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Contents
Introduction
1.
The
Section
-
of
3.
Market
and
2
supply
equilibrium,
market
4.
Elasticities
5.
Indirect
6.
Costs,
18
the
price
mechanism,
efficiency
35
46
ta xes,
subsidies
revenues
Per fect
economics
Microeconomics
Demand
and
and
and
price
controls
profits
Monopoly
9.
Monopolistic
63
77
competition
8.
102
112
competition
121
10.
Oligopoly
126
11.
Price
133
12.
Market
Section
discrimination
failure
2
-
139
Macroeconomics
13.
The
14.
Agg regate
demand
170
15.
Agg regate
supply
182
16.
Macroeconomic
17
.
level
Low
of
A
19.
Economic
20.
Equity
low
and
in
3
–
do
22.
Free
trade
23.
Exchange
24.
Balance
25.
Economic
26.
Terms
Section
activity
155
192
inflation
221
244
distribution
and
of
income
250
Economics
trade?
259
protectionism
267
rates
of
–
203
of
g row th
countries
of
4
rate
International
Why
282
payments
294
integ ration
309
trade
317
Development
Economic
Economics
development
28.
Measuring
29.
Domestic
30.
International
31.
Foreign
32.
Aid,
debt,
33.
The
balance
34.
Assessment
Index
economic
equilibrium
stable
the
21.
27
.
overall
unemployment
18.
Section
vi
1
2.
7
.
1
foundations
330
development
factors
and
trade
direct
and
economic
and
economic
between
development
economic
investment
advice
343
and
development
economic
development
development
markets
and
intervention
356
367
378
385
401
405
420
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the
words
diagram.
issue,
and
creative—even
don’t
headline
have
and
to
do
perhaps
it
a
few

1
ou
Y
H ea d l i n e :
foundations
of
economics
t
alis
journ
the
be
The
Hurricane
Economics
O l e s ya
c o n c e pt :
d eva stat e s
P r o d u ct i o n
local
economy
p o s s i b i l it i e s
curve

fa ct o r s
of
p r o d u ct i o n
D ia g ra m :
Here
is
an
P PC
curve
example
Hurricane
IN
NOVEMBER
powerful
through
the
devastating
The
this
A
is
a
curve
the
the
some
because
that
shows
can
in
a
of
be
goods
period,
used
and
shows
of
of
the
being
technology
diagram
the
is
the
province’s
production,
possibility
PPC
1
have
.
Kahlua
of
In
destroyed
factors
thereby
some
of
able
agricultural
done
the
those
Before
had
the
that
it
been
is
anywhere
producing
of
its
factor
as
capital.
P PC
no
force
2
is
of
shifting
PPC
2
.
the
In
curve
this
production
of
case,
called
oranges
means
produce
lost
some
known
that
Kahlua
fewer
goods.
many
lives
to
of
this
factories
has
people
fortunately
keen
this
none
and
to
get
local
were
there
the
was
labour
things
going.
entrepreneurs
goods
business
output
be
production
This
According
potential
to
much
could
damage
will
Kahlua
of
as
it
Sadly,
Kahlua
currently
loss
as
the
Damage
that
displaced,
the
unlikely
there
Although
P PC
of
fields.
manufactured
and
the
produce
output
famous
means
can
to
because
to
means
reducing
for
before
producing
reality,
actually
longer
before
hurricane
fixed.
PPC
Kahlua
hurricane.
hurricane,
to
are
are
use.
Manufactured
on
that
curve
produced
given
are
efficiently
province
after
there
resources
economy
summer.
resources
and
state
The
in
The
of
applied
possibilities
that
economy
the
fully
be
curve,
larutlucir gA
an
can
not
farms.
production
combinations
services
all
the
curve
Kahlua,
and
the
always
tuptuo
if
the
of
swept
local
situation.
maximum
and
of
production
(PPC)
by
province
devastates
on
year,
Olesya
factories
concept
possibilities
to
last
hurricane
Olesya
Kahlua
inwards
the
and
to
factor
land
is
this
time
(260
will
be
next
back
to
normal
by
year!
words)
of
no
17





