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jinyoung1900
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IB 1 Economics Unit 4 to 6. 4. Elasticities 5. Government intervention 6. Market failure
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2017-06-19T17:23:02Z
IB 1 Economics Unit 4 to
6
Market Failure
(Externalities)
Government
intervention
Elasticities
PED = %∆QD /
%∆P
YED = %∆QD / %∆Y
PES = %∆QS /
%∆P
XED = %∆QD(Corp A) /
%∆P (Corp B)
Determinants of PED
Numbers of
substitudes
Proportion of income
(Y)
Luxury or
necessity
Addictive or
not
Time to
responde
Examples:
New Kitchen:
Elastic,
Fruits:
Inelastic
Necessity
Lack of
substitudes
- Luxurious,
highly influenced
by income
- Not
addictive
- Many
subsidies
Impacts of elasticities for
stakeholders
Consumer
Governmnet
Producer
Inelastic
Elastic
P∆% more than
Qd
Might be put off by big prices, result in price
instability.
Y is inelastic, Y increases, demand
unaffected.
More competition. Increased R&D better quality and
lower price.
Conclusion
Secondary products offer more
choices to consumers, more price
stability, consumers can plan
how to use their income.
%D more than
%P
Elastic
Inelastic
Conclusion
Substitutes drive Price and Profit
down.
Price instability: difficult to plan
ahead
Elastic
Inelastic
Conclusion
Quantity D Limited, Y (profit)
inelastic
Easier to supply, better
efficiency
Can share stocks incase of shortage can
easy respond to increase in D easily
Elastic. More price stability, quality
product, can become very rich,
make lots of profit
Price instability: limited
growth in development,
lower standards of living.
Price instability (Most in primary
goods)
Stable price and
advance in technology,
competitiveness
advantage
Higher tax
revenue
Demand inelastic, large effect on
price.
Higher:
Increase
in
consumer
burden
Lower:
Lower TR
on
producers
Minimum Price
Maximum Price
No Equilibrium, it is distorted. Supply greater than
Demand
Distorts equilibrium, D is greater
than S
C & P surplus much reduced due to black
market, represented by the
A price elasticity, competitivity. This is
why LEDC (Less developed country) are
encouraged to diversify their primary
commodity.
Less people have access to the resources, reduction
of consumer surplus. Government didn't archive its
main object, fewer people access to the house.
Decrease of quality of life
No equilibrium. Reduced producer surplus. Triangle equilibrium Qeq
with Peq
Waste v self sufficiency, produce on larger scale, average cost
per unit reduces. Economy of scale prove, is this economic
development?
Primary Inelastic - eg:
Pineapples in philippines
Secondary, Elastic - eg:
iPhone
Explanation: No
specific substitutes for
pineapple, price
inelastic
Explanation:
Many others
substitutes,
and new, better
technology.
Latest iPhone
quickly
outdated.
Effect on revenue:
Revenue increase
because supply
decrease. Long term,
producer will react by
supply increase in
pineapple will increase
because price will go up.
In the end, Total
revenue will go
down because
of extra supply.
inefficiency of
resources. (Use
PPF graph)
Effects on revenue: Apple
will decrease price to
increase total revenue.
Price is elastic. Price
goes down, Quantity
demanded goes up, Total
revenue goes up.
YED: Since iPhone is elastic
product, if Y increases, D will
increase, result in higher
revenue when demand curve
shifts to right. Will significantly
influence quality of life.
3 factor
Consumer
Producer
Government
Positive
externalities
Negative
externality
Tax
solution
Advertisement
Legislation
Positive
Negative
Positive
Negative
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