Following the decrease in the price of a good, there is an increase in the quantity demanded by the consumer due to the substitution effect. However, in such a case, the income effect is opposite (Krugman and Wells
Either way - there is a tendency for output to move closer to the current level of demand. There may be occasions when in the short run, the economy cannot meet an increase in demand. This is more likely to occur when an economy reaches full-employment of factor resources. In this situation, the aggregate supply curve in the short run becomes increasingly inelastic. The diagram below tracks the effect of this.
Here elasticity is equal to infinity. Factors that cause a shift in demand Factors that cause a shift in demand affect price elasticity of demand because it changes the quantity demanded, which is used in the equation of price elasticity of demand. These factors include: • Price of substitute goods: a decrease in the price of substitute products will increase the quantity demanded of the current product. The opposite will occur with a decrease in price. • Price of complement goods: an increase in the price of a good that complements another will decrease quantity demanded.
This will reduce demand for domestic products from both domestic and foreign consumers. MOVEMENTS ALONG THE DEMAND CURVE:- As with a demand curve for a particular product, the cause of a movement along an aggregate demand curve will be a change in price, in this case a change in the general price level. A... ... middle of paper ... ...curs at the full employment level. However they argue that it occurs at less than full employment but where shortages in resources are beginning to be experienced, both output and the general price level will rise or if it occurs at a low level of economic activity it will cause a rise solely in output. Figure 28.
Conversely, a decrease in price level would result in higher value of wealth, causing an increase in quantity demanded. Another reason for the downward slope of the aggregate demand curve is the interest rate effect. The interest rate effect is the change in the quantity of investment demanded caused by the change in price level changing the interest rate. Were a chart to be drawn
Depreciation reduces the value o f the asset such that at the end, the cost of the asset goes down. The type of depreciation chosen by a company determines the lifespan of that particular asset. This therefore means that, since depreciation, that is, accelerated depreciation affect the company’s income statement, it also affects the financial rations of the company that depend on the balance sheet. There are several financial ratios that are affected by the depreciation method chosen by the company. Some of the financial ratios include; the returns from the assets, profit margin, debt of assets and the debt of equity.
The individual firms have some control over price. They exercise market power by having the ability to raise prices above the marginal cost without it having any effect on demand for their goods and services, which can eventually lead to inefficiency. In the real world it is impossible to achieve perfect competition so most markets exhibit characteristics of imperfect competition. Examples of imperfect competition include: oligopoly and monopoly. d. According to Government can attempt to inject competition into the supply of gas to the consumers through the following ways - They can restrict the behavior of already established firms through to prevent them from using their market dominance and brand loyalty in the market as an entry barrier for upcoming firms.
The aggregate supply is commonly expressed as short-term or long, where the short term is over a short period while long-term measures a relatively extended period. Nonetheless, there are some changes in the economy that may result in the modification of the aggregate supply. They are supply shocks, change in the anticipated inflation and also change in the prices of input. Supply shocks are sudden events that result in the either increase or a decrease in output for a short period. With aggregate demand, the curve used to monitor it is downward sloping, and it indicates that as the prices of goods and services decreases, more of the goods will be required.
Price Elasticity The degree to which a demand or supply curve reacts to a change in price is the curve's elasticity. Elasticity varies among products because some products may be more essential to the consumer. Products that are necessities are more insensitive to price changes because consumers would continue buying these products despite price increases. Conversely, a price increase of a good or service that is considered less of a necessity will deter more consumers because the opportunity cost of buying the product will become too high. A good or service is considered to be highly elastic if a slight change in price leads to a sharp change in the quantity demanded or supplied.
The law of demand states that: all other factors being equal, as the price of a good or service increases, consumer demand for the good or service will decrease, and vice versa. There are five determinants of demand: 1) Income. A rise in a person’s income will lead to an increase in demand, a fall will lead to a decrease in demand for normal goods. Goods which demand varies inversely with income are called inferior good; 2) Consumer Preferences. Favorable change leads to an increase in demand, unfavourable change lead to a decrease; 3) Number of Buyers.