DIM1002

PRINCIPLE OF ECONOMICS AND

MANAGEMENT

TAN WAH TIONG

940928-14-5531

JULY 2011

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NO

DETAIL

PAGE

1.0

Content

1-2

2.0

Introduction to Economics Basics (Demand

and Supply)

3.0

The Effect On The Price of an MP3 Player

4-6

and the Quantity of MP3 Players if

-

The price of a PC falls or the price of an MP3 download rises

More firms produce MP3 players or electronics workers

wages rise

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4.0

The Market of Cell Phones when events

7-10

occur

5.0

The effect of each event on the demand for cell phones

Graph

The law of demand

The Demand and Supply of Gum

11-14

Equilibrium price and quantity of gums graph

Price adjusts of gum when the price of gum is 70

Price adjusts of gum when the price of gum is 30

The change of the quantity of the gum in market when fire

destroys some factories that produce gum (graph)

The new equilibrium price and quantity of gum when the

teenager population is increase if at the time the fire occurs
before (graph)

6.0

Reference

15

7.0

Conclusion

16

8.0

Coursework

17-28

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2.0 Introduction to Economics Basics (Demand and Supply)

Supply and demand is perhaps one of the most fundamental concepts of economics and it is the
backbone of a market economy.

Demand refers to how much (quantity) of a product or service is desired by buyers. The
quantity demanded is the amount of a product people are willing to buy at a certain price; the
relationship between price and quantity demanded is known as the demand relationship.

Supply represents how much the market can offer. The quantity supplied refers to the amount of
a certain good producers are willing to supply when receiving a certain price. The correlation
between price and how much of a good or service is supplied to the market is known as the
supply relationship. Price, therefore, is a reflection of supply and demand.

The relationship between demand and supply underlie the forces behind the allocation of
resources. In market economy theories, demand and supply theory will allocate resources in the
most efficient way possible.

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3.0 The Effect of the Price and Quantity of an MP3 Player

The price of a PC falls or the price of an MP3 download rises

The demand of the MP3 Player will decrease while the price of PC decreases. PC is substitute
for MP3 Player. This cause the quantity and price also falls down. It leads to demand curve shift
leftward. The Price of MP3 Player falls while the quantity of MP3 Players decrease. The supply
of the MP3 Players remains unchanged.

Price (RM)

Decreased
Demand

Quantity of MP3

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More firms produce MP3 Players or electronics workers wages rise

The supply of the MP3 Players increases while the firms produce more MP3Player.Then, the
quantity of MP3 Players supply also increase. Next, the supply curve is shift rightward. The
prices of MP3 Players increase while the quantity of MP3 supplies increase and the demand will
remain unchanged.

Prices (RM)

Increase
Supply

Quantity of MP3

Electronics workers wages rise

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The supply of the MP3 Players decreases while electronics workers wages rise. Then, the
quantity of MP3 Players supply also decrease. This will lead the supply curve shift leftward.
Lastly, the prices of MP3 Players will decrease while the quantity of MP3 supplies decrease and
the demand remains unchanged.

Prices(RM)

Decrease
Supply

Quantity of MP3

The Market of Cell Phones when events occur

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The effect of each event on the demand for cell phone

The quantity of demand of cell phone increases while the price of a cell phone falls down.

Price

Quantity

The quantity of demand of cell phone decrease today if everyone expects the price of a cell
phone to fall next month.

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Price
Quantity of
demand decrease

Quantity

Then, the quantity of demand of cell phone will increase if the price of a cell made for a cell
phone falls. This case is complement with the first case (the price of the cell phone falls).
Price

Quantity of demand
increase

Quantity

The quantity of demand of cell phone increases if the price of a cell made from land-line phone
increase. This is because they are substitute.

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Price

Quantity of
demand increase

Quantity

The quantity of demand of cell phone increases if the introduction of camera phones makes cell
phone more popular.

Price
Quantity of demand
increase

Quantity

Law of Demand

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The law of demand states that assuming all factors are equal, ceteris paribus (i.e. everything
remains the same), the higher the price of a good, the lower the quantity that will be demanded
of the good, and the lower the price of a good, the higher the quantity that will be demanded of
the good. For example, when the price of the cell phone falls, the quantity to sell increase.
Besides, the price of a call made for a cell phone falls leads the rise of the quantity of cell phone
for selling.

