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Questions and Answers
What is the main focus of microeconomics?
What is the main focus of microeconomics?
What happens to the demand for a good when its price rises?
What happens to the demand for a good when its price rises?
What does the demand function express?
What does the demand function express?
What is the variable 'I' in the demand function: Q = 10 - 0.5P + 0.06I - 0.01Pt?
What is the variable 'I' in the demand function: Q = 10 - 0.5P + 0.06I - 0.01Pt?
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What does the inverse demand function express?
What does the inverse demand function express?
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What is elasticity of demand?
What is elasticity of demand?
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At what point on the linear demand curve is the elasticity of demand infinite?
At what point on the linear demand curve is the elasticity of demand infinite?
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What type of elasticity is characterized by a 1% change in price causing a 1% change in quantity?
What type of elasticity is characterized by a 1% change in price causing a 1% change in quantity?
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What is the characteristic of a perfectly elastic demand curve?
What is the characteristic of a perfectly elastic demand curve?
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What is the effect of a decrease in price on total expenditure in the elastic part of the demand curve?
What is the effect of a decrease in price on total expenditure in the elastic part of the demand curve?
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Which of the following factors affects demand elasticity the most?
Which of the following factors affects demand elasticity the most?
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What is the characteristic of an inelastic demand curve?
What is the characteristic of an inelastic demand curve?
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What happens to total expenditure when the price decreases at the unit elastic point of the demand curve?
What happens to total expenditure when the price decreases at the unit elastic point of the demand curve?
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What is the effect of a decrease in price on total expenditure in the inelastic part of the demand curve?
What is the effect of a decrease in price on total expenditure in the inelastic part of the demand curve?
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Study Notes
Introduction to Economics and Demand Analysis
- Economics is the study of production, distribution, and consumption, divided into two broad areas: microeconomics and macroeconomics.
- Microeconomics deals with individual economic units, including consumers and firms.
Demand Analysis
Law of Demand
- As the price of a good rises, buyers will choose to buy less of it (ceteris paribus).
- Conversely, as the price falls, buyers will buy more.
Demand Function
- The demand function expresses the demand for a particular good as a function of multiple variables.
- Key variables influencing demand include the price of the good, income levels, and the prices of other goods.
Example: Demand for Chairs
- Demand function: Q = 10 - 0.5P + 0.06I - 0.01Pt
- Q: quantity of chairs demanded
- P: own price of chairs
- I: average income level
- Pt: average price of tables
Inverse Demand Function
- Can be expressed as: P = 200 - 2Q
- Plotted on a graph, the demand curve shows the highest quantity consumers are willing to purchase at each price.
Elasticity of Demand
- Measures how the quantity of a good demanded responds to changes in its own price, holding other factors constant.
- Formula: ε = (ΔQ/Q) / (ΔP/P)
- For the example demand function, ε = -0.5(P/Q)
Linear Demand Curve
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Elasticity varies depending on where it is calculated on the curve.
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Example: ε = -0.5(P/Q) at different points on the demand curve:
- Point A: ε = -99 (very elastic)
- Point B: ε = -1 (unit elastic)
- Point C: ε = ? (infinite elasticity)### Elasticity of Demand
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Elasticity of demand varies along a negatively sloped linear demand curve.
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It is high at higher prices and low at lower prices.
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At a certain point (unit elastic point), a 1% change in price causes a 1% change in quantity.
Types of Elasticity
- Unit elastic: a 1% change in price causes a 1% change in quantity.
- Elastic: a small change in price causes a large change in quantity.
- Inelastic: a large change in price causes a small change in quantity.
Perfectly Elastic and Inelastic Demand Curves
- Perfectly elastic demand curve: horizontal, a small change in price has a huge impact on quantity.
- Perfectly inelastic demand curve: vertical, a change in price has no impact on quantity.
Factors Affecting Demand Elasticity
- Availability of close substitutes: if there are several close substitutes, elasticity is high.
- Broadness of product definition: if the product is broadly defined, substitutes may not be close.
- Portion of total budget: if the product represents a high percentage of the budget, elasticity is high.
- Time horizon: if the time horizon is long, elasticity is high.
- Discretionary or non-discretionary nature of the product: if the product is discretionary, elasticity is high.
Relationship between Elasticity and Total Expenditure
- Total expenditure is the total amount a consumer spends on a product (price x quantity).
- In the elastic part of the demand curve, a decrease in price leads to an increase in total expenditure.
- At the unit elastic point, a decrease in price does not change total expenditure.
- In the inelastic part of the demand curve, a decrease in price leads to a decrease in total expenditure.
Introduction to Economics and Demand Analysis
- Economics is divided into two broad areas: microeconomics and macroeconomics.
Demand Analysis
Law of Demand
- As the price of a good rises, buyers will choose to buy less of it (ceteris paribus).
- Conversely, as the price falls, buyers will buy more.
Demand Function
- The demand function expresses the demand for a particular good as a function of multiple variables.
- Key variables influencing demand include the price of the good, income levels, and the prices of other goods.
Example: Demand for Chairs
- Demand function: Q = 10 - 0.5P + 0.06I - 0.01Pt
- Q: quantity of chairs demanded
- P: own price of chairs
- I: average income level
- Pt: average price of tables
Inverse Demand Function
- Can be expressed as: P = 200 - 2Q
- Plotted on a graph, the demand curve shows the highest quantity consumers are willing to purchase at each price.
Elasticity of Demand
- Measures how the quantity of a good demanded responds to changes in its own price, holding other factors constant.
- Formula: ε = (ΔQ/Q) / (ΔP/P)
- For the example demand function, ε = -0.5(P/Q)
Elasticity of Demand Curve
- Elasticity varies depending on where it is calculated on the curve.
- Elasticity is high at higher prices and low at lower prices.
Types of Elasticity
- Unit elastic: a 1% change in price causes a 1% change in quantity.
- Elastic: a small change in price causes a large change in quantity.
- Inelastic: a large change in price causes a small change in quantity.
Perfectly Elastic and Inelastic Demand Curves
- Perfectly elastic demand curve: horizontal, a small change in price has a huge impact on quantity.
- Perfectly inelastic demand curve: vertical, a change in price has no impact on quantity.
Factors Affecting Demand Elasticity
- Availability of close substitutes: if there are several close substitutes, elasticity is high.
- Broadness of product definition: if the product is broadly defined, substitutes may not be close.
- Portion of total budget: if the product represents a high percentage of the budget, elasticity is high.
- Time horizon: if the time horizon is long, elasticity is high.
- Discretionary or non-discretionary nature of the product: if the product is discretionary, elasticity is high.
Relationship between Elasticity and Total Expenditure
- Total expenditure is the total amount a consumer spends on a product (price x quantity).
- In the elastic part of the demand curve, a decrease in price leads to an increase in total expenditure.
- At the unit elastic point, a decrease in price does not change total expenditure.
- In the inelastic part of the demand curve, a decrease in price leads to a decrease in total expenditure.
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Description
Learn about the basics of economics, microeconomics, and demand analysis, including the law of demand and demand function.
