Price Elasticity of Supply

Price Elasticity of Supply is defined as the responsiveness of quantity supplied when the price of the good changes. It is the ratio of the percentage change in quantity supplied to the percentage change in price. The Price Elasticity of Supply is always positive because the Law of Supply says that quantity supplied increases with an increase in…
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Price Floor

A Price Floor or a minimum price is defined as an intervention to raise market prices if the government feels the price is too low. In this case, since the new price is higher, the producers benefit. For a price floor to be effective, the minimum price has to be higher than the equilibrium price. For example, many governments intervene by…
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Reference Dependent Preferences

Reference dependent preferences are those that depend on comparisons to reference points (often the current state (the status quo), past states, expectations about future states, or social comparisons). There are many examples of reference-dependent behaviors and biases, but one simple example involves just a $100 bill. If someone is told that…
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Free Rider Problem

The Free Rider Problem occurs when there is a good (likely to be a public good) that everyone enjoys the benefits of without having to pay for the good. The free rider problem leads to under-provision of a good or service and thus causes a market failure. The problem occurs because of the failure of individuals to reveal their real or true…
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Determinants of Demand

17 The determinants of demand are factors that cause fluctuations in the economic demand for a product or a service. A shift in the demand curve occurs when the curve moves from D to D₁, which can lead to a change in the quantity demanded and the price. There are six determinants of demand. These six factors are not the same as a movement along…
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Deflation

Deflation is defined as the decrease in the average price level of goods and services. It means a general decrease in consumer prices and assets, but the increase in the value of money. If the inflation rate is negative, i.e. below 0%, then the economy is experiencing deflation. Deflation usually occurs during a deep recession, when there is a…
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