gallons per person per day. Think of that starting point as the edge from which a choice at the margin in water consumption is made. Could a higher price cause you to use less water brushing your teeth, take shorter showers, or water your lawn less? Could a higher price cause people to reduce their use, say, to 104 gallons per person per day? To 103? When we examine the choice to consume water at the margin, the notion that a higher price would reduce consumption seems much more plausible. Prices
affect our consumption of water because choices in water consumption, like other
choices, are made at the margin.
BBM103/03 Microeconomics 15


The Elements of Opportunity Cost, maximisation and choices at the margin can be found in each of two broad areas of economic analysis: Microeconomics and Macroeconomics. Your economics course, for example, may be designated as a “micro” or as a “macro” course. We will look at these two areas of economic thought in the next subsection.
MICROECONOMICS AND MACROECONOMICS
The Field of Economics is typically divided into two broad areas: Microeconomics
and Macroeconomics. It is important to see the distinctions between these broadareas of study.
Microeconomics
Macroeconomics
Macroeconomics is the branch of economics that focuses on the impact of Choices on the Total, or Aggregate, Level of Economic Activity.
Microeconomics is the branch of economics that focuses on the Choices made by Individual Decision-Making Units in the Economy - typically consumers and firms - and the impacts those choices have on individual markets.
Why do tickets to the best concerts cost so much? How does the threat of global warming affect real estate prices in coastal areas? Why do women end up doing most of the housework? Why do senior citizens get discounts on public transit systems? These questions are generally regarded as Microeconomic because they focus on individual units or markets in the economy.
Is the total level of economic activity rising or falling? Is the rate of inflation increasing or decreasing? What is happening to the unemployment rate? These are questions that deal with aggregates, or totals, in the economy; they are problems of Macroeconomics.
BBM103/03 Microeconomics 16


Both Microeconomics and Macroeconomics give attention to individual markets. But in Microeconomics that attention is an end in itself; in Macroeconomics it is aimed at explaining the movement of major economic aggregates - the level of total output, the level of employment and the price level.
We have now examined the characteristics that define the Economic Way Of Thinking and the two branches of this way of thinking: Microeconomics and Macroeconomics.
NORMATIVE AND POSITIVE STATEMENTS
Two (2) kinds of assertions in economics can be subjected to testing. One is hypothesis
and the other is a statement of fact, such as “It is raining outside” or “Microsoft is the largest producer of operating systems for personal computers in the world.” Like hypotheses, such assertions can be demonstrated to be false. Unlike hypotheses, they can also be shown to be correct. A statement of fact or a hypothesis is a positive statement.
Although people often disagree about positive statements, such disagreements can ultimately be resolved through investigation. There is another category of assertions, however, for which investigation can never resolve differences. A Normative Statement is one that makes a value judgement. Such a judgement is the opinion of the speaker; no one can “prove” that the statement is or is not correct. Here are some examples of normative statements in economics: “We ought to do more to help the poor.” “People in Malaysia should save more.” “Corporate profits are too high.” The statements are based on the values of the person who makes them. They cannot be proven false.
Because people have different values, normative statements often provoke disagreement. An economist whose values lead him or her to conclude that we should provide more help for the poor will disagree with one whose values lead to a conclusion that we should not. Because no test exists for these values, these two economists will continue to disagree, unless one persuades the other to adopt a different set of values. Many of the disagreements among economists are based on such differences in values and therefore are unlikely to be resolved.
BBM103/03 Microeconomics 17


Learning Activity 1.2
Read Unit 1, Pg 1-9 for a comprehensive explanation of this section, Once you have finished reading, answer Self-Check 1.2.
Self-Check 1.2
The Department of Agriculture estimated that the expenditures of a middle-income, husband-wife family of three would incur to raise one additional child from birth in 2005 to age 17 would be RM250,000. To what extent does this estimate illustrate the economic way of thinking? Would the Department’s estimate be an example of microeconomic or of macroeconomic analysis? Justify your answer.
1.3 FACTORS OF PRODUCTION
Choices concerning what goods and services to produce are choices about an economy’s use of its factors of production, the resources available to it for the production of goods and services. The value, or satisfaction, that people derive from the goods and services they consume and the activities they pursue is called Utility. Ultimately, an economy’s factors of production create utility; they serve the interests of people.
