In the case of a vertical demand curve, Increase in price does not affect the quantity demanded. This is complete inelastic demand, consumers pay any price to get the quantity. Elasticities of demand obey the law of demand meaning that elasticities of demand for goods and services ie between these two extremes in real life. The slope indicates the rate of change in units along the curve. At the upper end of the demand curve, where the price is high and the quantity demanded is low, a small change in the quantity demanded even in, say, one unit, is pretty big in percentage
Negative marginal utility is when the consumption of an additional item decreases the total utility. The preference of a consumer for a product is based from the two rational assumptions: (1) that all products can be ranked in an order of preference (indifference between two or more is possible); and (2) that the preference is transitive among the products with which the consumer has the same marginal utility. Consumer’s preference will eventually be transformed into demand. In principle, price is one major factor in influencing demand. 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.
Explicit costs are payments to non-owners for resources they supply. For example, this would include costs of uniform T-shirts, a clerk’s salary, and utilities. In the other hand, implicit costs are the money payments the self-employed resources could have earned in their best alternative employments. For example, this would include forgone interest, forgone rent, forgone wages, and forgone entrepreneurial income. Normal profit fit in implicit cost because they are the minimum payments required to keep the owner’s entrepreneurial abilities self-employed.
To determine the elasticity of the supply or demand curves, we can use this simple equation: Elasticity = (% change in quantity / % change in price) If elasticity is greater than or equal to one, the curve is considered to be elastic. If it is less than one, the curve is said to be inelastic. As we mentioned previously, the demand curve is a negative slope, and if there is a large decrease in the quantity demanded with a small increase in price, the demand curve looks flatter, or more horizontal. This flatter curve means that the good or service in question is elastic. Meanwhile, inelastic demand is represented with a much more upright curve as quantity changes little with a large movement in price.
This means that the actual income or the quantity or the goods and services, can purchase volume has maintained continuous. Disposable Income (Yd) = Gross Income - (Deductions from Direct Taxation + Benefits) The standard Keynesian consumption function is as follows: C = a + c Yd where, C= Consumer expenditure a = autonomous consumption. At this level of consumption, it would take place even if income were zero. If an individual's income fell to zero some of his existing spending could be sustain by using savings. This has known as dis-saving.
3.1 where MP curve depicts the diminishing marginal product of labour with a given stock of fixed capital and a given state of technology. As explained just above, marginal product (MP) curve of labour also represents the demand curve of labour (Nd). On the other hand, the supply of labour by the households in the economy depends on their pattern of preference between income and leisure. The classical theory assumes that in the short run when population does not vary, supply curve of labour slopes upward. Now, what is the rational behind the upward-sloping supply curve of labour.
Consumers choose the producers based on brand, advertising. 3. Producers still influence market price with relatively less entry and exit barriers. B. Linear vs Log-Linear Demand Curve Linear demand curve assume that changes in price, prices of complementary/supplementary goods, income, advertising and related factors will lead to a constant marginal effect.
Economic efficiency can be seen to maximizing total utility from a given amount of scarce resources. There are two types of economic efficiency—allocative efficiency and productive efficiency. According to their definitions, the idea of allocative efficiency is that “consumers pay firms exactly what the marginal cost is (Price=Marginal cost)…such a pricing strategy can be shown to be a key condition if achieving a ‘Pareto optimum’ resource allocation, where it is no longer possible to make anyone ‘better-off’ without making someone else ‘worse-off’.” (Griffiths and Wall, p93) When this condition is satisfied, total consumer and producer’s surplus are maximized. Alternatively, productive efficiency is about how to produce a good or service. To achieve productive efficiency, a firm must use all available methods to produce a certain level of output at the lowest possible costs.
The law of supply and demand describes how prices will vary based on the balance between the supply of a product and the demand for that product (Wikipedia, 2005). If there is a balance between the supply, (the availability of the product), and the demand, (how much product the consumers want), then the price for the product would be considered good. If there is an imbalance, the price will change. According to Adam Smith, the invisible hand is a self-adjusting force in the market that corrects the price of a product through supply and demand (Colander, 2006). When a product is in short supply and there is significant demand for the product, the price will increase (Colander, 2006).
In order to start the discussion I will provide with the definitions of both Aggregate Demand and Aggregate supply. According to (Blanchard,Amighini,Giavazzi, 2010), Aggregate Demand represents the Combination of price and output corresponds with the equilibrium in the goods and financial market. Further in order to understand above statement we can elaborate Aggregate Demand. Aggregate Demand shows the relationship between Equilibrium markets for goods with equilibrium market for money. If there is no shadow economy then total Expenditure(Y) can be equal to total GDP or total income earned, so consumption, investment and government expenditure can be found in the GDP or total expenditure model.