2





Demand
By
the
end
of
this
chapter,
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and
you
should

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define
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be
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demand
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movement
supply
supply
of
Supply
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verbally
of
shift
and
using
diag rammatic
analysis
supply
of
a
supply
curve
and
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movement
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curve
HL
explain
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use
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HL
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and
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and
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verbally
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and
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linear
supply
demand
supply
function
function
and
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to
analyse
changes
in
demand
function
and
graph
to
analyze
changes
in
supply.
Markets
In
economic
together
to
physical
there
as
places
are
or
ways
markets,
money
where
markets,
such
bought
foreign
and
At
the
and
sold.
of
or
and
services
where
can
are
are
market,
are
and
are
exchanged
sold
also
and
the
financial
shares
in
concepts
of
money,
made,
of
sold,
but
such
credit
and
of
such
as
are
bought
demand
factor
production
currencies
are
be
product
factors
companies
the
for
use
markets,
international
are
the
come
may
be
between
where
theory
may
with
bought
where
sellers
Markets
transactions
distinguish
services
There
buyers
transaction.
products
We
labour
market
where
economic
market,
markets,
core
goods
where
the
is
economic
that
goods
as
exchange
stock
market
an
transfers.
markets,
are
a
out
where
other
on-line
cards
theory
carry
the
traded,
and
and
sold.
supply.
Demand
Demand
willing
For
of
The
the
a
each,
drinks
at
they
for
must
financial
to
a
an
price
of
of
phrase
be
means
good
at
people
$1.20
here
to
able
to
a
afternoon.
consumers
also
of
purchase
group
in
important
enough
quantity
able
example,
$1.20
soft
is
and
buy
is
be
to
a
or
may
buy
be
to
it,
product,
in
soft
say
that
units
and
the
consumers
given
they
their
at
a
are
period.
price
demand
for
anafternoon.
a
to
It
good
must
ability
time
drinks,
ability”.
purchase
i.e.
a
150
150
“willingness
willing
that
price
would
would
purchase
the
service
given
We
is
or
have
buy.
not
service,
the
This
is
known
18
as
effective
demand
and
it
is
this

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to:
parrot
that
is
shown
on
a
demand
curve.
the
demand”
an
terms
and
economist.’
Thomas
the

supply
‘Teach
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Carlyle
you’ve
2
Law
of
simply
demanded
is
of
normally
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there
only
in
are
this
demand
The
Law
of
schedule
the
Table
of
2.1
a
may
($)
This
that
be
il l ustr ate d
The
s oft
d ri nks
Quantit y
at
demanded
a
of
0.80
225
0.40
400
of
soft
a
curve
be
s om et h i n g,
c o n st a n t .
Th u s ,
of
e ith e r
Tabl e
sp or t s
a
d em a nd
2. 1
il lu s t ra t e s
eve n t .
drink s
(cans )
drinks
demanded
is
increases
known
shown
that
h e ld
tha t
wh e n
in
shows
as
a
graphical
the
as
the
demand
form,
relationship
price
falls.
schedule.
using
a
The
The
demand
between
the
price
fo
a
product,
demanded
which
of
the
horizontal
axis.
As
see
is
placed
same
This
is
on
product
shown
the
vertical
over
in
time,
Figure
axis,
and
which
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the
quantity
placed
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ecirP
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demand
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oth e r
100
A
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the
ceteris
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any
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for
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2.00
showing
curve.
be
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fa ct o rs
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but
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same
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drink s
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of
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dema nd
quantity
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d i ffe re nt
a ll
of
us ua l ly
mo re
b ei ng
a nd
Dema nd
or
sof t
of
assume d
effective
Price
The
price
are
pr ice
wi ll
e ve n
t hi ng s
chang i ng
case,
the
d o w nw ar ds ”.
numbe r
is
“a s
p r o d uct
other
a
one
tha t
expr e s s e d
slopes
“all
supply
Demand
states
sometimes
and
1
This
Demand
s cim on o c e or ci M
The

