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Unit 2 Microeconomics(PED) - Coggle Diagram
Unit 2 Microeconomics(PED)
Definitions
Elasticity
The responsiveness of one variable to a change in another variable
Elasticity of Demand
a measure of the responsiveness of the quantity demanded of a good or service to changes in one of the factors that determine it.
Price Elasticity of Demand (PED)
a measure of how much the quantity demanded of a good changes when there is a change in its own price.
Formulas
PED=(%change in quantity demanded of good x)/(%change in price of good x)
%change=(new-old)/old*100
Elastic
Price Elastic Demand
A situation where the percentage change in the quantity of a good or service is greater than the percentage change in its price.
Elastic Goods
Sensitive to changes in price
General Characteristics of Elastic Goods
Many Substitutes
Non-Addictive
Luxury Goods
Large portion of income
Plenty of time to decide, not urgent
Elasticity coefficient greater than 1
Inelastic
Inelastic Goods
INsensitive to changes in price
Price Inlastic Demand
A situation where the percentage change in the quantity of a good or service is less than the percentage change in its price.
General Characteristics of INelastic Goods:
Few Close Substitutes
High Degree of necessity
Small portion of income
Addictive
Required now, rather than later (Time)
Elasticity coefficient less than 1
PED
PED>1 relatively elastic
PED=1 Unit or unitary elastic
PED=0 perfectly inelastic
PED=∞ perfectly elastic
PED changes from point to point along a demand curve
Inelastic vs Elastic
Inelastic Goods
Insensitive to changes in price.
Looks like an "I" - vertical
Elastic Goods
Sensitive to changes in price
Looks flatter!
Consumer and producer surplus
CONSUMER SURPLUS - the difference between the highest price consumers are willing and able to pay for a good and the actual price they pay.
Producer SURPLUS - the difference between the lowest price producers are willing and able to offer the good and the actual price that they receive for it.
Social/Community surplus
The sum of the consumer surplus and producer surplus. It is the total benefit gained by society when the market is at equilibrium..
YED
Definition
A change in people's incomes causes an increase or decrease (a shift) in demand for a good.
a measure of how much the quantity demanded of a good will change in response to a change in consumers' incomes.
tells us information regarding whether the good is a NORMAL or INFERIOR good
Formula
YED=(%change in quantity demanded of good x)/(%change in income(Y)
coefficient is negative
good is inferior
coefficient is positive
good is normal
Engel Curve
we use an Engel Curve. An Engel Curve is used to show the relationship between income and quantity demanded
Income is placed on the vertical axis quantity demanded on the horizontal axis.
situation
YED>0 normal good
YED<0 inferior good
-1<YED<1 income inelastic demand(necessity goods)
YED<-1 YED>1 income elastic demand(luxury goods)
YED=0 perfectly income inelastic demand(necessity goods)
YED=1 no classification term-proportional change
Economic Growth and YED
In times of economic growth, incomes typically rise. During an economic decline, incomes typically fall.
Income and Spending
As income-level changes over time, this can cause the entire output of an economy to shift to different sectors.Consumers will change the way they spend larger portions of their income.
Sectors of an Economy
Primary - primary commodities such as agriculture, mining, forestry.
Secondary - goods produced from primary commodities such as clothes, cars, houses, books, paper.
Tertiary - goods that are not yet tangible but improve quality of life such as entertainment, travel, healthcare, insurance, education.
As an economy grows over time, the relative size of these sectors, as a percentage of total output in the economy, changes.
This process is defined as Sectoral Change. Economists use YED to understand what an increase in income will do to each sector.