1. Explain the subject matter of economics as question concerning the adjustments between unlimited want and limited resources. 1 & 2 2. Explain how Market/Price mechanism solves there central problems of economics 1 & 2 3. Explain why the price in competitive markets settles down the equilibrium intersection of supply and demand. Explain what happens if the market price starts out too high or too low. 3 4.Explain the economic meaning 0f price elasticity of demand with the help of numerical example of your own choice. 4 & 5 5. Discuss the major determinant of price elasticity of Demand 4 & 5 6. Critically Discuss the law of diminishing marginal utility of a numerical example and suitable diagram 5 Price Elasticity of Demand
The elasticity of demand (ed) is a measure of the price responsiveness to the quantity demanded and is equal to the percentage change in quantity demanded divided by the percentage change in price. Because the elasticity of demand can vary depending on whether one moves up or down the demand curve, elasticities of demand are often calculated by taking an average the prices and quantities given by the following formula:
ed = change in Q / change in P
(Q1 + Q2)/2 (P1 + P2)/2
Determinants of price elasticity of demand
1. existence of substitutes—the closer the substitutes for a particular commodity, the greater will be its price elasticity of demand 2. importance of the commodity in the consumers budget—the greater the percentage of a total budget spent on the commodity, the greater the person’s price elasticity of demand for that commodity 3. time for adjustment in rate of purchase—the longer any price change persists, the greater the price elasticity of demand Must distinguish between the short run and the long run (long run is the time necessary for consumers to make a relatively full adjustment to a given price change) For example, short run price elasticity of demand for...