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Microeconomics

Negative Externalities

Externalities are defined as those spillover effects of the consumption or production of a good that are not reflected in the price of the good. More specifically, negative externalities are the costs or harmful consequences experienced by a third party when an economic transaction takes place (i.e. when a good is either produced or consumed).…
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Positive Externalities

Whether positive or negative, externalities are the effects of a good’s consumption or production on third parties; these effects are not accounted for in the price of said good. Externalities are otherwise known as “spill-over effects.” Positive externalities are the benefits experienced by these third parties as a result of consumption or…
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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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Income Elasticity of Demand (YED)

Income Elasticity of Demand (YED) is defined as the responsiveness of demand when a consumer's income changes. It is defined as the ratio of the change in quantity demanded over the change in income. The higher the income elasticity, the more sensitive demand for a good is to changes in income. This means that a very high-income elasticity of…
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Cross Price Elasticity of Demand

Cross Price Elasticity of Demand (XED) is the responsiveness of demand for one good to the change in the price of another good. It is the ratio of the percentage change in quantity demanded of Good X to the change in the price of Good Y. For businesses, XED is an important strategic tool. The elasticity can help determine whether or not it is a…
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Determinants of Demand

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 the…
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