The Factors of Production in an economy are its Labour, Capital and Natural Resources. Labour is the human effort that can be applied to the production of goods and services. People who are employed or would like to be are considered part of the labour available to the economy. Capital is a factor of production that has been produced for used in the production of other goods and services. Office buildings, machinery and tools are examples of capital. Natural resources are the resources of nature that can be used for the production of goods and services.
BBM103/03 Microeconomics 18


Figure 1.0: FACTORS OF PRODUCTIONS Source: ???
In the next three subsections, we will take a closer look at the factors of production we use to produce the goods and services we consume. The three basic building blocks of labour, capital and natural resources may be used in different ways to produce different goods and services, but they still lie at the core of production. We will then look at the roles played by technology and entrepreneurs in putting these factors of production to work. As economists began to grapple with the problems of scarcity, choice and opportunity cost two centuries ago, they now focused on these concepts
Learning Activity 1.3
Read Unit 1, pg 15-18 for a comprehensive explanation of the factors of production
BBM103/03 Microeconomics 19


For a better understanding of the factors of production, watch the following video.
Title : Episode 3: Resources Duration : 4.20 minutes
Source: https://youtu.be/0PgP0dXAGAE
Once you have finished reading and watched the video, answer Self-Check 1.3.
Self-Check 1.3
Explain whether each of the following is Labour, Capital, or a natural Resource.
1. An unemployed factory worker
2. A university professor
3. The library building on your campus
4. Taman Negara National Park
5. An untapped deposit of natural gas
6. The Seri Perdana Complex
7. The local power plant
BBM103/03 Microeconomics 20


1.4 SUMMARY
Now that you have completed Unit 1 you should be able to:
1. Explain the Concept of Economics.
2. Distinguish between Microeconomics and Macroeconomics.
3. Explain the difference between Positive and Normative Statements.
4. Describe the Economic Way of Thinking.
5. Examine Opportunity Costs and the Trade-offs in economics that people face.
1.4 REFERENCES
Case, K. E., Fair, R. C., & Olster, S. M., (2017). Principles of economics, (12th ed.) US: Prentice Hall.
Irvin, T. B. (2014). Economics for today, (8th ed.) Ohio: South-Western Publishing Company. Mankiw, N. G. (2017). Principles of economics, (8th ed.) Florida: South-Western/ Thomson.
Marginal Revolution University. (2018, Nov 27). Tyler Cowen’s idea #4: opportunity cost [Video file]. Retrieved from https://youtu.be/dw-or3GWMSo
Mjmfoodie. (2011, Jan 13). Episode 3: resources [Video file]. Retrieved from https://youtu.be/0PgP0dXAGAE
Wawasan Open University. (2017). Unit 1, BBM102/05 Microeconomics (pp.1-20). Penang: Wawasan Open University.
BBM103/03 Microeconomics 21


COURSE MODULE
UNIT 2
MARKET EQUILIBRIUM


U2
2.1
2.2
2.3
2.4
2.5 2.6
Demand
Learning Activity 2.1 Self-Check 2.1
UNIT STRUCTURE
Supply
Learning Activity 2.2 Self-Check 2.2
Market Equilibrium
Learning Activity 2.3 Self-Check 2.3
Elasticity of Demand and Supply
Learning Activity 2.4 Self-Check 2.4
Summary References
BBM103/03 Microeconomics 23
MARKET EQUILIBRIUM


U2 Market Equilibrium INTRODUCTION
What is market equilibrium? Now, try to relate the situations below for a better understanding of market equilibrium.
When durian season begins, you may have to pay from RM6 to RM15 for one durian. As more duri- ans are available in the market, the price of each durian may drop to as low as RM2. During the holiday season, most hotel rooms are fully booked and hotel room prices are at its peak. When it is off-season, prices fall and you can find many empty hotel rooms.
When there is a war in the Middle East, the price of petrol rises, and the price of a used 2000cc car falls. All these events have something in common. They all show the workings of demand and supply. Demand and supply are the forces that make the market economies work.
This section introduces the theories of demand and supply. It considers how buyers
and sellers behave and interact with one another in markets. A market is a group of buyers and sellers of a particular good or service. When buyers (demand) and sellers (supply) of durians in Penang interact with one another, prices in the durian market will be determined.
To see how the forces of demand and supply work, we will focus on the amount of a particular product that an individual decides to consume within a given period of time.