Thus, price and quantity demands have a negative or inverse relationship, and the demand
curves slope downward from left to right. For example, the quantity of cell phones falls when
everyone expects the price of the cell phone to fall next month .This cause the curve shift
leftward. The law of demand explains why the demand curve has a negative slope because of
the income and substitution effect. For example, the land-line phones price increase lead to cell
phone can substitute the land-line phone.

Law of demand also state that the effect of substitution. As the price of one good rises relative to
the prices of other goods, you will tend to substitute the good that is relatively cheaper for the
good that is relatively more expensive. As the price of a good increase [decrease] while the
prices of other goods is constant, it becomes relatively more[less] expensive. Individuals would
substitute relatively less expensive goods for relatively more expensive ones even if their real
income very constant.

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For example, as the price of land-line graph increase while the prices of cell phone remain
constant, it becomes relatively more expensive. So, individual would substitute relatively cell
phone for relatively land-line phone even if their income is constant.

5.0 The Demand and Supply of Gum

Equilibrium price and quantity of gums graph

120
110
100
90
80
70
60
Price (cents per pack)

50

Demand

40

Supply

30
20
10
0
0

20 60 100 140 180 220

40 80 120 160 200 240

Quantity (millions of packs per week)

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Price adjusts of gum when the price of gum is 70

The extra gum and price falls while the price of a gum is 70.

The quantity of demand of gum is 80 millions of packs per week while the price of a
gum is 70 .

The quantity of supplies of gum is 160 millions of pack per week.

There is an extra 80 million packs per week.

The price falls until the market equilibrium restored to 50 per packs and the quantity
120 million pack per week.

Price adjusts of gum when the price of gum is 30

The extra gum and price rises while the price of gum is 30 per peck.

The quantity of supply of gum is 80 million of pack per week.

The quantity of demand of gum is 160 million of pack per week.

There is an extra 80 million packs per week.

The price rises until the market equilibrium restored to 50 per packs and the quantity of
120 million pack per week.

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The change of the quantity of the gum in market when fire destroys some factories that
produce gum (graph)

When the supplied is decrease by 40 million packs a week at each price, the quantity of
demand of gum also decrease.

If the price for gum was 20 per pack and the quantity supplied decreased from 60 to 20
millions of packs per week.

So, the supply curve will shift leftward.

Gum manufacturers would be forced to supply less gum for the same price.

The price of um is falls until the market equilibrium restored to 60 per packs and the
quantity of 100 million pack per week.

Price (cents per pack)

120
110
100
90
80
70
60
50
40
30
20
10
0

Demand
Supply
Supply 2

20 60 100 140 180 220

40 80 120 160 200 240

Quantity (millions of packs per week)

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The new equilibrium price and quantity of gum when the teenager population is increase if
at the time the fire occurs before (graph)

The new equilibrium price and quantity for the market of the gum is 70 per pack 120
millions of pack per week.

If the price for gum was 20 per pack and the quantity supplied increase from 180 to 220
millions of packs per week.

So, the demand curve is shift rightward.

120
110
100
90
80
70
60
Price (cents per pack)
50
40
30
20
10
0

Demand
Supply
Supply 2
Demand 2

20 60 100 140 180 220

40 80 120 160 200 240

Quantity (millions of packs per week)

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6.0 Reference
http://www.investopedia.com/university/economics/economics3.asp#axzz1zrcEoPOQ

Textbook of Principle of Economics and Management Skill

http://www.mcafee.cc/Introecon/IEA.pdf

http://www.google.com.my/

http://www.britannica.com/EBchecked/topic/574643/supply-and-demand

http://www.answers.com/topic/supply-and-demand

http://business.yourdictionary.com/supply-demand-analysis

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7.0 Conclusion
Economics is best described as the study of humans behaving in response to having only limited
resources to fulfill unlimited wants and needs. Scarcity refers to the limited resources in an
economy. Macroeconomics is the study of the economy as a whole. Microeconomics analyzes
the individual people and companies that make up the greater economy.