1.50
1.00
2.1.
0.50
D
to
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them
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lines,
diagram,
for
ease
although
demand
of
curves
analysis,
they
still
are
normally
economists
call
them
usually
curves!
We
draw
will
0
price
saw
of
in
the
the
example,
product
demanded
of
curve.
phrase
since
the
The
it
of
1
the
price
itself
soft
Income
effect:
an
of
Substitution
a
from
demand
When
be
of
will
to
When
price
buy
the
to
from
of
“real
buy.
change
change
in
in
the
quantity
the
existing
demanded”
the
In
$0.80
150
a
along
from
demand.
two
price
a
Demand,
quantity
$1.20
for
their
likely
effect:
is
the
in
in
drinks
to
of
movement
the
change
soft
incomes
will
in
Law
lead
determinants
drinks
increase
their
people
in
the
i.e.
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a
in
will
product,
demanded
have
2
other
of
increase
that
the
differentiates
quantity
The
200
of
300
soft
400
drinks
(units)
same.
we
any
100
Quantity
do
F igure
As
(Demand)
convex
effect
Figure
leads
cans
to
to
is
demand
curve
for
soft
drinks
demand
a
change
in
2.1,
a
change
in
225
A
important,
of
an
2.1
the
increase
in
the
cans.
reasons:
a
product
income”,
With
more
price
this
of
of
increase
the
a
falls,
which
then
people
reflects
in
real
the
will
amount
income,
the
product.
product
falls,
then
the
19
product
will
be
relatively
more
attractive
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people
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other
2