Then you will move on to elasticity. Elasticity describes the sensitivity of a change in quantity to a change in price, income or price of other goods. When the price of a good changes, then the quantity changes. If the quantity changes more than the price, then we say this good is price elastic. You will first learn about demand elasticity, and later the simple mathematics and geometry of demand elasticity will be discussed. The more subtle aspects of elasticity will also be covered, after which it will be easy to extend the concept of elasticity to cross-price elasticity, income elasticity and supply elasticity.
BBM103/03 Microeconomics 24


U
NIT LEARNING OUTCOMES (CLOS)
By the end of this course, you will be able to:
1. Explain what determines the demand for a particular good and service.
2. Explain what determines the supply of a particular good and service.
3. Illustrate how demand and supply together determine the price and quantity of a good sold.
4. Apply the concept of elasticity to real-world problems.
2.1 DEMAND
How many pizzas will people eat this year? How many doctor visits will people make? How many houses will people buy?
Each good or service has its own special characteristics that determine the quantity people are willing and able to consume. One is the price of the good or service itself. Other independent variables that are important determinants of demand include consumer preferences, prices of related goods and services, income, demographic characteristics such as population size, and buyer expectations. The number of pizzas people will purchase, for example, depends very much on whether they like pizza. It also depends on the prices for alternatives such as hamburgers or spaghetti. The number of doctor visits is likely to vary with income, people with higher incomes are likely to see a doctor more often than people with lower incomes. The demands for pizza, for doctor visits, and for housing are certainly affected by the age distribution of the population and its size.
BBM103/03 Microeconomics 25


While different variables play different roles in influencing the demands for different goods and services, economists pay special attention to one: the price of the good or service. Given the values of all the other variables that affect demand, a higher price tends to reduce the quantity people demand, and a lower price tends to increase it. A medium pizza typically sells for RM5 to RM10. Suppose the price were RM30. Chances are, you would buy fewer pizzas at that price than you do now. Suppose pizzas typically sold for RM2 each. At that price, people would be likely to buy more pizzas than they do now.
We will discuss first how price affects the quantity demanded of a good or service and then how other variables affect demand.
Price and the demand curve
Because people will purchase different quantities of a good or service at different prices, economists must be careful when speaking of the “demand” for something. They have therefore developed some specific terms for expressing the general concept of demand.
The quantity demanded of a good or service is the quantity buyers are willing and able to buy at a particular price during a particular period, all other things unchanged. (We can substitute the Latin phrase “ceteris paribus” for “all other things unchanged.”)
Suppose, for example, that 100,000 movie tickets are sold each month in a particular town at a price of RM8 per ticket. That quantity - 100,000 - is the quantity of movie admissions demanded per month at a price of RM8. If the price were RM12, we would expect the quantity demanded to be less. If it were RM4, we would expect the quantity demanded to be greater. The quantity demanded at each price would be different based on several factors such as the population of the town itself. That is why we add the qualifier that other things have not changed to the definition of quantity demanded.
BBM103/03 Microeconomics 26


Learning Activity 2.1
For a comprehensive explanation of demand and the factors that influence it. Read Unit 1, pg. 21 – 28
Self-Check 2.1
All other things unchanged, what happens to the demand curve for DVD rentals if there is:
1. An increase in the price of movie theatre tickets.
2. A decrease in family income.
3. An increase in the price of DVD rentals.
2.2 SUPPLY
Have you ever asked yourself, what determines the quantity of a good or service sellers are willing to offer for sale? Price is one factor; ceteris paribus, a higher price is likely to induce sellers to offer a greater quantity of a good or service. Production cost is another determinant of supply. Variables that affect production cost include the prices of factors used to produce the good or service, returns from alternative activities, technology, the expectations of sellers and natural events such as weather changes. Another factor affecting the quantity of a good that will be offered for sale is the number of sellers. The more sellers of a particular good or service, the greater will be the quantity offered at any price per time period.
The quantity supplied of a good or service is the quantity sellers are willing to sell at a particular price during a particular period, all other things unchanged. Ceteris paribus, the receipt of a higher price increases profits and induces sellers to increase the quantity they supply.
Price and the supply curve
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In general, when there are many sellers of a good, an increase in price results in an increase in quantity supplied, and this relationship is often referred to as the law of supply. We will see, though, through our exploration of microeconomics, that there are a number of exceptions to this relationship. There are cases in which a higher price will not induce an increase in quantity supplied. Goods that cannot be produced, such as additional land on Penang Island and Kuala Lumpur city, are fixed in supply - a higher price cannot induce an increase in the quantity supplied. There are even cases, which we investigate in microeconomic analysis,
in which a higher price induces a reduction in the quantity supplied.
