Economics Grade 11 Exam Review PDF

CIE3M Exam Review Topics Remember to bring a calculator and materials to draw graphs to the exam! Format Section 1 - multiple choice - 30 marks - 40 mins Section 2 - short answer - drawing graphs, short answer and calculation questions - 25 marks - 40 mins Section 3 - essay - choose 1 of 2 essay q...

CIE3M Exam Review Topics Remember to bring a calculator and materials to draw graphs to the exam! Format Section 1 - multiple choice - 30 marks - 40 mins Section 2 - short answer - drawing graphs, short answer and calculation questions - 25 marks - 40 mins Section 3 - essay - choose 1 of 2 essay questions (micro/macro) - 20 marks - 40 mins Topics and Terminology Introduction & Money ​ The economic problem - scarcity The basic economic problem that arises because resources are limited while human wants are unlimited, forcing choices in resource allocation. Scarcity: the state of being scarce or in short supply; shortage. Limited Resources: Resources such as land, labor, and capital are limited. There aren't enough of them to satisfy all our desires. Unlimited Wants: People have infinite wants, such as food, clothing, shelter, and entertainment. This mismatch creates scarcity. Choice and Trade-offs: Because of scarcity, we must make choices about how to allocate our limited resources. This often involves trade-offs, meaning that choosing one option typically means giving up another. Resource Allocation: Scarcity forces societies to decide how to allocate resources efficiently, often leading to discussions about supply and demand, pricing, and economic policies. ​ Factors of production - land, labour, capital Land: Natural resources (e.g., minerals, forests). Labour: Human effort, both physical and mental. Capital: Man-made resources used for production (e.g., machinery, buildings). Entrepreneurship: The ability to organize resources and take risks to create goods and services. Technology: Knowledge and tools that enhance production efficiency.  ​ 3 economic questions - for whom to produce, what to produce, how to produce What to produce? Deciding which goods/services to produce. How to produce? Determining the production methods. For whom to produce? Allocating goods to specific groups. ​ Production possibilities curve/frontier - factors that affect economic growth/decline Production Possibilities Curve (PPC): A graphical representation showing the maximum combinations of two goods that can be produced with available resources, illustrating concepts like efficiency and trade-offs. ​ GROWTH – AN ECONOMY WANTS TO MOVE THE PPC CURVE TO THE RIGHT – IT CAN ONLY DO SO BY GROWTH ​ SHIFTS IN THE PPC CURVE CAN BE CAUSED BY: ​ 1. CHANGE IN TECHNOLOGY ​ 2. CHANGE IN QUANTITY AND QUALITY OF RESOURCES (HUMAN RESOURCES AS IN WORKERS, SKILLED WORKERS, BETTER QUALITY OF GOODS USED) ​ REASONS FOR GROWTH ​ ACCUMULATION OF CAPITAL ​ TECHNOLOGICAL ADVANCES ​ INCREASE IN POPULATION – IMMIGRANTS, BIRTH RATE RISES ​ AVAILABLE LAND OR IMPROVEMENTS TO LAND ​ REASONS FOR DECLINE ​ DECREASE IN POPULATION – DISEASE, CATASTROPHE, WAR, DECLINE IN BIRTH RATES ​ LOSS OF LAND – WAR OR NATURAL DISASTER ​ DECREASE IN PRODUCTION DUE TO AN AGING POPULATION, MORE UNEDUCATED POPULATION, LESS HEALTHY POPULATION A point outside the curve is currently unattainable. A point inside the curve is inefficient. A point on the curve is efficiently using resources. ​ Opportunity cost Opportunity Cost: The opportunity cost is always the next best alternative you give up when making a choice. ​ Positive (analytical) and normative economic statements Positive Statements: Fact-based and testable (e.g., "Raising taxes increases revenue."). Normative Statements: Opinion-based and value-driven (e.g., "Taxes should be higher to reduce inequality."). Positive: Facts can be tested. Normative: Opinions, based on values. ​ Different ways to spend and save money - types of investments RRSPs ​ Registered Retirement Savings Plan ​ Try to save investors income tax on whatever their investment earn ​ Allows investors to deduct the money invested this year from their income ​ Reduces their income taxes and gives them more money to invest. ​ When they take money out of an RRSP, they must pay income tax on that money TFSA ​ Tax Free Savings Account ​ Save investors income tax on whatever their investments earn. ​ Does not give a tax deduction when the investment is made but allows investors to take money out of the TFSA without paying any taxes on whatever the investment earned. ​ Began in 2009 for people over the age of 18 in Canada ​ Current contribution allowance is $6000 per year - this is retroactive for years