CONTENT

1. INTRODUCTION TO ECONOMICS

• 2.1 Demand
• 2.2 Supply
• 2.3 Competitive market equilibrium
• 2.4 Critique of the maximising behaviour of consumers and producers
(HL)
2. MICROECONOMICS • 2.5 Elasticities of demand
• 2.6 Elasticity of supply
• 2.7 Role of government in microeconomics
• 2.8 Market failure – externalities and common pool resources
• 2.9 Market failure – public goods

3. MACROECONOMICS
THE GLOBAL ECONOMY
UNIT 2: MICROECONOMICS

Debate:
UNIT 2: MICROECONOMICS

Questions:
1. What do you understand by “Elasticity”?
2. Try to explain a situation with something inelastic.
3. Explain the terms: interaction and interdependence
2.5 ELASTICITIES OF DEMAND

Impact

minimal amount Business decision?

Ex. Masks during

how much quantity covid
demanded declines
in response to a price
rise? Impact

very responsive to a
Business decision?
price rise

Ex?
2.5 ELASTICITIES OF DEMAND: PRICE ELASTICITY OF DEMAND (PED): DEFINITION, FORMULA AND
CALCULATIONS
2.5 ELASTICITIES OF DEMAND: PRICE ELASTICITY OF DEMAND (PED)
2.5 ELASTICITIES OF DEMAND: PRICE ELASTICITY OF DEMAND (PED)
REMEMER

definition

To what extent do
the generalisations
about change made
allow us to make Stakeholders
accurate predictions and change
about consumers’

CHANGE
behaviours?

Market Price
Incomes and
and
consumers
consumers
2.5 ELASTICITIES OF DEMAND: PRICE ELASTICITY OF DEMAND (PED)
2.5 ELASTICITIES OF DEMAND: PRICE ELASTICITY OF DEMAND (PED)
2.5 ELASTICITIES OF DEMAND: PRICE ELASTICITY OF DEMAND (PED)
2.5 ELASTICITIES OF DEMAND: PRICE ELASTICITY OF DEMAND (PED)
2.5 ELASTICITIES OF DEMAND: PRICE ELASTICITY OF DEMAND (PED)
2.5 PED: DETERMINANTS OF PRICE ELASTICITY OF DEMAND
(PED)

Working with your partner, provide

arguments for the following
statements 
 2.5 PED: DETERMINANTS OF PRICE ELASTICITY OF DEMAND
(PED)
Determinants of demand are factors that make the demand curve shift, while the determinants of price
elasticity of demand (PED) influence how sensitive the quantity demanded of a good is to changes
in its price.

The number and closeness of The degree of necessity and how The proportion
The time period of income spent
substitutes widely a product is defined considered on the good

The more The closer (more The greater the

substitutes there are similar) the existing level of The demand for a The higher the
substitutes for a Case study: Sky-
for a product, high drug prices in necessity for the good will be more proportion of
the more elastic the product are, consumer, the more inelastic in a short income spent on a
the more elastic the the United States
demand for it will inelastic the period of time than good, the more
be. demand for it will demand of the good in a longer period elastic the demand.
be will be. of time
REMEMBER DEFINITIONS

Define the unitary

elasticity of price inelastic
following demand, demand,
elastic
terms:​​ demand,

perfectly perfectly
profit, total revenue, inelastic elastic
demand, demand,
REMEMBER

Explain the determinants Explain the determinants

of PED, including: of PED, including:
State PED ecuation Number and closeness of Proportion of income
substitutes spent on the good
Degree of necessity Time

Explain the relationship Examine the importance

between price elasticity of of of PED for firms
demand and total revenue. decision-making.
2.5 PED AND TOTAL REVENUE FOR FIRMS

When there is a change in the price of a good or service, the impact on the firm's
total revenue will depend on the price elasticity of demand of the good.

A firm's total revenue is not the same as profit. As revenue increases, total costs
might rise even faster, which would cause a decline in the firm's profits.

Formula: Profit= Revenues – Total Cost

2.5 CHANGING PRICE ELASTICITY OF DEMAND (PED) ALONG A STRAIGHT
LINE, DOWNWARD-SLOPING DEMAND CURVE (HL)

 SLOPE VS PED
 PED should not be confused with the slope of the demand curve.
 While the slope of a linear demand curve is constant, PED varies along its price range
 2.5 CHANGING PRICE ELASTICITY OF DEMAND (PED) ALONG A STRAIGHT
LINE, DOWNWARD-SLOPING DEMAND CURVE (HL)

 Relationship between PED and the slope of the demand curve

 2.5 CHANGING PRICE ELASTICITY OF DEMAND (PED) ALONG A STRAIGHT
LINE, DOWNWARD-SLOPING DEMAND CURVE (HL)

 Change in price elasticity of demand (PED) along a linear demand curve

 2.5 CHANGING PRICE ELASTICITY OF DEMAND (PED) ALONG A
STRAIGHT LINE, DOWNWARD-SLOPING DEMAND CURVE (HL):
 PED along the demand curve and total revenue