However, when there are many sellers of a good, an increase in price results in a greater quantity supplied. The relationship between price and quantity supplied is suggested in a supply schedule, a table that shows quantities supplied at different prices during a particular period, all other things unchanged, gives a supply schedule for the quantities of coffee that will be supplied per month at various prices, ceteris paribus. At a price of RM4 per kg, for example, producers are willing to supply 1 million kg of coffee per month. A higher price, say RM6 per kg, induces sellers to supply a greater quantity - 3 million kg of coffee per month.
Learning Activity 2.2
For a comprehensive explanation of supply and the factors that influence it. Read Unit 1, pg. 28 – 33.
Self-Check 2.2
If all other things are unchanged, what happens to the supply curve for DVD rentals if there is:
1. An increase in wages paid to DVD rental store clerks.
2. An increase in the price of DVD rentals.
3. An increase in the number of DVD rental stores.
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2.3 MARKET EQUILIBRIUM
Markets, the institutions that bring together buyers and sellers, are always responding to events, such as bad harvests and changing consumer tastes that affect the prices and quantities of particular goods. The demand for some goods increases, while the demand for others decreases. The supply of some goods rises, while the supply of others falls. As such events unfold, prices adjust to keep markets in balance. This section explains how the market forces of demand and supply interact to determine equilibrium prices and equilibrium quantities of goods and services. We will see how prices and quantities adjust to changes in demand and supply and how changes in prices serve as signals to buyers and sellers.
The model of demand and supply that we shall develop in this section is one of the most powerful tools in all of economic analysis. You will be using it throughout your study of economics. We will first look at the variables that influence demand. Then we will turn to supply, and finally we will put demand and supply together to explore how the model of demand and supply operates.
As we examine the model, bear in mind that demand is a representation of the behaviour of buyers and that supply is a representation of the behaviour of sellers. Buyers may be consumers purchasing groceries or producers purchasing iron or to make steel. Sellers may be firms selling cars or households selling their labour services. We shall see that the ideas of demand and supply apply, whatever the identity of the buyers or sellers and whatever the good or service being exchanged in the market. In this section, we shall focus on buyers and sellers of goods and services.
In this section, we combine the demand and supply curves we have just studied into a new model. The model of demand and supply uses demand and supply curves to explain the determination of price and quantity in a market.
Learning Activity 2.3
Read Unit 1, pg. 34 – 43 for a deeper explanation on the relationship between demand and supply in a market setting.. The development of market equilibrium, surpluses and shortages and how these influence prices will be clearer once you have read this section.
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It will also help if you were to watch this video at https://youtu.be/2Wp-diDRVKI on the market equilibrium.
Title : What Is Supply and Demand? Duration : 1.48 minutes
Source: https://youtu.be/2Wp-diDRVKI
Self-Check 2.3
As reported in a newspaper article ‘Here is a piece of hot news’. Chili prices are expected to drop as wholesalers have brought in fresh supplies from Thailand and China.
If the equilibrium price of chilies is RM15/kg. Analyse what would happen to the equilibrium price and quantity of local chilies in Malaysia? and what would happen to the equilibrium price and quantity of the imported chilies?
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2.4 ELASTICITY OF DEMAND AND SUPPLY
Imagine that you are the manager of the public transportation system for a large metropolitan area. Operating costs for the system have soared in the last few years, and you are under pressure to boost revenues. What do you do? An obvious choice would be to raise fares. That will make your customers angry, but at least it will generate the extra revenue you need or will it. The law of demand says that raising fares will reduce the number of passengers riding on your system. If the number of passengers falls, only a little, then the higher fares that your remaining passengers are paying might produce the higher revenues you need. But what if the number of passengers falls a lot, than your higher fares actually reduce your revenues? If that happens, you will have made your customers mad and your financial problem worse! This section will explain to you how this phenomenon is related to the elasticity of demand and supply.
Price elasticity of demand / supply
Elasticity measures the proportionate change in one variable relative to the change in another variable. Consider, for example, the response of the quantity demanded to a change in the price. The price elasticity of demand is the percentage change in the quantity demanded divided by the percentage change in the price:
OR
When the price increases (the percentage change in the price is positive), the quantity decreases, meaning that the percentage change in the quantity is negative. In other words, the law of demand tells us that the elasticity of demand is a negative number.
