In: Economics
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.
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)