Question

In: Economics

1. “A greater quantity of an item will be demanded at a lower price?” Is anything...

1. “A greater quantity of an item will be demanded at a lower price?” Is anything wrong with the following statement of the law of demand? If something is wrong with it, restate it so that it will be true.
3. Describe a recent world affair that you believe to be related to economics.
4. Explain why the coefficient of price elasticity of demand always has a negative sign.

Solutions

Expert Solution

Ans.

1.

"A greater quantity of an item will be demanded at a lower price", this statement is right and fulfill the condition of the law of demand. According to the law of demand is one of the most fundamental concepts in economics. It works with the law of supply to explain how market economies allocate resources and determine the prices of goods and services that we observe in everyday transactions. The law of demand states that quantity purchased varies inversely with price. In other words, the higher the price, the lower the quantity demanded. This occurs because of diminishing marginal utility. That is, consumers use the first units of an economic good they purchase to serve their most urgent needs first, and use each additional unit of the good to serve successively lower valued ends.

Increase in Quantity Demanded

An increase in quantity demanded is caused by a decrease in the price of the product (and vice versa). A demand curve illustrates the quantity demanded and any price offered on the market. A change in quantity demanded is represented as a movement along a demand curve. The proportion that quantity demanded changes relative to a change in price is known as the elasticity of demand and is related to the slope of the demand curve.

3.

The United Nations recently released the World Economic Situation and Prospects Report, 2020. According to the report, the world economy is to shrink by 3.2% in 2020. The GDP growth in developed countries will decline to -0.5% in 2020.

Highlights India

The report says that the growth rate of India in 2018 was 6.8% and in 2019 it was 4.1%. It will reduce to 1.2% in 2020. The report predicts that the growth of India will raise eventually in 2021 hitting 5.5%

Highlights World

The Global economy is to gradually recover by 2021. The world economy will lose around 8.5 trillion USD due to COVID-19. Also, the global economy is to shrink by 4.9% in 2020. Around 34.3 million people are to enter below poverty line by 2020.
Also, the report say that several governments are rolling out uneven fiscal stimulus measures that are roughly equal to 10% of their GDP to minimize the crisis created by COVID-19 outbreak.

Solution Suggested

The report has suggested following solutions to combat COVID-19
The COVID-19 is disturbing fundamental premise of globalization. Therefore, stronger international cooperation is required to contain the virus
More liquidity should be pumped into the economies
The International Tourism should be given focus. Around 80% of the tourism has become idle rendering millions jobless.

4.

Coefficients of Elasticity of Demand

Coefficient means value

*Elasticity is a number!

*Coefficient could be high – elastic

*Or it might be low – inelastic

*Or zero – perfectly inelastic

*Or infinity – perfectly elastic

Price elasticity of demand

Formula: Ped = % change in quantity demanded of good X / % change in price of good X

PED will normally be negative – i.e. inverse relationship between quantity demanded and a change in the price

IMPORTANT! New specs require students to include the minus or plus signs along with the coefficient

*If PED = 0, demand is perfectly price inelastic

*If PED <1, demand is price inelastic

*If PED > 1, demand is price elastic
*If PED = infinity, demand is perfectly price elastic

*If PED = 1, demand is unitary elastic

Income elasticity of demand

Income elasticity of demand (YED) measures the responsiveness of quantity demanded for a product to a change in income

Formula: YED = % change in quantity demanded / % change in income

For normal necessity products: YED is positive but coefficient < +1

For normal luxury products: YED is positive but coefficient > +1

For inferior products: YED is negative (YED<0)


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