• If (elasticity of demand) > 1, demand is relatively elastic.
• If (elasticity of demand) < 1, demand is relatively inelastic.
We can use the idea of the elasticity of demand whether we are thinking about the demand curve faced by a firm or the market demand curve. The definition is the same in either case.
Price elasticity of demand (Ed) = percentage change in quantity / percentage change in price.
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Elasticity of supply
The elasticity measures encountered so far in this unit all relate to the demand side of the market. It is also useful to know how responsive quantity supplied is to a change in price.
We measure the price elasticity of supply (ES) as the ratio of the percentage change in quantity supplied of a good or service to the percentage change in its price, all other things unchanged.
The formula for elasticity of supply is:
Because price and quantity supplied usually move in the same direction, the price elasticity of supply is usually positive. The larger the price elasticity of supply, the more responsive the firms that supply the good or service are to a price change.
Suppose the demand for apartments rises. There will be a shortage of apartments at the old level of apartment rents and pressure on rents to rise. All other things unchanged, the more responsive the quantity of apartments supplied is to changes in monthly rents, the lower the increase in rent required to eliminate the shortage and to bring the market back to equilibrium. Conversely, if quantity supplied is less responsive to price changes, price will have to rise more to eliminate a shortage caused by an increase in demand.
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Cross Elasticity of Demand
The demand for a good or service is affected by the prices of related goods or services. A reduction in the price of salsa, for example, would increase the demand for chips, suggesting that salsa is a complement of chips. A reduction in the price of chips, however, would reduce the demand for peanuts, suggesting that chips are a substitute for peanuts.
The measure economists use to describe the responsiveness of demand for a good or service to a change in the price of another good or service is called the cross price elasticity of demand. It equals the percentage change in the quantity demanded of one good or service at a specific price divided by the percentage change in the price of a related good or service. We are varying the price of a related good when we consider the cross price elasticity of demand, so the response of quantity demanded is shown as a shift in the demand curve.
The formula for cross elasticity of demand is:
In general, we can use elasticity whenever we want to show how one variable responds to changes in another variable.
Cross price elasticity of demand defines whether two goods are substitutes, complements, or unrelated. If two goods are substitutes, an increase in the price of one will lead to an increase in the demand for the other the cross price elasticity of demand is positive. If two goods are complements, an increase in the price of one will lead to a reduction in the demand for the other the cross price elasticity of demand is negative.
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If two goods are unrelated, a change in the price of one will not affect the demand for the other the cross price elasticity of demand is zero.
• If the cross-price elasticity of demand is positive, the goods are substitutes.
• If the cross-price elasticity of demand is negative, the goods are complements.
• If the cross-price elasticity of demand is zero, the goods are unrelated.
Learning Activity 2.4
Read Unit 2, pg. 19 – 31 for a comprehensive explanation of the elasticity of demand and supply. This section also covers the factors that influence elasticity.
Self-Check 2.4
Based on the formula for elasticity (see page 22), calculate the elasticity of demand if price:
1. Increases from RM0.70 to RM0.80
2. Decreases from RM0.80 to RM0.70
Are the coefficients different? Justify your answer.
2.5 SUMMARY
Now that you have completed Unit 2 you should be able to:
1. Explain what determines the demand for a particular good and service.
2. Explain what determines the supply of a particular good and service.
3. Illustrate how demand and supply together determine the price and quantity
of a good sold.
4. Apply the concept of elasticity to real-world problems.
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2.6 REFERENCES
Case, K. E., Fair, R. C., & Olster, S. M., (2017). Principles of economics, (12th ed.) US: Prentice Hall.
IMF. (2017, Dec 7). What is supply and demand? [Video file]. Retrieved from https://youtu.be/2Wp-diDRVKI
Irvin, T. B. (2014). Economics for today, (8th ed.) Ohio: South-Western Publishing Company. Mankiw, N. G. (2017). Principles of economics, (8th ed.) Florida: South-Western/ Thomson.
Wawasan Open University. (2017). Unit 1, BBM102/05 Microeconomics (pp.21-44). Penang: Wawasan Open University.
Wawasan Open University. (2017). Unit 2, BBM102/05 Microeconomics (pp.19-33). Penang: Wawasan Open University.