Besides, the Production Possibility Frontier (PPF) allows us to determine how an economy can
allocate its resources in order to achieve optimal output. In addition, knowing this will lead
countries to specialize and trade products amongst each other rather than each producing all the
products it needs.

Furthermore, demand and supply refer to the relationship price has with the quantity consumers
demand and the quantity supplied by producers. As price increases, quantity demanded
decreases and quantity supplied increases.

Elasticity tells us how much quantity demanded or supplied changes when there is a change in
price. The more the quantity changes, the more elastic the good or service. Then, products
whose quantity supplied or demanded does not change much with a change in price are
considered inelastic. Utility is the amount of benefit a consumer receives from a given good or
service. Economists use utility to determine how an individual can get the most satisfaction out
of his or her available resources.
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Lastly, market economies are assumed to have many buyers and sellers, high competition and
many substitutes. Monopolies characterize industries in which the supplier determines prices
and high barriers prevent any competitors from entering the market. Oligopolies are industries
with a few interdependent companies. Perfect competition represents an economy with many
businesses competing with one another for consumer interest and profits.

8.0 Coursework
Relationship between GDP and GNP
1. The difference in value between GDP and GNP is due to the net factor income from abroad.
The net factor income from abroad is calculated by subtracting the factor income paid abroad
from

Net factor income from abroad = Factor income received from abroad

factor

Factor income paid abroad

the

income received from abroad.

2. Factor income paid abroad is the payment made to foreign citizens for the use of factors of
production owned by foreign citizens within the nation.
3. Factor income received from abroad d is the income received by citizens of the nation for the
use of factors of production owned by the nation that are located abroad.

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4. Net factor income from abroad will be included in the calculation of GDP.Net factor income
paid abroad will be included in the calculation of GDP.
5. Therefore, the relationship between GDP and GNP can be shown as:
GDP = GNP net factor income from abroad
And,

GNP = GDP + net factor income from abroad

6. The relationship between GDPmp, GNPfc can be shown as:

GDPmp = GNPfc net factor income from abroad + indirect taxes - subsides
And,

GNPfc = GNPmp +net factor income from abroad + subsidies indirect taxes

7. The relationship between GDP, and GDPmp can be shown as:

GDPmp = GNPfc net factor income from abroad + subsidies indirect taxes
And,

GDPmp = GNPfc + net factor income from abroad + indirect taxes - subsides

Calculation Of National Income

1. There are generally methods used to calculate national income:
(a) Expenditure (final value) method
The expenditure (final value) method is a measure of the expenditure of local and foreign
residents of country on final goods and services within the period of one year.
(b)Output (added value) method
The product (added value) method is a measure of the value of the countrys total production
within the period of one year .The added value of the countrys total production within the
period of one year. The added value will cause an increase in the price of goods after going
through the production process.
(c) Income (factor cost) method

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The income (factor cost) method is a measure of the total factor income paid to various factors
of production such as labour, capital, entrepreneurs, and land in the production of the countrys
product. This method also measures the total income generated by each sector in the economy
within the period of one year.
2. Theoretically, all of the three methods will result in the same value of national income,
because

National expenditure = National product = National income

Expenditure (Final Value) Method

1. Using the expenditure method, national income can be calculated from the total of all
expenditures on final goods and services within a year.
2. It is important to calculate national income through the sum of expenditure on final goods
only, to avoid the problem of double counting.
3. An economy will produce intermediate goods and final goods. Intermediate goods are goods
that must be processed further before use by consumers. Examples of intermediate goods are
cocoa seeds, lumber, palm oil, and iron core. Final goods are goods that can be immediately
used by consumers without having to be further processes, such as chocolate, furniture, cooking
oil, and clothes.
5. In the calculation of national income using the expenditure method, expenditure is made by
the following sectors:

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(a) Expenditure by the household sector for final goods and services. This expenditure is known
as personal or private consumption expenditure(C).
(b) Expenditure by the governments to purchase capital for use in production. This expenditure
is known as investment expenditure (I).
(c) Expenditure by the government sector for final goods and services. This expenditure is
known as government or public expenditure (G).
(d) Expenditure made by residents of a country for goods and services produced by other
countries. This expenditure is known as import expenditure (M). However, the sale of goods and
services produced by residents of one country to abroad is known as export expenditure(X), Net
export is the net difference between export expenditure and import expenditure.
Net exports = Exports Imports
Or,
Net exports = X M
6. The sum of all types of expenditure made by households, governments, firms, and overseas
sectors will result in gross domestic product at market price (GDPmp).
GDPmp = Household consumption expenditure (C) + Investment expenditure (I) + Government
expenditure (G) + Net exports ( X M ) + Changes in inventory
7. Exports cause the interflow of money, while imports cause the outflow of money. Therefore,
exports must be added to the GDP while imports must be subtracted from the GDP.

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8. Changes in inventory must be taken into account because inventories are stocks of unsold
goods that are included in value of total production for the year.
9. If the value of change in positive, this value must be added to the GDP. However, if the value
of change in inventory is negative, this value must be subtracted from the GDP.
10. The GDP at factor cost (GDPfc) is calculated by subtracting indirect taxes and adding
subsidies to the GDPmp.
GDPfc = GDPmp + Subsidies Indirect taxes
11. The gross national product at factor cost (GDPfc) is obtained by adding the factor income
from abroad and subtracting the factor income spent abroad from the GDPfc.
GDPfc = GDPfc + Factor income from abroad Factor income spent abroad
12. The net national product at factor cost (NNPfc) is calculated by subtracting depreciation from
the GNPfc.
NNPfc = GNPfc Depreciation
13. An example of calculation of national income through the expenditure method is depicted in
Table 3.1.
Table 3.1 Calculation of national income through the expenditure method

1
2

Detail
Household consumption expenditure (C)
Private and public investment expenditure (I)

3
4

(+)
Government expenditure (G)
Changes in inventory

(+)

(RM)Million
3000
450

(+) 400
150
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Exports of goods and services (X)

700

Imports of goods and services (M) 500

Net exports ( X M )

(700500)

GDP at market price (GDPmp)

6
Factor income from abroad

900

Factor income paid abroad

800

(+)

200
4200

Net factor income from abroad

(900800)
GNP at market price (GNPmp)
7
Indirect taxes
8
Subsidies
GNP at factor cost (GNPfc)
9
Depreciation
NNP at factor cost (NNPfc) / National income
Notes:

(+)

100
4300
() (400)
(+) 250
4150
() (150)
4000

1. The value of net factor income from abroad is positive if factor income from abroad is greater
than factor income paid abroad.
2. The value of net factor income from abroad is negative if factor income paid abroad is greater
than factor income from abroad.

Product (Added Value) Method

1. Using the product method, national product is calculated from the total value of final products
created by each sector in the economy using the added value method.
2. Added value is the increased value of a product after undergoing the production process in an
economic activity, for example, in the production of furniture.
3. This calculation only involves the value of the final products, to avoid double counting. In the
production process, each sector will use intermediate goods produced by other sectors.
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Therefore, during the calculation of national production, the value of intermediate goods used in
the production process is excluded.
4 Therefore, using the product method, national product is the total value of final goods and
services produced by all sectors of an economy within one year, or the total added value of
product produced at every stage of the production process within one year. Table 3.2 depicts the
calculation of added value within the production process of furniture.

Table 3.2 Calculation of added value

Product
Logs
Sawn logs
Lumber
Furniture
Total added value

Product value (RM)

8000
10000
16000
22000

Added value
8000-0
10000-8000
16000-10000
22000-16000

=8000
=2000
=6000
=6000
22000

5. In a logging activity, the value of logs is equal to the total factor income paid to factors of
production to produce the logs, i.e. RM8000.
6. When logs are processed into sawn logs, many other factors of production must be used. The
total payment to these factors of production is RM2000 (RM 10000 RM8000). This means
that the added value to produce sawn logs is RM 12000.

