HL
UNIT 1:
MICROECONOMICS
NOTES FOR 2020 IB
SYLLABUS
Delicia Pascall
,Changing PED and the (straight line) Demand Curve
Why does PED vary along the straight-line demand curve?
In the upper section people will be more
sensitive to changes in price
Slope = ∆ P ÷ ∆ Q – constant for a straight line
p/q is falling when we move downwards the
demand curve as p decreases while q increases
Constant number x decreasing number =
decreasing value of PED
- On any(downward sloping) straight-line demand curve, demand is price-elastic at high prices &
low quantities, and price-inelastic at low prices and high quantities, and has a midpoint of unit
elastic demand
THEREFORE, the terms ‘inelastic’ and ‘elastic’ should not be used to describe an entire demand
curve, only for a portion of the curve corresponding with a particular price/price range (except
3 cases where PED is constant)
PED for Commodities
Commodities = raw materials and crops
Manufactured products = goods produced with factors of production including commodities
- They’re necessities for manufacturers and the demand depends upon their production targets
- Some manufactured products have inelastic demand as well if they are necessities.
- They have no or very small number of substitutes. Manufactured products normally have a lot
of substitutes >> PED is high
- Demand for commodities is price inelastic (PED < 1 )
PES for Commodities
- The supply of commodities is price inelastic
- It takes time to grow / extract commodities
- Import and export contracts
- Due to inelastic supply and demand for commodities – the prices for them are volatile
- PED < 1
PED and TR
,Total revenue = the amount of money received by firms when they sell a good/service
TR = P x Q
Elastic Demand: P increases, TR falls. Inelastic Demand:
- Fall in supply of commodities (e.g. due to poor weather conditions) will generate significantly
higher prices. The small in quantity is proportionately much smaller that the rise in price. The
total revenue of farmers increases
- In general any changes in supply will generate significant fluctuations in prices. The revenue of
farmers is unstable and requires government intervention.
, Applications of YED
- If goods and services have income elastic demand, the demand increases at a higher rate than
incomes
- If goods and services have income inelastic demand, the demand increases at a slower rate
than incomes
Luxury products:
(With income elastic demand)
- Benefit significantly during periods of economic growth – the demand increases at a faster rate
than the rise in incomes
- During recession: the demand for these goods falls at a faster rate than the decline in incomes
Inferior products:
(with negative income elasticity)
- Will be hit hardest during periods of economic expansion – the demand declines as incomes
are rising
- During recession: the markets for inferior products will benefit while markets for normal goods
decline
Necessities:
(with low income elasticity)
- Will benefit less than luxury goods during economic growth
- During recession: the demand for these goods will fall by far less than for luxury products
3 Sectors of the Economy
Primary Sector = Agricultural Products and Natural resources
- Have income inelastic demand
- Sector growth is at a very slow rate
- Share reduces relative to the other sectors (as they grow faster)
Secondary = Manufactured Products
- Have income elastic demand
- Sector growth is at a fast rate
- Share increases relative to primary sector
Tertiary = Services (high YED)
- Higher income elasticity than manufacturing sector
- Sector is expanding at the fastest rate
- Share increases relative to the other two sectors
Sectoral change = when the share of each sector changes. The overall output (GDP) is 100%
- Economically less developed countries tend to have a large primary sector.
While these countries are growing, the share of the primary sector declines as the other 2
sectors rise
- Developed countries have a very large tertiary sector with the highest share
UNIT 1:
MICROECONOMICS
NOTES FOR 2020 IB
SYLLABUS
Delicia Pascall
,Changing PED and the (straight line) Demand Curve
Why does PED vary along the straight-line demand curve?
In the upper section people will be more
sensitive to changes in price
Slope = ∆ P ÷ ∆ Q – constant for a straight line
p/q is falling when we move downwards the
demand curve as p decreases while q increases
Constant number x decreasing number =
decreasing value of PED
- On any(downward sloping) straight-line demand curve, demand is price-elastic at high prices &
low quantities, and price-inelastic at low prices and high quantities, and has a midpoint of unit
elastic demand
THEREFORE, the terms ‘inelastic’ and ‘elastic’ should not be used to describe an entire demand
curve, only for a portion of the curve corresponding with a particular price/price range (except
3 cases where PED is constant)
PED for Commodities
Commodities = raw materials and crops
Manufactured products = goods produced with factors of production including commodities
- They’re necessities for manufacturers and the demand depends upon their production targets
- Some manufactured products have inelastic demand as well if they are necessities.
- They have no or very small number of substitutes. Manufactured products normally have a lot
of substitutes >> PED is high
- Demand for commodities is price inelastic (PED < 1 )
PES for Commodities
- The supply of commodities is price inelastic
- It takes time to grow / extract commodities
- Import and export contracts
- Due to inelastic supply and demand for commodities – the prices for them are volatile
- PED < 1
PED and TR
,Total revenue = the amount of money received by firms when they sell a good/service
TR = P x Q
Elastic Demand: P increases, TR falls. Inelastic Demand:
- Fall in supply of commodities (e.g. due to poor weather conditions) will generate significantly
higher prices. The small in quantity is proportionately much smaller that the rise in price. The
total revenue of farmers increases
- In general any changes in supply will generate significant fluctuations in prices. The revenue of
farmers is unstable and requires government intervention.
, Applications of YED
- If goods and services have income elastic demand, the demand increases at a higher rate than
incomes
- If goods and services have income inelastic demand, the demand increases at a slower rate
than incomes
Luxury products:
(With income elastic demand)
- Benefit significantly during periods of economic growth – the demand increases at a faster rate
than the rise in incomes
- During recession: the demand for these goods falls at a faster rate than the decline in incomes
Inferior products:
(with negative income elasticity)
- Will be hit hardest during periods of economic expansion – the demand declines as incomes
are rising
- During recession: the markets for inferior products will benefit while markets for normal goods
decline
Necessities:
(with low income elasticity)
- Will benefit less than luxury goods during economic growth
- During recession: the demand for these goods will fall by far less than for luxury products
3 Sectors of the Economy
Primary Sector = Agricultural Products and Natural resources
- Have income inelastic demand
- Sector growth is at a very slow rate
- Share reduces relative to the other sectors (as they grow faster)
Secondary = Manufactured Products
- Have income elastic demand
- Sector growth is at a fast rate
- Share increases relative to primary sector
Tertiary = Services (high YED)
- Higher income elasticity than manufacturing sector
- Sector is expanding at the fastest rate
- Share increases relative to the other two sectors
Sectoral change = when the share of each sector changes. The overall output (GDP) is 100%
- Economically less developed countries tend to have a large primary sector.
While these countries are growing, the share of the primary sector declines as the other 2
sectors rise
- Developed countries have a very large tertiary sector with the highest share