not used Stocks ​ Certificates that are sold to raise money for starting a new company or for expanding an existing company. ​ Also called securities. People who buy them are called investors. ​ When you buy one you are basically purchasing a share in the ownership of a company (McDonalds, Apple) ​ Typically have the potential for higher returns compared with other types of investments over the long-term. ​ Can also drop in value. ​ Some stocks pay dividends (a portion of the company’s profits that go to you on a regular basis) Bonds ​ Governments and corporations issue bonds to raise money. ​ When you buy a bond, you loan money to the issuer in return for the promise they will pay back the principal (the amount you initially loaned) by a certain date with interest. ​ Bonds are rated according to safety and some are virtually risk-free. ​ The safer the bond, the less interest it will pay. ​ (You give government or a corporation money and they give you the money back later with a little more) Mutual Funds ​ Allows you to own a basket of stocks and/or bonds. ​ You spread out your risk, because if the price of one investment tanks, others may rise. ​ Safer than stocks due to diversification GICs ​ Guaranteed Investment Certificate ​ You agree to lock in your money for a certain period of time (usually 1-5 years) in return for a guaranteed pay-off of interest. ​ Usually less risky. ​ Higher interest rates than a regular savings account Spending​ Some of the forms of spending include: Loan ​ You borrow money to buy something (e.g., a car or house). ​ You own the item and are responsible for it. ​ You repay the loan over time, including interest. ​ Once you finish paying, the item is yours completely. Example: Getting a car loan to buy and own the car. Lease ​ You pay to use something for a specific time (e.g., a car or office space). ​ A contractual agreement between two parties where the lessee pays the lessor for the use of an asset. ​ You don’t own it—the owner keeps it. ​ You pay monthly fees to use it, and when the lease ends, you return it. ​ Sometimes, you have the option to buy it at the end of the lease. Example: Leasing a car for 3 years and returning it when the lease ends. Debit Cards -​ Treat debit cards like cash -​ You can only spend what you have in your account -​ Generally have a daily cash/spending limit -​ Use for cash withdrawal from ATMS (credit cards have fees for cash advance) -​ Merchants pay fees for transactions (less than credit and they get the money immediately, due to you not borrowing money from the bank) Cash -​ Legal tender  -​ Can be saved or spent -​ Value: Currency Credit ​ Most common form of credit today are credit cards ○​ Visa ○​ Mastercard ○​ Amex ​ Interest fees range approx 20%. Interest charged back to date of purchase. ​ Merchants pay fees per transaction. 2% to visa for accepting that card. ​ Conditions → Using a websearch on one of Canada’s Chartered Banks tells us how to apply for a credit card. ​ Benefits of carrying or purchasing credit include: ○​ Credit Score ○​ Convenience ○​ Points/rewards ​ Drawbacks of carrying or purchasing with credit include: ○​ Impact on credit score (negatively) ○​ Debt accumulation ○​ Overspending/sometimes there are limits on spending ○​ Risk of identity theft ​ What happens if you don't pay: ○​ Late fees ○​ Interest accumulation ○​ Increased interest rates Microeconomics ​ Change in supply and demand vs. change in quantity supplied and quantity demanded  ​ Change in Supply/Demand: ○​ Entire curve shifts due to non-price determinants (e.g., income, tastes, input prices, technology). ○​ Increase in demand shifts curve right, decrease shifts left. ○​ Increase in supply shifts curve right, decrease shifts left. ​ Change in Quantity Supplied/Demanded: ○​ Movement along the curve due to changes in the price of the good/service. ​ Determinants of supply and demand Non-Price Determinants of Supply include: Costs of Production Productivity Government Intervention Price of Related Goods Supply Shocks Number of firms Non-Price Determinants of Demand include: Income Price of Related Goods Tastes and Preferences Expectations of Future Prices and Income Number of Potential Buyers Demographic change Government Policy Seasonal Change ​ Equilibrium - allocative efficiency, how we arrive at a new equilibrium after a shift, tax, etc. Equilibrium: The intersection of the supply and demand curves. The quantity demanded is equal to the quantity supplied At a price below the equilibrium price…. ​ Prices below the equilibrium there is a shortage created between Qs2 and Qd2. The quantity demanded exceeds the quantity supplied. Above