Demand
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identify
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demand
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demand
change
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in
of
to
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and
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are
and
product,
so
it
is
likely
substituting
it
purchased.
demand
demand
and
the
of
determinants,
the
it
is
one
If
we
do
almost
of
outlined
right
the
or
lead
either
assumption.
complicated
effect
of
determine
curve
paribus
unchanged,
more
previously
Thedeterminants
1
the
of
ceteris
becomes
stayed
determinants
the
the
have
purchase
were
number
shift
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prices
will
not,
the
to
left.
we
then
impossible
the
to
determinants.
below.
Income
There
are
two
for
product.
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to
a
consider
change
are
in
normal
when
we
income
and
are
affects
inferior
the
goods.
rise.
goods,
Such
demand
as
income
goods
curve
are
for
a
rises,
known
normal
the
as
demand
normal
good
will
for
the
goods.
shift
to
product
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the
will
income
right.
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rises,
The
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of
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demand
will
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the
good
itself.
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D
increase
0
in
income
may
cause
a
small
shift
to
the
right
in
the
demand
curve
Quantity
for
salt,
but
a
larger
increase
in
the
demand
for
cinema
tickets.
F igure
The
demand
case,
to
an
the
curve
increase
right,
so
for
in
air
travel
income
more
air
is
shifts
travel
is
shown
the
in
Figure
demand
demanded
2.2.
In
curve
for
every
price.
at
2.2
The
air
goods
product
is
travel
for
chicken
considered
to
be
inferior,
then
demand
for
the
product
ecirP
a
air
)$(
If
for
travel
D emand
Inferior
demand
this
p
will
fall
as
income
substitutes
may
be
in
rises
place
cheap
of
wine
and
the
or
the
consumer
inferior
“own
good.
brand”
starts
to
Examples
supermarket
buy
of
higher
inferior
priced
p
goods
detergents.
As
D
income
left.
rises,
When
the
demand
income
gets
to
curve
a
for
certain
the
inferior
level,
the
good
will
consumer
shift
will
to
the
be
q
0
buying
only
the
higher
priced
goods
and
the
demand
for
the
q
inferior
Quantity
good
will
become
zero.
Thus
the
demand
curve
will
D emand
2
The
price
are
three
possible
substitutes
for
beef
products
for
relationships
each
other,
between
products.
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(kg)
disappear.
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price
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of
substitutes
the
for
products
each
will
other,
lead
to
then
a
a
change
change
in
the
in
D
the
0
for
the
other
product.
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example,
if
there
is
a
fall
in
the
q
q
price
Quantity
ofchicken
in
an
economy,
quantity
demanded
which
a
of
then
chicken
there
and
a
will
fall
be
in
an
the
increase
demand
in
substitute.
for
(kg)
the
beef,
F igure
2. 3
20
is
D
demand
and
beef
The
demand
for
chicken
of
air
miles
2
shown
A
fall
the
in
in
a
of
buying
the
a
the
left
the
D
to
in
is
D
a
way,
a
along
of
the
1
.
whose
that
prices,
Even
fall
in
from
the
demand
demand
in
some
and
and
curve
curve
in
prices
of
q
to
the
will
price
from
q
to
price
demand
not
q
to
1
.
for
for
beef.
This
of
a
increase
change
will
a
is
beef
in
the
from
the
will
has
in
in
switch
fall
curve
of
q
an
This
be
demand
demanded
the
have
leads
1
there
the
quantity
p
consumers
the
demand
(shift
to
from
though
increase
the
p
chicken
chicken
all
an
fall
of
means
demand
substitutes
left
chicken
at
to
there
same
increase
of
buying
beef,
from
lead
the
demanded
to
for
movement
to
substitute
changed,
will
a
supply
2.3.
price
beef
demand
to
shift
Figure
quantity
price
In
lead
and
and
1
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Demand
shift
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changed.
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a
then
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in
products
ink
change
the
that
cartridges.
in
the
demand
are
If
price
for
the
often
purchased
products
of
one
other
are
of
together,
complements
the
products
product.
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such
to
will
each
lead
example,
to
if
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for
DVD
players
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and
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there
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and
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fall
in
the
be
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of
increase
increase
in
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in
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the
demand
players
quantity
for
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an
economy,
demanded
DVDs,
which
of
are
then
DVD
a
p
players
complement.
D
This
would
players
lead
and
a
to
shift
a
movement
to
the
right
along
of
the
the
demand
demand
curve
curve
for
for
DVD
DVDs.
0
This
Quantity
is
shown
As
we
an
see,
increase
change
consumers
DVD
the
not
In
to
the
a
similar
product
product
price
from
there
is
fashion,
will
lead
and
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to
fall
of
buy
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price
at
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a
in
all
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1
.
in
players
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the
demand
in
in
means
go
the
of
that
be
price
of
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1
leads
to
q
1
increase
curve
q
of
to
.
q
demand
of
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for
the
complements
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prices
have
not
will
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If
0
have
example,
are
no
an
effectupon
are
3
q
q
Quantity
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curve
to
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2.4
The
demand
for
DVD
players
changed.
DVDs
goods
products
will
D
1
and
Unrelated
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p
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left)
for
in
complementary
demanded
the
p
q
additional
price
from
to
some
an
demand
the
p
from
the
will
demand
quantity
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with
though
the
from
players
there
and
Even
increase
to
and
prices,
D
increase
fall
DVD
complement
buying
to
an
an
a
of
demanded
more
are
DVDs,
right
changed,
the
quantity
now
that
for
in
the
the
will
players
fall
in
in
demand
shift
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2.4.
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to
in
unrelated,
effect
upon
increase
the
in
demand
then
the
the
for
a
change
demand
price
of
pencils.
for
in
toilet
We
the
the
price
other
paper
say
will
that
of
one
product.
the
have
two
product
For
no
products
unrelated.
Tastes/Preferences
To
the
economist,
scope
of
study.
tastes
and
It
tastes
is
are
enough
usually
to
know
considered
that
to
be
marketing
outside
may
the
alter
21
that
firms
attempt
to
influence
tastes
so
that
they
can
2