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COURSE MODULE
UNIT 3
GOVERNMENT INTERVENTION IN MARKET


U3
3.1
3.2
3.3
3.4 3.5
Price Floors
Learning Activity 3.1 Self-Check 3.1
UNIT STRUCTURE
Price Ceilings
Learning Activity 3.2 Self-Check 3.2
Taxes and Subsidies
Learning Activity 3.3 Self-Check 3.3
Summary References
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GOVERNMENT INTERVENTION IN MARKET


U3 Government Intervention in Market INTRODUCTION
The price of one toasted bread today is RM1.50. Yesterday’s price was RM1.30. Carbohydrates such as bread made up most of Malaysians’ breakfast. Do you feel frustrated when the you see price increase by RM0.20 in just one day? so much and so easily? Who is to be blamed? Should government be doing something about this? You will find the answers to questions above in this unit.
Unit 3 requires you to pay more attention to the study of economics. In this unit, you will learn some ‘real stuff ’ about this fascinating subject. Make sure you understand a section thoroughly before you proceed to the next section. Economics is a subject that you have to study sequentially. You should not jump randomly through the material.
You will start by looking at three specific government policies that influence supply and demand: price ceiling, price floor and per-unit tax. These policies can be analysed using the demand-supply framework.
You will also study the inefficiency of government taxation and subsidies and the effect it has on consumer surplus and producer surplus. This unit begins with a simple analytical tool, which like all analytical tools, turns out to be very useful in explaining real-life phenomena. Economics is filled with such tools. I hope you will be convinced of this after studying this unit.
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UNIT LEARNING OUTCOMES (CLOS)
By the end of this course, you will be able to:
1. Explain price floor, price ceiling, tax and subsidy.
2. Explain the impact of price floor, price ceiling, tax and subsidy on consumers and sellers.
3.1 PRICE FLOORS
A price floor is set when the market price is seen to be too low. A low market price is detrimental to sellers and producers. If the sellers are selling necessities, a low price will push them to stop production or sales. This would be disastrous for consumers who need these goods for household use.
A minimum allowable price set above the equilibrium price is a price floor. With a price floor, the government forbids a price below the minimum. Notice that, if the price floor were for whatever reason set below the equilibrium price, it would be irrelevant to the determination of the price in the market since nothing would prohibit the price from rising to equilibrium. This is called non-binding price floor.
A price floor that is set above the equilibrium price creates a surplus and is binding. Governments often seek to assist farmers by setting price floors in agricultural markets.
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Figure 3.1 shows the market for wheat. Suppose the government sets the price of wheat at PF. Notice that PF is above the equilibrium price of PE. At PF, we read over to the demand curve to find that the quantity of wheat that buyers will be willing and able to purchase is W1 bushels. Reading over to the supply curve, we find that sellers will offer W2 bushels of wheat at the price floor of PF. Because PF is above the equilibrium price, there is a surplus of wheat equal to (W2 – W1) bushels. The surplus persists because the government does not allow the price to fall.
Figure 3.1. A price floor for Wheat Market.
Why there are many governments around the world set price floors in agricultural markets? Farming has changed dramatically over the past two centuries. Technological improvements in the form of new equipment, fertilizers, pesticides, and new varieties of crops have led to dramatic increases in crop output per acre. Worldwide production capacity has expanded markedly. As we have learnt, technological improvements cause the supply curve to shift to the right, reducing the price of food. While such price reductions have been celebrated in the electronics industry, farmers have successfully lobbied for government programmes aimed at keeping their prices from falling.
While the supply curve for agricultural goods has shifted to the right, the demand has increased with rising population and with rising income. But as incomes rise, people spend a smaller and smaller fraction of their incomes on food. While the demand for food has increased, that increase has not been nearly as great as the increase in supply. Figure 3.2 shows that the supply curve has shifted much farther to the right, from S1 to S2, than the demand curve has, from D1 to D2. As a result, equilibrium quantity has risen dramatically, from Q1 to Q2, and equilibrium price has fallen, from P1 to P2. A relatively large increase in the supply of agricultural products, accompanied by a relatively small increase in demand, has reduced the price received by farmers and increased the quantity of agricultural goods.
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On top of this long-term historical trend in agriculture, agricultural prices are subject to wide swings over shorter periods. Droughts or freezes can sharply reduce supplies of particular crops, causing sudden increases in prices. Demand for agricultural goods of one country can suddenly dry up if the government of another country imposes trade restrictions against its products, and prices can fall. Such dramatic shifts in prices and quantities make incomes of farmers unstable.
