Unit 2.5 - Elasticities of Demand
What you need to know and understand:
Key concepts:
Questions to consider:
- Concept of elasticity
- Price elasticity of demand (PED)
- PED = percentage change in quantity demanded / percentage change in price
- Degrees of PED—theoretical range of values for PED
- Changing PED along a straight line downward sloping demand curve [HL only]
- Determinants of PED—number and closeness of substitutes, degree of necessity, proportion of income spent on the good, time
- Relationship between PED and total revenue
- Importance of PED for firms and government decision- making
- Reasons why the PED for primary commodities is generally lower than the PED for manufactured products [HL only]
- Income elasticity of demand (YED)
- YED = percentage change in quantity demanded / percentage change in income
- Income elastic demand (services and luxury goods) and income inelastic demand (necessities)
- Significance of sign
- Positive YED (normal goods) and negative YED (inferior goods)
- Less than one (necessities) and greater than one (services and luxury goods)
- Importance of YED [HL only]:
- for firms
- in explaining changes in the sectoral structure of the economy.
Key concepts:
- Scarcity
- Choice
- Efficiency
- Equity
- Economic well-being
- Sustainability
- Change
- Interdependence
- Intervention
Questions to consider:
- Interaction between consumers and producers in a market is the main mechanism through which resources are directed to meet the needs and wants in an economy..
- Consumer and producer choices are the outcome of complex decision-making.
- Welfare is maximized if allocative efficiency is achieved.
- Constant change produces dynamic markets.
TEXTBOOK unit 2.5
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