Definition – Demand is price inelastic when a change in price causes a smaller percentage change in demand. It occurs where there is a price elasticity of demand (PED) of less than one. Goods which are price inelastic tend to have few substitutes and are considered necessities by users. Diagram of price inelastic demand For …
Definition – A maximum price occurs when a government sets a legal limit on the price of a good or service – with the aim of reducing prices below the market equilibrium price. For example, the government may set a maximum price of bread of £1 – or a maximum price of a weekly rent …
Definition The observation that some goods (e.g. water) which are more essential to human life can be cheaper than non-essential goods (e.g. diamonds) Paradox of value – Economics explainedWatch this video on YouTube Explanation The paradox of value examines why goods that are not essential to life can command a much higher price than goods …
Price gouging is a situation where business take advantage of an external crisis to charge excessive prices for basic necessities – selling the goods significantly above their usual price. Many countries have laws against the practise of price gouging – to protect consumers against unfairly high prices during a national emergency. Example of price gouging …
Definition of a liquidity trap: When monetary policy becomes ineffective because, despite zero/very low-interest rates, people want to hold cash rather than spend or buy illiquid assets. A liquidity trap is characterised by Very low-interest rates Low inflation Slow/negative economic growth Preference for saving rather than spending and investment Monetary policy becomes ineffective in boosting …
Income elasticity of demand (YED) measures the responsiveness of demand to a change in income. For example, if your income increase by 5% and your demand for mobile phones increased 20% then the YED of mobile phones = 20/5 = 4.0 Definition of Inferior Good This occurs when an increase in income leads to a …
Price elasticity of demand measures the responsiveness of demand to a change in price. Price inelastic – a change in price causes a smaller % change in demand. Price elastic – a change in price causes a bigger % change in demand. Price inelastic demand We say a good is price inelastic, when an increase …
A kinked demand curve occurs when the demand curve is not a straight line but has a different elasticity for higher and lower prices. One example of a kinked demand curve is the model for an oligopoly. This model of oligopoly suggests that prices are rigid and that firms will face different effects for both …