The Equilibrium At a price above the equilibrium price it is called a surplus A surplus is created between Qd2 and Qs2 The Quantity supplied exceeds the quantity demanded  ​ Consumer surplus, producer surplus and community surplus Community surplus represents the benefit received by the community due to a free market Community surplus = CS + PS Triangle formula: 0.5(b*h) ​ Elasticity - PED, formula and definition ○​ PED = [(Q2-Q1)/(Q1)] / [(P2-P1)/(P1)] Elastic: Consumers are very responsive to a change in price. Value > 1 ​ Example: Luxury goods like designer handbags or high-end electronics. Unit - Elastic: consumers are proportionally responsive to a change in price. Value = 1 ​ Example: A restaurant meal deal where price and demand change equally. Inelastic: consumers are not very responsive to a change in price. Value < 1 ​ Example: Essential goods like gasoline or insulin. ​ Government intervention - taxes (specific excise and ad valorem), subsidies, price floor, price ceiling, regulations/restrictions ​ Taxes: ○​ Specific Excise: Fixed amount per unit. ○​ Ad Valorem: Percentage of the price. ○​ Creates deadweight loss and decreases both consumer and producer surplus. ​ Subsidies: ○​ Payments to reduce production costs and encourage output. ​ Price Controls: ○​ Price Floor: Minimum price (e.g., minimum wage). ○​ Price Ceiling: Maximum price (e.g., rent control). ​ Regulations/Restrictions: ○​ Limits on production, quotas, or safety requirements.  ​ Costs - fixed and variable costs, short run costs vs. long run costs Fixed Costs: Costs that don’t change change with the amount produced Examples: 1.​ Rent: The monthly payment for factory or office space remains the same, whether you produce 1 unit or 1,000 units. 2.​ Salaries: Fixed salaries for management or administrative staff who are not directly involved in production. 3.​ Insurance: Payments for business insurance don’t fluctuate based on production. 4.​ Equipment Depreciation: The cost of machinery losing value over time is fixed, regardless of usage. Variable Costs: Costs that do change with the amount produced Examples: 1.​ Raw Materials: The more products you make, the more raw materials (e.g., wood for furniture, steel for cars) you need to purchase. 2.​ Hourly Wages: Workers paid per hour or per unit produced (e.g., assembly line workers). 3.​ Electricity for Production: Energy costs for running machines increase as production increases. 4.​ Packaging: The cost of boxes, labels, and other materials used to package each product. Total Cost: Fixed costs + variable costs Marginal Cost: Additional cost of one additional unit ​ Short run: Cost of resources that are relatively flexible and can be adjusted quickly (labour, fuel), maximum capacity is fixed because of a shortage of at least one resource. The ability to produce is limited. ​ Long run: All costs become variable, including costs such as plant facilities. No fixed costs of production. ​ Profit Economic Profit:  ​ Profit = Total Revenue - Total Costs Normal Profit: ​ When Economic Profit = 0; firm is covering all explicit and implicit costs. ​ Market structure - characteristics of different competitive markets Perfect competition -​ Number of sellers = a lot -​ Market power = No control over price -​ Product differentiation = homogeneous (same) -​ Barriers to entry = None Ex. Agricultural goods, etc. Grocery stores Monopolistic competition -​ Number of sellers = Many, but less than perfect competition -​ Market Power = Little control over price -​ Product differentiation = Heterogeneous (different) -​ Barriers to entry = Small barriers to entry Ex. Restaurants, fast food, diners, Oligopoly -​ Number of sellers = Few sellers -​ Market power = Significant -​ Product differentiation = Homo/heterogeneous (a bit of both) -​ Barriers to entry = Significant Ex. Airlines, phone/service providers, banks, gas stations Monopoly -​ Number of sellers = One -​ Market power = Complete -​ Product differentiation - (one product, no close substitutes) -​ Barriers to entry: Major (Dominant brands like Google Search engine & Diamond mining)  ​ Law of increasing returns to scale Definition: When all inputs (like workers and machines) increase by the same proportion, but output increases by an even larger proportion. This means the business becomes more efficient as it grows. Scenario: Pizza Shop A pizza shop doubles its: ​ Number of chefs ​ Ovens ​ Ingredients Outcome: Instead of just making twice as many pizzas, the shop produces more than double because: ​ Workers get faster with practice. ​ Bigger ovens cook more pizzas at once. ​ Buying ingredients in bulk reduces