Make conections: Look at

these two graph

Make your own conclusion

using data and numbers.
Include the words total
revenues and elasticity

(The terms elastic or

inelastic should be used to
refer to a portion of a
demand curve or a price
range along the demand
curve.)
2.5 ELASTICITIES OF DEMAND: ACTIVITIES
 2.5 IMPLICATIONS OF PRICE ELASTICITY OF DEMAND (PED) FOR
GOVERNMENT POLICIES
tax incidence: Elasticity of consumers will only pay
PED and the incidence of demand has an impact on part of the tax, reflected in
indirect tax
taxes and subsidies the tax burden faced by
the higher price (Pc > P*)
GOV Intervention

consumers

a Gov that imposes an indirect

Government revenue from tax
PED and government revenue
also varies based on PED.
Governments can use taxes and
PED and influencing subsidies to influence the
production/consumption quantity of products produced
and consumed in society
tax on a good is likely to earn
Revenue for the government relatively more revenue from
= (Pc−Pp)×Qt those taxes on goods with
inelastic demand than on goods
with elastic demand.
governments will often use
increased taxes to claim that
If governments really want to
their goal is to reduce
reduce production and
consumption of harmful
consumption of harmful goods,
products, like petrol,
they need to raise taxes very
cigarettes or alcohol, when the
significantly.
main reason is really to increase
government revenues
2.5 IMPLICATIONS OF PRICE ELASTICITY OF DEMAND (PED) FOR
GOVERNMENT POLICIES

 Homework: Questions
 1. Define VAT
 2. Outline 3types (%) in Spain
 3. Find examples of goods
 4. Why three?
 5. Do we have to pay VAT no matter what?
 6. Online research: Find examples of Spanish government subsidies for Primary, secondary and tertiary sector.
ACTIVITY

 Case study: Taxes on soft drinks and sugar-sweetened beverages in Chile (Kognity)
2.5 PRICE ELASTICITY OF DEMAND (PED) OF PRIMARY
COMMODITIES (HL)

 Def: commodities or primary goods, are goods that come from the land, are extracted from it, or are extracted
from under the sea. They include agricultural, fishing, oil, coal, mineral and forestry products.
 PED: The demand for most primary commodities is inelastic, with a low price elasticity of demand (PED), so
consumers are not very responsive to price changes. Primary commodities are often necessities to those who
consume them and have few or no substitutes. In addition, many primary commodities take up a small proportion
of income and are used immediately.
2.5 INCOME ELASTICITY OF DEMAND (YED): DEFINITION,
FORMULA, CALCULATIONS, RANGE OF VALUES AND DIAGRAMS

definition formula Be aware

Income elasticity of YED = % change in the quantity Both the sign of YED and the
demand (YED) is a demanded of good X size of its value are relevant, as
together they will reveal what
measure of how / % change in the income (Y) of type of good we are examining.
much the quantity consumer This is different from price
demanded of a good elasticity of demand (PED),
will change in where we noted the sign is
response to a change YED=%△Q/ always negative.

in consumers'
incomes.
%△Y Also, the abbreviation for
income in the calculations is Y.
2.5 INCOME ELASTICITY OF DEMAND (YED): DEFINITION,
FORMULA, CALCULATIONS, RANGE OF VALUES AND DIAGRAMS

 Normal goods and inferior goods

2.5 INCOME ELASTICITY OF DEMAND (YED): DEFINITION,
FORMULA, CALCULATIONS, RANGE OF VALUES AND DIAGRAMS

 Normal goods and inferior goods

 2.5 INCOME ELASTICITY OF DEMAND (YED): DEFINITION,
FORMULA, CALCULATIONS, RANGE OF VALUES AND DIAGRAMS

 Activity

Maria has received a 25 per cent raise in her monthly salary. Now that she has more income, she has decided to
increase her expenditure on clothes from USD 600 to USD 750 a month. She will also decrease her expenditure
on public transportation from USD 500 to USD 250, as she will take more taxis. Her expenditure on library
membership will remain the same.

a) Calculate her income elasticity of demand for clothes and explain what the value means.
b) Calculate her income elasticity of demand for public transportation and explain what the value means.
c) Calculate her income elasticity of demand for the library membership and explain what the value means.
2.5 INCOME ELASTICITY OF DEMAND (YED): DEFINITION,
FORMULA, CALCULATIONS, RANGE OF VALUES AND DIAGRAMS

 Normal goods and inferior goods

2.5 INCOME ELASTICITY OF DEMAND (YED): DEFINITION,
FORMULA, CALCULATIONS, RANGE OF VALUES AND DIAGRAMS
2.5 INCOME ELASTICITY OF DEMAND (YED): DEFINITION,
FORMULA, CALCULATIONS, RANGE OF VALUES AND DIAGRAMS
 2.5 INCOME ELASTICITY OF DEMAND (YED): DEFINITION,
FORMULA, CALCULATIONS, RANGE OF VALUES AND DIAGRAMS

Activity: 1. Clasify these goods

2. Explain their PED

3. Explain their YED
4. Analysis the meaning of YED=0
5. Find the meaning of “necessity goods”
2.5 IMPORTANCE OF INCOME ELASTICITY OF DEMAND (YED)
FOR FIRMS AND SECTORAL CHANGE IN THE ECONOMY (HL)
 2.5 IMPORTANCE OF INCOME ELASTICITY OF DEMAND (YED)
FOR FIRMS AND SECTORAL CHANGE IN THE ECONOMY (HL)

Economic sectors: sectoral change in

For Firms
• make predictions
• In an recession, incomes and
employment are decreasing. We would
expect an increase in the demand and
quantity demanded of inferior goods.
the economy
• As an economy grows over time, the
relative size of these sectors, as a
percentage of total output in the
economy, changes.
• demand for necessity goods is income
inelastic.
• demand for manufactured goods will
increase more rapidly (with higher
YED) than demand for agricultural
products (with lower YED)
DEBATE
In groups of three, asnwer the following question:
Is it a good idea to allow producers to raise prices on necessity goods during emergencies?
You could use these articles and others they find to support their arguments.

Ethic
Profit
s