AP ECONOMICS Topic : Changes in demand | extension, contraction, fall , rise

Movement along the demand Curve

Extension of demand

Extension of demand is the increase in demand due to the fall in price, all other factors remaining constant.

Contraction of demand

Contraction of demand is the fall in demand due to the rise in price, all other factors remaining constant.

Shift in the demand curve

Usually demand curves are drawn based on the assumption except for price all other factors remain the same. But there might be instances when demand may be affected by factors other than price. This will result in the change in demand although the price will remain the same. This change in demand may cause the demand curve to SHIFT inwards or outwards.

• Shift of demand curve OUTWARDS shows an increase in demand at the same price level. It is known as INCREASE IN DEMAND.
• Shift of demand curve INWARDS shows that less is demanded at the same price level. It is known as a FALL IN DEMAND.

AP ECONOMICS Topic : Straight line demand curve

Straight line (linear) demand curve

A straight line demand curve will have a different elasticity at each point on it.
The price elasticity of demand can also be measured at any point on the demand curve.
If the demand curve is linear (straight line), it has a unitary elasticity at the midpoint. The total revenue is maximum at this point. Any point above the midpoint has elasticity greater than 1, (Ed > 1).
Here, price reduction leads to an increase in the total revenue (expenditure). Below the midpoint elasticity is less than 1. (Ed < 1). Price reduction leads to reduction in the total revenue of the firm. Now the question arises, why does a straight line demand curve have different elasticity at each point? The value of PED falls as price falls.
The reason is that low priced products have a more inelastic demand than high priced products, because consumers are not that price sensitive when the product is inexpensive, Similarly the value of PED is higher when the prices increase because consumers are more sensitive to price change when the good is expensive. A mathematical explanation can be given as follows. As we seen in diagram below

AP ECONOMICS Topic : What is demand

What is demand?

Demand is defined as want or willingness of consumers to buy goods and services.

In economics willingness to buy goods and services should be accompanied by the ability to buy (purchasing power) and is referred to as effective demand.

Law of demand

The law of demand is an economic law that states that 

 consumers buy more of a good when its price decreases and less when its price increases, ceteris paribus.

It states that when price increases, the amount demanded will fall and when prices fall, the amount demanded will rise.

Rationale of the law of demand

There are two reasons for a fall in demand when the prices increase.
Income effect: People feel poorer. As the price of a good rises the purchasing power of people to buy that good will fall. This is known as income effect.
Substitution effect: Some people might shift to cheaper alternatives/substitutes once the price of a good rise, thus leading to a fall in demand for that good.

AP ECONOMICS Topic : What is Market

What is Market

Market is a place where buyers and sellers meet. In economics, the concept of a market is any structure that allows buyers and sellers to exchange any type of goods, services and information. The exchange of goods or services for money is a transaction.

Features of a market

• Market participants consist of all the buyers and sellers of a good who influence its price.
• There are two roles in markets, buyers and sellers.
• The market facilitates trade and enables the distribution and allocation of resources in a society.
• Markets allow any tradable item to be evaluated and priced.
• A market emerges spontaneously or is constructed deliberately by human interaction in order to facilitate the exchange of goods and services

AP ECONOMICS Topic : Transition Economies

Transition Economies

A transition economy is an economy which is changing from a centrally planned economy to a free market. Transition economies undergo economic liberalization, where market forces set prices rather than a central planning organization and trade barriers are removed, privatization of government-owned enterprises and resources, and the creation of a financial sector to facilitate the movement of private capital.

The Ingredients of the Transition Process include

• Liberalization: the process of allowing most prices to be determined in free markets and lowering trade barriers that had shut off contact with the price structure of the world's market economies.
• Macroeconomic stabilization: primarily the process through which inflation is brought under control and lowered over time, after the initial burst of high inflation that follows from liberalization and the release of pent-up demand. This process requires discipline over the government budget and the growth of money and credit (that is, discipline in fiscal and monetary policy) and progress toward sustainable balance of payments.
• Restructuring and privatization: the processes of creating a viable financial sector and reforming the enterprises in these economies to render them capable of producing goods that could be sold in free markets and of transferring their ownership into private hands.
• Legal and institutional reforms: These are needed to redefine the role of the state in these economies, establish the rule of law, and introduce appropriate competition policies.

Examples of Transition economies
 Transition economies in Europe and the former Soviet Union
 CEE
Albania, Bulgaria, Croatia, Czech Republic, FYR Macedonia, Hungary, Poland, Romania, Slovak Republic, Slovenia
Baltics   
Estonia, Latvia, Lithuania
CIS
Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyz Republic, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine, Uzbekistan
 Transition economies in Asia
 Cambodia, China, Laos, Vietnam

AP ECONOMICS Topic : Market economic system | features, advantages and disadvantages

Market Economic System

The central thought of this system is that it should be the producers and consumers who decide how to utilise the resources. Thus, the market forces decide what to produce, how much to produce and for whom to produce.

Features

• All resources are privately owned by people and firms.
• Profit is the main motive of all businesses.
• There is no government interference in the business activities.
• Producers are free to produce what they want, how much they want and for whom they want to produce.
• Consumers are free to choose.
• Prices are decided by the Price mechanism i.e. the demand and supply of the good/service.

Advantages

• Free market responds quickly to the people’s wants: Thus, firms will produce what people want because it is more profitable whereas anything which is not demanded will be taken out of production.
• Wide Variety of goods and services: There will be wide variety of goods and services available in the market to suit everybody’s taste.
• Efficient use of resources encouraged: Profit being the sole motive, will drive the firms to produce goods and services at lower cost and more efficiently. This will lead to firms using latest technology to produce at lower costs.

Disadvantages

• Unemployment: Businesses in the market economy will only employ those factors of production which will be profitable and thus we may find a lot of unemployment as more machines and less labour will be used to cut cost.
• Certain goods and services may not be provided: There may be certain goods which might not be provided for by the Market economy. Those which people might want to use but don’t want to pay may not be available because the firms may not find it profitable to produce. For example, Public goods, such as, street lighting.
• Consumption of harmful goods may be encouraged: Free market economy might find it profitable to provide goods which are in demand and ignore the fact that they might be harmful for the society.
• Ignore Social cost: In the desire to maximise profits businesses might not consider the social effects of their actions.

AP ECONOMICS Topic : Planned economy | features, advantages and disadvantages

Planned Economy

In a planned economy, the factors of production are owned and managed by the government. Thus the Government decides what to produce, how much to produce and for whom to produce.

Features:

• All resources are owned and managed by the government.
• There is no Consumer or producer sovereignty.
• The market forces are not allowed to set the price of the goods and services.
• Profit in not the main objective, instead the government aims to provide goods and services to everybody.
• Government decides what to produce, how much to produce and for whom to produce.

Advantages

• Prices are kept under control and thus everybody can afford to consume goods and services.
• There is less inequality of wealth.
• There is no duplication as the allocation of resources is centrally planned.
• Low level of unemployment as the government aims to provide employment to everybody.
• Elimination of waste resulting from competition between firms.

Disadvantages

• Consumers cannot choose and only those goods and services are produced which are decided by the government.
• Lack of profit motive may lead to firms being inefficient.
• Lot of time and money is wasted in communicating instructions from the government to the firms.

Examples of Planned economies

• North Korea
• Cuba
• Turkmenistan
• Myanmar
• Belarus
• Laos
• Libya
• Iran
• Iraq (until 2003)