ECONOMICS HOLIDAY PACKAGE 10.04.2023 SECTION A A good's price elasticity of demand is a measure of how sensitive the quantity demanded is to its price Consumers' loyalty refers to their tendency to consistently choose a particular brand or product over others in the market. A retailer that has a loyal customer base may be able to charge higher prices and maintain higher profit margins than a retailer that has less loyal customers. • loyalty cards enable retailers to find out about consumer wants and target promotions • retailers recognise the importance of price and can offer discounts through loyalty cards However, In contrast to that the article says: • price is not the most significant factor in determining choice • there is no loyalty if buying is based on habit or has low emotional D) The indifference curve theory of consumer behavior is based on the idea of rationality, which assumes that consumers make choices that maximize their utility, or satisfaction. According to this theory, consumers allocate their limited budget to purchase a combination of goods and services that provides them with the highest level of satisfaction or utility, subject to their budget constraint The theory of indifference curves represents the various combinations of goods and services that provide consumers with the same level of utility or satisfaction. An indifference curve is a graph that shows the different combinations of two goods that give the consumer the same level of utility. The slope of the indifference curve reflects the rate at which the consumer is willing to trade off one good for another while keeping utility constant. The concept of rationality is essential to the indifference curve theory, as it assumes that consumers make choices that are consistent with their preferences and budget constraint. This means that consumers will always choose the combination of goods and services that maximizes their utility, given the prices of the goods and their budget constraint. The idea of rationality is also used to explain how consumers respond to changes in prices and incomes. For example, when the price of a good increases, the consumer will shift their consumption towards other goods that provide the same level of utility but are now relatively cheaper. Similarly, an increase in income allows the consumer to purchase more of both goods, which leads to a shift in the budget constraint and changes the consumption bundle. Critics of the indifference curve theory argue that the assumption of rationality may not always hold true, as consumers may not always make choices that maximize their utility. For example, consumers may have limited information or cognitive biases that affect their decision-making, leading to choices that are not consistent with their preferences. In conclusion, the concept of rationality is central to the indifference curve theory of consumer behavior. It assumes that consumers make choices that maximize their utility, subject to their budget constraint, and explains how consumers respond to changes in prices and incomes. While the assumption of rationality has been subject to criticism, the theory remains a useful tool for understanding consumer behavior and making SECTION B positive externalities represent a classic example of market failure. They occur when the social benefit of a good or service exceeds its private benefit. In other words, a positive externality arises when a third party, who is not directly involved in the production or consumption of a good, benefits from it.. For example, education has positive externalities because a more educated population contributes to the overall prosperity of society. To illustrate how government intervention can correct market failure caused by positive externalities, consider the following diagram: In this diagram, the demand for labor (D) is downward sloping, reflecting the inverse relationship between the wage rate and the quantity of labor demanded by firms. The supply of labor (S) is upward sloping, reflecting the positive relationship between the wage rate and the quantity of labor supplied by workers. The intersection of the demand and supply curves determines the equilibrium wage rate (W) and employment level (Q). SECTION C 4.. Devaluation of a currency: The value of one currency is reduced against another A balance of payments deficit means the country imports more commodities, capital and services than it exports inflation is an increase in the general price level of goods and services in an economy.. In the short run, devaluing a country's currency can lead to a decrease in the price of its exports and an increase in the price of its imports. This can make exports cheaper and more competitive on the global market, while making imports more expensive and potentially reducing demand for foreign goods. This can help to address a current account deficit by increasing exports and reducing imports, as the country becomes more competitive in the global market. However, the long-term consequences of devaluation may not be as favorable. A devalued currency can lead to higher inflation because imports become more expensive, which can increase the cost of production and lead to higher prices for consumers. This can lead to a wage-price spiral, where workers demand higher wages to keep up with rising prices, which in turn can lead to even higher prices as firms pass on their increased labor costs to consumers. Moreover, if the devaluation is not accompanied by other policy measures to address the underlying causes of the balance of payments deficit, such as reducing domestic consumption or increasing domestic savings, then the short-term benefits of devaluation may be short-lived. The country may continue to experience a balance of payments deficit, which can lead to further currency devaluation and inflation. Therefore, while devaluation can be an effective short-term solution to a persistent balance of payments deficit on a country's current account in goods and services, it is important to consider the long-term consequences of such a policy. To avoid the risk of high inflation, a country should implement complementary policies to address the underlying causes of the deficit and promote sustainable economic growth. THANK YOU!