costs. This shows increasing returns to scale because output (pizzas) increases more than inputs (workers, ovens, ingredients). ​ Law of diminishing marginal returns​ Definition: fundamental economic principle that states when one input in a production process increases while other factors remain constant, there comes a point where each additional unit of that input produces a smaller increase in output. Scenario: Making Burgers A small burger shop has one grill and starts adding more workers to make burgers faster. ​ 1st worker → Makes 10 burgers per hour ​ 2nd worker → Makes 20 burgers per hour (10 more)  ​ 3rd worker → Makes 27 burgers per hour (only 7 more) ​ 4th worker → Makes 30 burgers per hour (only 3 more) ​ 5th worker → Gets in the way, slowing things down Why It Happens: ​ First, more workers help make more burgers. ​ But after a point, they start getting in each other’s way because there’s only one grill. ​ Each extra worker adds less and less to total burger production. This is diminishing marginal returns—after a certain point, adding more of one input (workers) increases output by smaller amounts. Macroeconomics ​ GDP (definition and formula) Definition: ​ The total market value of all final goods and services produced within a country in a given period. ​ Measures a nation's economic performance. (Expenditure approach) GDP = C + I + G + (X-M) C: Consumption I: Investment G: Government expenditures X: Exports M: Imports Real GDP Growth Rate Formula (Looking for %): Year 2 - Year 1 x 100 Year 1 ​ Aggregate demand Aggregate Demand (AD): The total demand for all goods and services in an economy at a specific price level and time. Determinants of aggregate demand: CONSUMPTION is determined by the following factors  ​ Aggregate supply ​ Leakages/injections Leakages: Money that leaves the economy, reducing the flow of spending. ​ Examples: ○​ Imports (M): Buying cars from another country. ○​ Savings (S): Putting money into a savings account instead of spending it. ○​ Taxes (T): Paying income taxes to the government. Injections: Money that enters the economy, increasing the flow of spending. ​ Examples:  ○​ Exports (X): Selling goods to another country (e.g., Canadian wheat sold to Europe). ○​ Investment Spending (I): A company buying new machines. ○​ Government Spending (G): Building a new highway. Summary: Leakages slow down economic activity, while injections boost it. ​ Types of unemployment Frictional Unemployment: ​ Definition: When people are between jobs or new graduates are looking for their first job. ​ Example: A software engineer quits to find a better job. Seasonal Unemployment: ​ Definition: When jobs are temporary and depend on the season or time of year. ​ Example: Ski instructors losing work in the summer. Cyclical Unemployment: ​ Definition: Caused by a drop in demand during an economic slowdown or recession. ​ Example: Factory workers laid off during the Great Depression. Structural Unemployment: ​ Definition: When certain skills or jobs become outdated due to economic changes. ​ Example: Coal miners losing jobs as the world shifts to renewable energy. Replacement Unemployment: ​ Definition: When jobs are moved to another country to cut costs. ​ Example: A call center relocating from Canada to India. Technological Unemployment: ​ Definition: When machines or automation replace human workers. ​ Example: Robots replacing workers on an assembly line.  ​ Unemployment rate formula + definition Unemployment rate - percentage of labour force not working at any given time ​ Number unemployed x 100 Labour force ​ Labour force ​ Definition: ○​ Includes all individuals aged 15 and over who are either employed or actively seeking employment. ​ Formula: Labour Force = Employed + Unemployed ​ CPI - formula and definition Definition: ​ Measures the average price level of a basket of goods and services consumed by households over time. Formula: CPI = Price of market basket x 100 Price of market basket ​ in base year ​ Inflation rate formula + definition Inflation rate (% Change) calculation: (CPI year 2 - CPI year 1) x 100 ​ CPI year 1 ​ Interest rate -​ Interest rates play a key role in the economy because they affect our decisions as consumers about both saving money and borrowing money. The higher interest rates are, the less likely we are to borrow, and the more likely we are to save. -​ Tophey also influence the value of the Canadian dollar internationally, as higher interest rates attract more foreign investors and, therefore, increase the demand for Canadian dollars. -​ The budgets of governments are affected because the more they spend on interest on their debts, the