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7. Sawn logs will then be processed into timber. This process will create an added value of
RM6000 (*RM16000 RM10000). Finally, timber is processed into furniture, which is a final
good to be used by consumers. This process also creates an added value of RM600 (RM22000
RM16000).
8. The total added value is equal to the value of the final good (furniture) i.e. RM22000.
9. The added value for all goods and services produces in an economy is equal to the total value
of final goods in the economy.
10. If the added value method is not used in the calculation of national income using the product
method, the value of intermediate goods will be included in the calculation of the value of the
final goods, thus causing the national product to be overvalued. Therefore, the added value
method is used to prevent double counting in the calculation of national product (national
income).
11. Using the product method, economic sectors are divided into the following three main
sectors:
(a) Agriculture and mining sector, covering agriculture, forestry, fishery, and farming, as well as
mining and quarrying.
(b) Industrial sector, covering factories, construction, and utility supply such as electricity, gas
and water.
(c) Services sector, covering transportation, communication, trading, hotel and restaurant,
financial insurance, property, government services, and other services.
12. The total value of final goods and services created by the economic sectors is equal to the
gross domestic product at market price (GDPmp).

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13. The GDP at factor cost (GDPfc) is calculated by subtracting indirect taxes and adding
subsidies to the GDPmp.
GNPfc = GDPmp + Subsidies Indirect taxes
14. The gross national product (GNP) is calculated by differentiating the products produced by
factors of production owned by citizens of the country that are located abroad from the products
produced by factors of production owned by foreign citizens that are located within this country.
Therefore,
GNPfc = GNPmp +Factor income from abroad Factor income paid abroad
15. The net national product at factor cost (NNPfc) or national income is generated when
depreciation is subtracted from the GNPfc
NNPfc = GNPfc Depreciation
16. An example of calculation of national income through the product method is shown in Table
3.3
Table 3.3 Calculation of national income using the product method
Economic sectors
1 Agriculture, fishery, livestock, and forestry (+)
2 Mining and quarrying (+)
3 Industries
(+)
4 Construction (+)
5 Utilities
(+)
6 Transportation, storage and communications (+)
7 Trade and commerce, hotels and restaurants (+)
8 Finance, insurance and real estate
(+)
9 Government services (+)
10 Other services (+)
GDP at market price (GNPmp)
11 Factor income from abroad
700
Factor income paid abroad
Net factor from abroad

(RM) Million
1800
800
2000
500
90
100
110
80
60
70
5610

600
(700-600)

(+)
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GNP at market price (GNPmp)

12 Indirect taxes
13 Subsidies
GNP at factor cost (GNPfc)
14 Depreciation
NNP at factor cost (NNPfc)/ National income

(-)
(+)
(-)

100
5710
(250)
100
5560
(70)
5490

Income (Factor Cost) Method

1. Using the income method, the income of factors of production consists of:
(a) Rent (from land)
(b) Wages and salaries (from labour)
(c) Interest (from capital)
(d) Profit (from entrepreneurs).
2. In the calculation of national income using the income method, the income of factors of
production consists of:
(a) Wage and salaries
(b) Net interest (Gross interest Interest on consumer loans Interest on government loans)
(c) Rent
(d) Private corporate income
(e) Corporate income
3. National income is generated from the total income of factors of production.
4. Interest from consumer and government loans must be subtracted from national income,
because both these forms of interest are not considered to be income for capital used for national
production.

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5. Interest on consumer loans is charged to governments that borrow money to finance national
expenditure, such as expenditure on defence and security.
6. Interest on government loans is charged to governments that borrow money to finance
national expenditure, such as expenditure on defence and security.
7. Income from transfer payments is not included in the calculation of national income because
this income is not income from productive factors. Examples of transfer payments are pensions
to retirees, scholarships for students, and unemployment allowances.
8. An example of calculation of national income using the income method is depicted in
Table 3.4.

Table 3.4 Calculation of national income using the income using the method

Items
1

Salaries and wages

Net interest

(RM) Millions
(+)

3000

Gross interest
Interest on consumer loans

(-)

Interest on government loans (-)

500
50
120

330

Rent

(+)
(+)

90

Private corporate income

(+)

350

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Corporate profit
Dividends
Undistributed profit
Corporate income tax

150

520

200
-

170
NNP at factor cost (NNPfc)/National income

(+)
-

4290

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