2.5-2.6 Elasticities
A good that is a necessity with limited substitutes would likely result in demand that is (price elastic/price inelastic/unitary price elastic/perfectly price elastic).
Price Inelastic Demand
Describe excess supply.
At a price point, excess supply refers to a situation where the production (supply) of a good is more than the ability and willingness to purchase it, known as demand. Also called a surplus, excess supply would illustrate market disequilibrium.
State the formula for Price Elasticity of Supply.
PES= % change in quantity supplied / % change in price
Define the term 'market equilibrium'.
Market equilibrium is when a market of a good or service results in a direct intersection of the quantity supplied and quantity demanded at a price known as the equilibrium price.
Explain how the 'mobility of factors of production' is a PES determinant.
If the factors of production are more mobile, for example, it is easier to hire more workers given an increase in price, then the supply would be price elastic. However, if the factors of production are less mobile, such as finite or fixed land or space, then the supply would tend to be price inelastic and less responsive or sensitive to a price change.
Explain how three functions of the price mechanism attempt to correct market disequilibrium.
Signalling- Higher or lower prices give signals to producers or consumers to enter or leave the market. This may result in a new equilibrium point as a new curve is established in the market.
Incentive- Higher or lower prices incentivize (motivate) producers to supply more or less (quantity), or consumers to demand more or less (quantity). Due to this function, markets will move back to equilibrium.
Rationing- Due to scarce resources during a shortage (excess demand), higher prices will ration off demand for limited goods.
The price of hand soap increases from 80,000 KIP to 90,000 KIP. The quantity demanded decreases by 4%. Calculate the PED and state the type of elasticity.
4%
90,000-80,000= 10,000/80,000= .125 x 100= 12.5
4/12.5= PED = .32
The demand for hand soap is price inelastic as it is less than 1.
Discuss how the price of related goods would cause a shift in supply or demand for a particular good.
For supply, the discussion of the non-price determinant of price of related goods should explicitly include joint and competitive supply.
For demand, the discussion of the non-price determinant of price of related goods should explicitly include substitutes and compliments.
Explain why normal goods result in a positive YED, inferior goods result in a negative YED, and necessity goods result in a low positive YED.
As income rises, the quantity demanded for normal goods increases, resulting in a positive relationship and YED. The same is true for a decrease in demand. This is because normal goods are those products that people tend to buy more or less of as income rises or falls. An example of a normal good would be an ironing board.
Inferior goods, on the other hand, see an inverse relationship, which causes a negative YED. This is because as incomes rise, the quantity demanded falls, and vice versa. Bus tickets would be an example of this.
Necessity goods, such as cat food, would not respond as sensitively to an income change because they are, of course, essential for people (and their pets, in this case). So, necessity goods - which can be normal goods - would result in a low positive YED because they are income inelastic.
HL ONLY- Discuss the assumptions and limitations of rational consumer choice.
Discussion should include both assumptions as well as critiques of rational consumer choice. These include perfect information, consumer rationality, and utility maximization, as well as rule of thumb, anchoring and adjusting, availability, framing, bounded rationality theory, bounded selfishness, bounded self-control, and imperfect information.
For a 500 point question, five different discussion points (terminologies) should be given.