Readers Question: Evaluate the importance of knowing YED in a firm’s decision-making process. Knowing the YED of a product may help a firm respond to changing economic situations and help the firm to plan ahead. If a firm is producing inferior goods Demand will increase during periods of recessions and economic downturns. Therefore, in …
The aggregate demand curve (AD) is the total demand in the economy for goods at different price levels. AD = C + I + G + X – M If there is a fall in the price level, there is a movement along the AD curve because with goods cheaper – effectively, consumers have more …
Readers Question: What are the effects of increased investment on aggregate demand in the short term and the long term. Investment means capital expenditure (e.g. purchasing machines or building bigger factory) Investment is a component of AD – AD+ C+I+G+X-M. Investment spending takes about 15% of AD; it is not as significant as consumer spending …
Demand tends to be more price inelastic in the short-run as consumers don’t have time to find alternatives. In the long-run, consumers become more aware of alternatives. Price elasticity of demand measures the responsiveness of demand to a change in price. Demand is price inelastic if a change in price causes a smaller % change …
Demand management policies are efforts to influence the level of aggregate demand (AD) in an economy. The two main types of demand management policies are: Monetary Policy Fiscal Policy To some extent, the exchange rate could be used to influence aggregate demand, but in practice, it is rarely used as a tool to influence aggregate …
Definition Joint demand occurs when demand for two goods is interdependent. For example, it is no good having a printer without the ink to go with it. Similarly, ink cartridges are no use without a printer. Another example could be a razor and razor blades. Basically, the definition of joint demand is when you need …
The US Dept of Food produces an interesting service on offering estimated elasticities of demand. [link] This graph shows the Cross Elasticity of demand (XED) for various goods with respect to food. I choose two countries – Bangladesh (low income) and the UK (relatively high income) Source: [link] What this means is that if the price …
How to calculate price elasticity of demand. Price elasticity of demand = % change in Q.D. / % change in Price To calculate a percentage, we divide the change in quantity by initial quantity. If price rises from $50 to $70. We divide 20/50 = 0.4 = 40% Example of calculating PED When the price …