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Microeconomics

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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Externalities

Externalities are a form of market failure. Externalities are defined as the spillover effects of the consumption or production of a good that is not reflected in the price of the good. For example, the production of steel results in pollution being released into the air, but the cost of the pollution to the environment is not reflected in the…
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Budget Constraint

When consumers’ income limits their consumption behaviors, this is known as a budget constraint. In other words, it’s all of the many combinations of goods/services that consumers are able to purchase in light of their particular income as well as the current prices of these particular goods/services. In the short term, budget constraints can be…
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