Demand
the
being
The
demand
in
tastes
demanded
demand
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nature”
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5
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Assessment
Be
and
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workpoint
Demand
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Student
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of
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have
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curves
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2,000
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roller
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ways
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taxes
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effect,
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taxes
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to
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amount
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29
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eeffoc
both
a
“a
)$(
same
it
and
economic
look
Figure
the
until
very
as
disturbance”),
equilibrium
that
formulate
lying
spend
the
outside
rest”).
change
situations
Let
is
is
defined
“outside
state
new
be
any
disequilibrium
itis
equilibrium
may
that
known
Pe
the
will
stay
disturbance”
equilibrium.
D
The
equilibrium
move
the
away
original
in
from
this
it,
situation
without
position.
This
is
an
is
“self-righting”,
outside
best
i.e.
disturbance,
explained
through
it
if
you
will
try
to
return
0
Qe
Quantity
to
of
coffee
(kg)
diagrams.
F igure
3.1
The
market
for
coffee
35

3
In
Market
equilibrium,
Figure
or
lower
tried
to
demanded
2
than
.
We
will
will
s cim on o c e or ci M
demanded
process
fall
to
at
price
Q
and
1
P
and
until
1
.
the
lower
increase
continue
P
happen
1
.
In
of
the
efficiency
the
diagram
quantity
Q
1
to
prices.
2
.
producers
(a),
this
the
the
producers
More
is
they
supplied
so,
will
demanded
(a)
to
rises
supplied
surplus,
the
fall.
once
quantity
supply
being
this
do
try
producers
price,
eliminate
As
quantity
quantity
at
that
Q
order
their
the
In
if
However,
supply
price
to
will
price.
to
excess
the
need
will
will
the
have
demanded
producers
equilibrium
raise
now
what
market
ecirP
Q
the
see
and
S
E
P
fo
to
can
mechanism,
eeffoc
have
we
price
)$(
raise
3.2,
the
Pe
quantity
This
again
equals
D
the
quantity
supplied.
This
will
be
back
at
the
equilibrium
price
and
0
so
the
situation
is
self-righting
if
price
is
raised
for
no
external
Q
Qe
Q2
reason.
Quantity
of
coffee
(kg)
1
In
diagram
(b),
the
producers
have
tried
to
lower
the
price
to
P
2
.
(b)
However,
that
In
Q
the
producers
Q
3
order
4
.
supply
More
to
quantity
is
falls
being
eliminate
demanded
to
Q
3
.
We
demanded
this
shortage,
will
rise
now
than
to
have
Q
and
the
excess
supplied
producers
4
at
will
the
need
to
2
their
prices.
the
quantity
the
quantity
As
they
supplied
do
will
so,
the
increase.
quantity
This
demanded
process
will
will
fall
continue
and
ecirP
raise
S
fo
of
.
price,
eeffoc
demand
price
P
this
)$(
quantity
at
Pe
until
P2
will
be
back
demanded
at
the
once
again
equilibrium
equals
price
and
the
so,
quantity
once
supplied.
again,
the
This
situation
Excess
demand
D
is
self-righting.
0
Q3
Qe
Quantity
The
the
As
effect
of
changes
in
demand
and
supply
we
know,
the
change
in
the
Take
the
an
which
an
would
increase
normal
increase
holidays
be
will
in
of
in
the
to
to
a
any
or
for
for
either
of
The
and
paribus,
as
than
for
coffee
of
the
curves.
foreign
then
the
demand
shown
S
Pe1
Pe
in
3.3.
the
market
a
the
increases,
holidays
ceteris
be
other
consumers
income
right,
would
supply,
of
3.2
“outside
this
shift
income
When
demand
the
by
supply,
demand
lead
good.
shift
moved
and
ecirP
When
be
a
may
demand
determinants
of
is
of
(kg)
fo
for
Figure
product,
which
will
curve
the
example
holidays,
there
of
case
syadiloh
of
one
F igure
equilibrium
the
coffee
)$(
price
In
of
upon
equilibrium
disturbance”.
Q4
E
demand
curve
shifts
from
D
to
D
1
,
price
initially
remains
at
D
P
e
and
so
we
increases
to
find
Q
2
.
that
This
Q
continues
e
means
that
at
to
be
the
supplied,
old
but
equilibrium
demand
price,
there
is
Qe
0
Qe1
Quantit
now
a
situation
demand,
it
is
of
excess
necessary
demand.
for
price
to
In
order
rise
to
until
eliminate
the
this
again
reaches
P
e1
equals
,
the
equilibrium
Whenever
clearing,
36
new
if
price.
is
left
a
to
quantity
supplied.
equilibrium
quantity,
there
marketwill,
the
is
both
shift
act
of
price,
where
demanded
the
alone,
and
demand
adjust
Thus
quantity
to
or
a
price
Q
e1
,
will
the
supply
holida
s
da
demanded
rise
until
it
new
supplied.
new
Q2
of
excess
F igure
once
D
now
curve,
the
equilibrium,
market-
3. 3
The
market
for
foreign
holidays
s