less money they have available for social or other programs. ​ Fiscal policy and monetary policy - recessionary and inflationary gap and solutions ○​ Contractionary vs expansionary fiscal policies ○​ Tight money vs easy money Easy money ​ Low interest rates, easy availability of credit, growth money supply ​ Used in recessionary periods to lessen the effects of recession Tight money ​ High interest rates, more difficult availability of credit, decrease in the money supply ​ Used in expansionary periods to restrain an overheated economy and keep prices from soaring Fiscal Policy: ​ Government actions regarding taxes and spending to influence the economy. Expansionary fiscal policy - during times of recession, characterized by high unemployment, and little or no growth in GDP, the government will attempt to increase aggregate demand through various components of the GDP equation. E.g. tax cut, increased government spending Contractionary Fiscal Policy - This policy is used during times of high inflation, high employment and high GDP growth to decrease aggregate demand. E.g. tax hikes, decreased government spending Contractionary Fiscal Policy: ​ Reduces aggregate demand to curb inflation. ​ Examples: Raising taxes, cutting government spending. Expansionary Fiscal Policy: ​ Boosts aggregate demand to reduce recession and stimulate growth. ​ Examples: Cutting taxes, increasing government spending. Monetary Policy: ​ Central bank actions to control the money supply and interest rates. ​ Tight Money Policy: ○​ Used to control inflation. ○​ Decreases money supply, raises interest rates. ​ Easy Money Policy: ○​ Used to combat recession. ○​ Increases money supply, lowers interest rates. Practice Essays Microeconomics "Explain the impact of government intervention on market outcomes, specifically focusing on the effects of taxes, price controls (price floors and ceilings), and subsidies. How do these interventions affect consumer and producer surplus, and what are the potential consequences for overall economic efficiency? Provide examples of real-world applications of these policies." Introduction Government intervention in markets is a common practice in modern economies, often designed to address market failures, protect consumers, and ensure social welfare. Interventions such as taxes, price controls (price floors and ceilings), and subsidies can have significant effects on market outcomes, including consumer and producer surplus, and overall economic efficiency. These interventions often aim to correct imbalances or achieve specific economic goals, but they can also introduce inefficiencies that may have unintended consequences. In this essay, we will examine the impact of taxes, price controls, and subsidies on market outcomes and explore their effects on consumer and producer surplus and economic efficiency, using real-world examples. Taxes Taxes are one of the most common forms of government intervention, typically levied to generate revenue for public spending or to discourage undesirable behaviors such as smoking or pollution. In a market, taxes are usually either specific excise taxes (a fixed amount per unit) or ad valorem taxes (a percentage of the price). When a tax is introduced, the price consumers pay increases, and the price producers receive decreases, causing a shift in both the supply and demand curves. From an economic perspective, the introduction of a tax creates a "deadweight loss," which refers to the loss of total welfare (consumer and producer surplus) that occurs because the tax discourages mutually beneficial transactions. In a taxed market, the consumer surplus decreases because consumers pay higher prices, and the producer surplus decreases because producers receive lower prices after the tax. The total tax revenue, however, is captured by the government, and this becomes a transfer rather than a loss to society. A real-world example of a tax intervention is the excise tax on cigarettes. This tax increases the price of cigarettes, reducing consumption. The consumer surplus decreases because smokers pay higher prices, while producers may lose some of their market share as demand decreases. While the tax may reduce consumption and improve public health, it introduces inefficiency by preventing some transactions that would have occurred at the pre-tax price. Price Controls Price controls are another form of government intervention designed to protect consumers or ensure affordability. These controls come in two forms: price floors and price ceilings. A price ceiling sets a maximum price that can be charged for a good or service, typically used to prevent