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 …
Interest rates have a strong influence on house prices, principally because changes in the interest rate affect the cost of mortgage payments. How do interest rates affect house prices? If interest rates rise it will have a significant effect on increasing the cost of mortgages. Higher mortgage payments will deter prospective home-buyers – it becomes …
Readers Question: Evaluate the case for raising the legal drinking age to 21. Will it be more effective than other methods for reducing the harmful effects of alcohol? There are several reasons to be concerned about the over-consumption of alcohol, especially amongst young people. In the UK, abuse of alcohol has contributed to several social, …
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 …
Price discrimination involves charging different prices to different sets of consumers for the same good. Firms can charge different prices depending on several criteria: Quantity bought (e.g. lower unit price when higher quantity is bought) Time of use (higher price at peak times) Age profile (e.g. discounts for OAPs) When unit is bought (e.g. discounts …
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 …
Demand is price elastic if a change in price causes a bigger percentage change in demand. It will have a PED of greater than one. Example of elastic demand % change in Q.D – 60/110 = – 0.545 % change in price 15/65 = 0.23 In the above example, the PED = -2.36 Characteristics of …