Elasticity of demand (Ped) = % change in demand of good X / % change in price of good X • If the PED is greater than one, the good is price elastic. Demand is responsive to a change in price. If for example a 15% fall in price leads to a 30% increase in quantity demanded, the price elasticity = 2.0 • If the PED is less than one, the good is inelastic. Demand is not very responsive to changes in price. If for example a 20% increase in price leads to a 5% fall in quantity demanded, the price elasticity = 0.25 • If the PED is equal to one, the good has unit elasticity. The percentage change in quantity demanded is equal to the percentage change in price. Demand changes proportionately to a price change. • If the PED is equal to zero, the good is perfectly inelastic. A change in price will have no influence on quantity demanded. The demand curve for such a product will be vertical. • If the PED is infinity, the good is perfectly elastic. Any change in price will see quantity demanded fall to zero. This demand curve is associated with firms operating in perfectly competitive markets Cross Price Elasticity - This measures the responsiveness of demand to a change in the price of a substitute or complement. Income Elasticity - This measures the responsiveness of demand to a change in income.
Recession - An economy is in recession when a contraction in an economy (GDP) occurs over two consecutive quarters (six months). 2007-2010 Recession - Sub prime mortgages and excessive credit caused a global banking crisis when banks started to uncover significant losses from sub prime mortgages and credit back securities for which they could not afford and because of the globalization of banking, the whole world has exposure to the banking crisis.
Substitutes - These are rival products; for example, a BMW is a substitute for a Mercedes. Compliments - A product which complements another (dvd player and dvd)
Fiscal policy - The governments decisions regarding taxation and spending or fiscal policy involves the use of government spending, taxation and borrowing to influence both the pattern of economic activity and also the level and growth of aggregate demand, output and employment. Monetary policy - Monetary Policy influences the decisions the government makes about how much we save, borrow and spend. (eg. Quantitive Easing - Involves the central bank buying government debt, corporate debt and other financial securities; in return, cash is provided to the vendors of these assets).
Supply is the quantity of a good or service that a producer is willing and able to supply onto the market at a given price in a given time period. The supply curve shows a relationship between the price of a good or service and the quantity a producer is willing and able to sell in the market. What causes a shift in the supply curve?
i) Costs of production
ii) Changes in production technology
iii) Government taxes and subsidies
iv) Climatic conditions
v) Change in the price of a substitute
vi) The number of producers in the market
Demand is defined as the quantity of a good or service consumers are willing and able to buy at a given price in a given time period. i) Changing price of a substitute
ii) Changing price of a complement
iii) Change in the income of consumers
iv) Change in tastes and preferences
v) Changes in interest rates
Opportunity cost - The benefits foregone from the next best alternative.
MR=Marginal Revenue (revenue received by selling one more unit of output AC=Average Cost (This is the total cost divided by the number of units being produced) AR=Average Revenue (This is the average price charged by the firm and is equal to total revenue/quantity demanded: PQ/Q) MC=Marginal Cost (cost of creating one more unit of output)