prices from rising too high, as seen in rent control policies. A price floor, on the other hand, establishes a minimum price, often used to ensure producers receive a fair return, such as with minimum wage laws. Price Ceilings: When a price ceiling is set below the market equilibrium price, it creates a shortage. The quantity demanded exceeds the quantity supplied, leading to long waiting lines, reduced quality, or non-price rationing mechanisms. A well-known example of a price ceiling is rent control. Rent-controlled apartments may lead to a shortage of available rental housing because landlords are unwilling to supply rental properties at the artificially low price, while demand increases due to the lower price. In this case, both consumer and producer surpluses are affected: consumers benefit from lower prices, but producers (landlords) may reduce the quality or quantity of rental housing, reducing the overall welfare. Price Floors: A price floor set above the equilibrium price leads to a surplus. The quantity supplied exceeds the quantity demanded, which can result in wasted resources and inefficiency. A common example is the minimum wage, where employers may hire fewer workers at the higher wage, leading to unemployment in certain sectors. In this case, while some workers benefit from higher wages, others may lose their jobs, and the economy experiences an inefficient allocation of labor. In both cases, price controls cause a distortion in the market, leading to either shortages or surpluses. These market inefficiencies result in a loss of total welfare, as the market no longer clears at the equilibrium price where supply equals demand. Subsidies Subsidies are government payments to encourage the production or consumption of certain goods, often aimed at promoting specific industries or addressing externalities. A subsidy lowers the cost of production or increases the price received by producers, leading to an increase in supply or demand for the subsidized good. Subsidies can be beneficial in addressing market failures. For example, subsidies for renewable energy production encourage the use of cleaner energy sources, which can lead to long-term environmental benefits. However, subsidies also distort the market and can lead to inefficiencies. For example, agricultural subsidies can encourage overproduction of certain crops, leading to a surplus that may have to be stored or sold at a loss. This overproduction not only wastes resources but can also result in lower prices for farmers in other sectors, who may struggle to compete with subsidized products. A real-world example of subsidies can be found in the electric vehicle (EV) industry. Governments often provide subsidies to consumers purchasing electric cars in order to reduce pollution and stimulate the growth of the EV market. While this increases demand for electric vehicles, it can also lead to inefficiency if the subsidies are too large, as the market may become reliant on government support rather than improving technology and reducing costs independently. Conclusion Government interventions, such as taxes, price controls, and subsidies, play a significant role in shaping market outcomes. While these interventions can achieve important social or economic objectives, they often come with trade-offs in the form of reduced consumer and producer surpluses, as well as deadweight loss. Taxes can decrease overall welfare by reducing mutually beneficial transactions, while price controls can lead to inefficiencies like shortages or surpluses. Subsidies can promote desirable behaviors but may lead to overproduction and resource misallocation. Ultimately, while government intervention can correct certain market failures, it is crucial for policymakers to carefully consider the potential unintended consequences of such interventions to ensure that they maximize social welfare and economic efficiency. Microeconomics Prompt #2 "Discuss the role of elasticity in determining the impact of price changes on market outcomes. How do price elasticity of demand (PED) influence the burden of taxes, price changes, and overall 🤣 market efficiency? Provide real-world examples to support your analysis." (aint no way ts gna be a question) - fr Introduction Price elasticity of demand (PED) is a critical concept in microeconomics that helps to explain how changes in the price of goods and services influence consumer behavior. PED measures the responsiveness of the quantity demanded of a good to changes in its price. The degree of this responsiveness can vary across different goods, and PED can be classified into three categories: elastic, inelastic, and