DHS Y5 H2 Economics_Content Clinic 1 - Price Mechanism (with answers)

1 H2 Economics – Content Clinic 1 (Price Mechanism) 1. Demand, Supply & Elas�ci�es a. Key Defini�ons: i. Demand is defined as the quan�ty of a good (or service) that a consumer is both willing and able to buy at each possible price during a given period of �me, ceteris paribus. ii. Supply is defined as the quan�ty of a good or service that a producer is both willing and able to sell at each possible price during a given period of �me, ceteris paribus. iii. Price elas�city of demand (PED) is a measure of the degree of responsiveness of the quan�ty demanded for a good to a change in the price of the good itself, ceteris paribus. iv. P rice elas�city of supply (PES) is a measure of the responsiveness of the quan�ty supplied of a good to changes in its price, ceteris paribus. v. Income elas�city of demand (YED) is a measure of the degree of responsiveness of the demand for a good to a change in the income, ceteris paribus. vi. Cross elas�city of demand (XED or CED) is a measure of the degree of responsiveness of the demand for one good to a change in the price of another good, ceteris paribus.

2 b. Key Concepts i. Demand & Supply Demand Quan�ty Demanded Graphical Representa�on Refers to the en�re demand curve Refers to a point on the demand curve Shi� vs Movement • A change in non-price factors will cause a shi� in the demand curve. • When demand ↑/↓ (shi�s right/le�), it means that qty dd has ↑/↓ at all prices. A change in the price of the good will cause a movement along the demand curve. Factors • Expecta�ons of future price change • Govt policies • Y - income • P - Price of related goods (subs�tutes/Complements), Popula�on size • T – Tastes and Preferences • Price of the good itself Supply Quan�ty Supplied Graphical Representa�on Refers to the en�re supply curve Refers to a point on the supply curve Shi� vs Movement • A change in non-price factors will cause a shi� in the supply curve. • When supply ↑/↓ (shi�s right/le�), it means that qty ss has ↑/↓ at all prices. A change in the price of the good will cause a movement along the supply curve. Factors • Number of sellers • Marginal cost of produc�on • Unpredicted Events/ Supply shocks • Qty of goods in joint supply or compe��ve supply • Expecta�ons of future price change • Govt policies • Price of the good itself Note: When explaining shifts in demand or supply, do the following: • Based on the event, identify and explain the non-price factor (include assumptions, if any) • State whether there is an ↑/↓ in demand/supply Example: Given the global economic recovery  economies are experiencing econ growth  ↑income by households  ↑purchasing power  assume the good is a normal good  ↑qty dd at all prices  ↑demand

3 Prac�ce 1: Iden�fy the impact on demand or supply, and the direc�on of change. Market Event Explain impact on demand and/or supply Cars There have been increasing occurrences of disrup