Figure 3.2. Market for agricultural goods.
The federal government has always been directly involved in agricultural markets. This has meant a variety of government programmes that guarantee a minimum price for some types of agricultural products. These programmes have been accompanied by government purchases of any surplus, by requirements to restrict acreage in order to limit those surpluses, by crop or production restrictions, and the like.
To see how such policies work, look back at Figure 3.1. At PF, W2 bushels of wheat
will be supplied. With that much wheat on the market, there is market pressure on the price of wheat to fall. To prevent price from falling, the government buys the surplus of (W2 − W1) bushels of wheat, so that only W1 bushels are actually available to private consumers for purchase on the market.
The government can store the surpluses or find special uses for them. For example, surpluses generated in some countries have been shipped to developing countries as grants-in-aid or distributed to local school lunch programmes. As a variation on this programme, the government can require farmers who want to participate in the price support program to reduce acreage in order to limit the size of the surpluses. The government would simply stop buying the surpluses (with some exceptions) and simply guaranteed farmers a “target price.” If the average market price for a crop fell below the crop’s target price, the government paid the difference.
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If, for example, a crop had a market price of RM3 per unit and a target price of RM4
per unit, the government would give farmers a payment of RM1 for each unit sold. Farmers would thus receive the market price of RM3 plus a government payment of
RM1 per unit. For farmers to receive these payments, they had to agree to remove acres from production and to comply with certain conservation provisions. These restrictions sought to reduce the size of the surplus generated by the target price, which acted as a kind of price floor.
What are the effects of such farm support programmes? The intention is to boost and stabilise farm incomes. But, with price floors, consumers pay more for food than they would otherwise, and governments spend heavily to finance the programmes. With the target price approach, consumers pay less, but government financing of the programme continues.
This form of assistance to farmers has sometimes been justified on the grounds that it boosts incomes of small-scale farmers. However, since farm aid has generally been allotted on the basis of how much farms produce rather than on a per-farm basis, most
federal farm support has gone to the largest farms. If the goal is to eliminate poverty among farmers, farm aid could be redesigned to supplement the incomes of small or poor farmers rather than to undermine the functioning of agricultural markets.
Learning Activity 3.1
Read Unit 2, pg. 3 – 6 for a comprehensive explanation of price floor.
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Watch this video at https://youtu.be/65kfAswiHLk. It explains price floor in the context of minimum wage. You will notice that as much as there is a positive impact on the sellers, there are negative effects on the consumers when price floor is fixed.
Title : Price Floors: The Minimum Wage Duration : 9.45 minutes
Source: https://youtu.be/65kfAswiHLk
Self-Check 3.1
A minimum wage law is another example of a price floor. Draw demand and supply curves for unskilled labour. The horizontal axis will show the quantity of unskilled labour per period and the vertical axis will show the hourly wage rate for unskilled labour, which is the price of unskilled labour. Show and explain the effect of a minimum wage that is above the equilibrium wage.
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3.2 PRICE CEILINGS
A maximum allowable price set below the equilibrium price is a price ceiling. With a price ceiling, the government forbids a price above the maximum. Notice that, if the price ceiling were for whatever reason set above the equilibrium price, it would be irrelevant to the determination of the price in the market since nothing would prohibit the price from dropping to equilibrium. This is called non-binding price ceiling. A price ceiling that is set below the equilibrium price creates a shortage and is binding.
Bear in mind that price ceilings are government imposed price control that is put in place to protect consumers from overpriced necessities. In Malaysia, the Price Control and Anti-profiteering Act 2011 (formerly Price Control Act 1946), plays the role of enforcing the price control mechanism of the government. During festivities, prices of essentials can soar to an unattainable level for some. To avoid this, the Ministry of Domestic Trade, Co-operatives and Consumerism implement a Festive Season Price-Control Scheme. Under this scheme, a number of essential festive season goods are identified as price-controlled goods wherein their maximum selling price will be determined according to areas and districts for a specified period. This scheme is enforced throughout Malaysia at the producer, wholesaler and retailer level. You can look at the list of goods in this scheme it the ministry’s website at https://www.kpdnhep.gov.my/kpdnkk/wp-content/uploads/2019/05/SENARAI-BARANGA N-SHMMP-HRP-2019.pdf
Figure 3.3. Price ceiling.