unit elastic. This essay will examine how each of these types of elasticity affects market outcomes, focusing on the influence of price changes, taxes, and overall market efficiency. Argument #1: Elastic Demand and Its Market Impact When the demand for a product is elastic, consumers are highly responsive to price changes. In this case, a small increase in price leads to a significant decrease in the quantity demanded, while a decrease in price results in a large increase in demand. The value of PED is greater than 1 in this situation. Elastic demand is common for luxury goods, non-essential items, and products with readily available substitutes. For example, if a company raises the price of designer handbags—a product with elastic demand—many consumers will choose not to purchase the handbag, or they may switch to a different brand or product. As a result, the company may experience a significant drop in revenue despite the price increase, because the decrease in quantity demanded outweighs the increased price. The market effect of elastic demand is important for businesses because it highlights the risks associated with price hikes. For goods with elastic demand, companies must carefully evaluate the potential for revenue loss due to a large drop in consumer purchases. If companies raise prices too much, they may reduce overall sales and harm their profitability. Argument #2: Inelastic Demand and Its Market Impact In contrast, inelastic demand refers to situations where consumers are less responsive to price changes. In this case, even large price increases lead to only small decreases in the quantity demanded, meaning that consumers continue to purchase the good despite price hikes. The value of PED is less than 1 for inelastic goods. Essential goods and necessities typically exhibit inelastic demand. For example, insulin is an essential medication for diabetic patients, and its demand remains relatively constant even when prices increase. Despite higher prices, people will continue to purchase insulin because it is necessary for their health, and there are few alternatives. The market impact of inelastic demand is significant, especially when taxes are imposed. Since consumers are less likely to reduce their consumption in response to price increases, the burden of taxes on inelastic goods typically falls more heavily on consumers than producers. For instance, a government-imposed tax on cigarettes will likely result in higher prices for consumers, but since the demand for cigarettes is inelastic, smokers will continue to buy them, leaving most of the tax burden to fall on them. Argument #3: Unit Elastic Demand and Its Market Impact Finally, unit elastic demand occurs when the percentage change in quantity demanded is exactly equal to the percentage change in price. This means that the price increase or decrease does not lead to a change in total revenue because the proportional change in quantity demanded offsets the price change. The value of PED in this case is exactly 1. Unit elastic demand is relatively rare, but it can occur in markets where price changes and demand shifts are in perfect balance. For example, a restaurant offering a meal deal where both the price and the quantity demanded change in such a way that total revenue remains the same could be considered an example of unit elastic demand. If the price of the meal deal goes up by 10%, but the number of people purchasing it decreases by 10%, the restaurant's revenue will remain unchanged. In markets with unit elastic demand, the impact of price changes is less clear-cut. The business or government taxing the good can adjust prices without affecting total revenue, but there is little opportunity to increase revenue significantly through price increases or to boost sales through price reductions. Conclusion In conclusion, price elasticity of demand plays a key role in determining how price changes, taxes, and other factors affect market outcomes. Elastic demand leads to significant shifts in quantity demanded in response to price changes, often resulting in lost revenue for businesses. Inelastic demand means that consumers are less responsive to price changes, causing the tax burden to fall more heavily on consumers and reducing the likelihood of reduced consumption. Finally, unit elastic demand represents a balanced situation where price changes do not affect total revenue. Understanding the differences in elasticity helps businesses and policymakers make informed decisions that align with their objectives, whether it be to maximize revenue, minimize market disruptions, or ensure fairness in taxation.