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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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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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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 demand 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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Economies of Scale

Economies of Scale is defined as a fall in the long run average costs because of an increased scale of production. This basically means the cost of production per unit reduces as you produce more units. Reducing the cost per unit of production is the most significant advantage of achieving economies of scale. For example, if we are producing a…
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Price Elasticity of Demand

Price Elasticity of Demand (PED) is defined as the responsiveness of quantity demanded to a change in price. It is also the slope of the demand curve. We calculate the slope as "rise over run." For example, if I increase the price of a phone from $300 to $500, then how much can I expect my demand to fall? This answer will depend on various…
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