AOS1

• Low PED (Inelastic demand)

  • Quantity demanded changes relatively less than the change in price.
  • Less responsive to price changes.
  • Demand curve is steep.
  • Examples include necessities like food, gasoline, and prescription medications.
  • Consumers continue to buy similar quantities even if prices change.
  • Formula: PED < 1.
• High PED (Elastic demand)

  • Quantity demanded changes significantly more than the change in price.
  • More responsive to price changes.
  • Demand curve is flat.
  • Examples include luxury items, entertainment, and non-essential services.
  • Consumers adjust their purchasing behaviour in response to price changes.
  • Formula: PED > 1.
• Low PES (Inelastic Supply):

  • Quantity supplied changes relatively less than the change in price.
  • Producers cannot easily adjust production in response to price changes.
  • Supply curve is steep.
  • Examples include unique or specialized goods and goods with limited resources.
  • Producers are unable to quickly increase or decrease production.
  • Formula: PES < 1.
• High PES (Elastic Supply):

  • Quantity supplied changes significantly more than the change in price.
  • Producers can easily adjust production in response to price changes.
  • Supply curve is flat.
  • Examples include goods with readily available resources and goods produced with flexible production processes.
  • Producers can quickly increase or decrease production.
  • Formula: PES > 1.
• Relative price


  the price of one good or service compared to the price of another good or service in another market.
• Profit motive 


  Businesses are profit motive therefore will reallocate resources in response to changes in relative prices
• Market mechanism

  Prices are determined by the interactions of buyers (demand) and sellers (supply) - i.e. market forces ensure that an equilibrium is achieved
• PED= % change in quantity demanded /

  %change in price
• PES= %change in quantity supplied / %change in price
• Market failure


  When the allocation of resources achieved in the economy is inefficient
• Non-excludable goods


  Suppliers cannot stop a person from consuming/using the product (even if they have not paid)
• Non-rivalrous goods (non-depletable)


  Consumption by a person doesn't lead to a reduction in the amount available for other potential consumers
• Public good characteristics

  Non-excludable (suppliers can't stop consumption of a product)

  Non-rivalrous (consumption doesn't reduce availability of product for potential consumers)
• Private good characteristics

  Excludable (suppliers can prevent someone from consuming the product)

  
  

  Rivalrous/depletable (consumption by one person reduces the availability for another person)
• Externality 


  When a person is engaged in a transaction (or activity) that affects the wellbeing of a third party who is not involved in the transaction (or activity).
• Positive externality


  When the third party (producer or consumer) receives a benefit from the production or consumption activity who are not directly involved in the transaction.
• Negative externality 


  When a cost is imposed on a third party (producer or consumer) not involved in the transaction (or activity)