Figure 3.3 shows the market for sugar. Notice that the demand and supply curves are drawn to look like all the other demand and supply curves you have encountered so far in this text. The demand curve is downward-sloping and the supply curve is upward-sloping.
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The demand curve shows that a higher price reduces the quantity of chicken demanded. For example, with higher prices, more people will choose to eat less chicken. With lower prices, chicken intake increases. The supply curve is drawn to show that as price increases, chicken farmers will be encouraged to offer more chicken for sale.
Suppose the government sets the price of chicken at PC in Figure 3.3. Notice that PC is below the equilibrium price of PE. At PC, we read over to the supply curve to find that sellers are willing to offer A1 chickens. Reading over to the demand curve, we find that consumers would like to buy A2 chickens at the price ceiling of PC. Because PC is below the equilibrium price, there is a shortage of chicken equal to (A2 − A1).
(Notice that if the price ceiling were set above the equilibrium price, it would have no effect on the market since the law would not prohibit the price from settling at an equilibrium price that is lower than the price ceiling.)
Learning Activity 3.2
Read Unit 2, pg. 6 – 8 for a comprehensive explanation of price ceiling. The explanation will also include what happens after a price ceiling is implemented.
Title : Price Ceilings: Rent Controls Duration : 9.42 minutes
Source: https://youtu.be/hMkvmZK3AJ4
Watch this video at https://youtu.be/hMkvmZK3AJ4. It explains price ceiling in the context of rent control. After you have finished reading and have watched the video, try out Self-Check 3.2.
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3.3 TAXES AND SUBSIDIES
Taxes
A tax is a payment made to the government that is associated with an economic transaction. Although the details of taxes can differ substantially, most taxes come down to one simple point; the price paid by the buyer is higher than the price received by the seller.
Suppose you want to purchase a book for its list price, say, RM20. In the United States, if you take this book to the cash register, you will typically be charged a sales tax. If the sales tax is 5 percent, you will have to pay RM21 for the book. The store collects the RM1 tax on behalf of the government. So who is paying this tax? On the one hand, the amount of the tax is marked right there on the receipt as an amount you have to pay. Yet it is the store that actually sends the money to the government.
Imagine, by contrast, that you had to give the bookstore only RM20 but then were personally responsible for sending the sales tax to the government. You would have to file a sales tax declaration each year for every item you bought. That would be both inconvenient and difficult for the government to monitor; for this reason, sales taxes are funnelled through the seller. But we are interested in a more fundamental question: would this make a difference on who pays the tax? The answer is no. You would still pay RM21, the government would still get RM1, and the bookstore would still get RM20.
In a Malaysian context, a sales tax has already been included in the price of the book. Therefore, the book would be priced at RM21 of which RM1 would go to the government as tax and the seller gets RM20.
In other words, it does not make any difference whether the tax is imposed on buyers
or sellers. This is one of the most surprising results that economics teaches us. In our book example, the conclusion may seem obvious. Yet people often to fail to appreciate the far-reaching significance of this insight.
For example, social security taxes in most countries are imposed on both workers and employers. Suppose the government changed its policy and declared that the portion of social security that was previously paid by the employer now had to be paid by the worker instead.
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Looking at this as employed workers, we might think that we had just been hit with a huge tax increase. Indeed, if nothing else changed, the policy change would make workers worse off. Fortunately, the logic of supply and demand would quickly come to our rescue. At existing wages, firms would no longer be able to hire all the workers they wanted. Wages would be bid up, and before long we would expect to see workers and firms no better and no worse off than they were previously.
Subsidies
A subsidy is the opposite of a tax. It is a payment made to a producer to encourage production. A subsidy means that the price paid by the buyer is lower than the price received by the seller. A subsidy means that some transactions are now carried out even though they actually destroy value. Case in point would be the price of RON95 in Malaysia which received a subsidy of RM0.83 at the price of RM1.90. Subsequently, in September 2013, the government reduced subsidy by RM0.20 which increased the price of RON95 to RM2.10. Currently, the price of RON95 is fixed at RM2.08 as it still enjoys subsidy.
Learning Activity 3.3
Read Unit 2, pg. 12 – 18 for an explanation on three important aspects as below: 1. The burden of tax faced by consumers and sellers
2. Why does the government collect taxes.
3. The different ways government intervenes in the market.
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