3
Market
equilibrium,
the
price
DI D
a
thinker—illustrate
fully
labelled
and
diag rams,
illustrate
what
will
happen
to
price
what
has
and
quantity
in
each
of
the
situations
demand
“World
below,
and
a
surge
in
There
has
been
a
health
scare
relating
to
the
has
been
motorcycle
There
has
textile
4
price
an
increase
in
the
costs
of
production
in
the
display
been
an
improvement
in
production
technolog y
in
the
of
every
prices
in
training
the
spor tswear
industry
have
decided
to
raise
they
the
global
shoes.
of
the
price
now
as
good,
the
to
due
“signal”
to
to
profits
more
The
“price
of
a
a
good.
be
thing
producers
serves
producers
as
to
a
and
Chapter
2
related
related,
and
goods,
your
on
a
as
diag rams
the
Using
prices
your
functions
price
of
such
it
28.
Now
label
supply
for
one
your
explain
of
both
price,
mechanism.
the
supply
from
well
was
half
year
strong,
of
increased
the
same
year.
what
before
as
by
period
Manufacturers
prepared
to
the
to
and
will
to
buy
wish
in
this
to
an
the
then
for
the
It
is
in
price
this
of
gives
good.
a
a
Since
maximise
more
highest,
fans!
allocate
incentive
allocate
is
equilibrium.
re-allocated,
good,
football
to
we
their
produce
resources
since
this
is
where
of
the
the
good,
creating
good.
of
the
planning
it
it
is
the
agency
the
as
if
buyers
in
to
there
production
increase
incentive
Referring
is
the
is
an
around
the
that
for
specifically
in
price
the
ideas
of
invisible
to
Adam
hand
produce
in
the
economy.
skateboards
example
creative
and
traced
and
roller
changes
think
of
skates
in
your
described
the
own
markets
example
in
for
using
goods.
reason
of
about
the
3.2
of
be
different,
demand
in
Cup.
otherwise
helps
increase
producers
earlier,
by
The
seconds
World
TV
profit.
factors
example
diag rams
of
of
and
wish
central
more
more
the
for
demand
producers,
wanted
goods.
but
no
mentioned
page
give
the
is
markets
an
rational
more
there
to
is
producers
where
produce
the
fully
think
will
workpoint
on
two
Now
price
signal
we
to
two
Draw
to
there
demand
demand,
mechanism
allocated,
If
are
and
move
consumers
make
that
services
back
in
Therefore,
to
supply
price
are
price.
that
moving
Student
Refer
this
producers
produce
whom
economy
goods
in
goods
is
how
Resources
able
of
mechanism”,
see
higher
that
Smith,
that
flat-screen
mechanism
forces
increase
that
those
will
key
an
tells
the
to
producers
then
towards
the
changes
assume
they
how
resources.
response
can
seen
important
scarce
One
claimed
15
previous
eager
have
a
the
were
were
were
role
to
Although
industry.
the
known
(LCD)
2006.
retailer
run-up
135%
We
in
selling
once
industry.
Manufacturers
The
led
liquid-
chicken.
There
3
of
consumption
was
2
sales
then
British
of
already
fever”
happened.
televisions
1
was
Cup
the
crystal
explain
K N OW?
YOU
Although
explain
to
equilibrium
efficiency
3.1
strong,
Using
market
1
Be
workpoint
and
s cim on o c e or ci M
Student
mechanism,
a
the
and
demand
change
in
products
effect
that
diag rams
consumer
becoming
the
for
more
change
your
two
preferences
in
or
less
products.
for
your
“cool”
.
consumer
taste
Using
has
products.
and
explain
the
concepts
how
of
resources
the
are
signalling
allocated
and
incentive
according
to
the
37
3

Market
equilibrium,
mechanism,
and
market
efficiency
efficiency
and
Figure
producer
3.4
sei gniht
Consumer
Consider
price
)$(
Market
the
surplus
illustrating
the
market
for
thingies,
an
imaginary
fo
ecirP
product.
As
we
can
see,
equilibrium
s cim on o c e or ci M
week.
This
the
equilibrium
quantity
is
price
demanded
determined
by
the
of
and
thingies
supplied
forces
of
is
is
$10
ten
demand
and
S
15
10
the
thingies
and
20
per
supply.
5
At
the
D
equilibrium
point,
there
are
some
consumers
who
would
have
been
0
prepared
This
is
to
pay
clearly
a
higher
shown
by
price
the
for
their
demand
5
10
thingies.
curve.
For
15
Quantity
example,
at
a
price
20
of
thing ies
of
F igure
3.4
The
market
for
thing ies
1
$15,
there
there
would
not
have
This
to
pay
they
were
$15
that
have
or
all
to
thingies
three
$17,
of
a
thingies.
they
the
demanded
just
They
at
However,
have
consumers
gain.
and
to
pay
who
have
a
price
a
$17,
the
consumers
the
equilibrium
purchase
paid
of
price
the
first
below
the
one
pay.
concept
of
consumer
surplus.
This
is
defined
as
the
ecirP
the
for
made
prepared
illustrates
five
fo
thingies
This
demand
means
nine
be
sei gniht
price.
be
still
)$(
do
would
a
Consumer
20
S
surplus
15
b
10
c
extra
satisfaction
(or
utility)
gained
by
consumers
from
paying
a
price
5
that
is
lower
than
that
which
they
are
prepared
to
pay.
D
In
this
case,
one
consumer
was
willing
to
pay
as
much
as
$19
for
a
0
thingy,
but
as
he
only
has
to
pay
$10,
he
is
gaining.
The
5
10
15
total
Quantity
consumer
curve
and
surplus
It
is
should
of
surplus
above
also
This
$5,
is
does
have
equilibrium
the
them.
nine
She
prepared
to
be
the
five
sell
for
This
received
$3,
terms
a
Figure
lower
of
price
the
consumer
what
higher
some
example,
and
sell
will
at
her
have
she
a
F igure
a
price
the
a
at
of
concept
actual
of
earnings
producer
that
a
surplus.
producer
Consumer
surplus
in
the
thing ies
$3,
the
gain
have
one
of
on
each
accepted
she
was
This
makes
is
defined
from
a
as
ecirP
theexcess
the
for
of
accept.
illustrates
3.5
producer
thingies
made
price
fo
This
thing ies
production
at
the
would
than
of
demand
$10.
However,
can
she
point,
than
supplied
she
3.5,
the
market
For
thingies.
that
under
abc.
curve.
thingies
or
In
area
equilibrium
price
three
$5
in
a
supply
means
thingies
has
of
price.
triangle
the
at
the
sei gniht
for
first
to
by
supply
price.
at
place
by
)$(
of
still
a
shaded
that,
take
shown
be
shown
equilibrium
the
clear
would
would
not
by
would
clearly
there
there
be
usually
the
shown
thingies
is
20
given
a
Consumer
20
S
surplus
15
b
10
c
quantity
of
output,
over
and
above
the
amount
the
producer
Producer
would
surplus
5
be
prepared
to
accept
for
that
output.
D
In
this
case,
the
producer
was
willing
to
supply
a
thingy
for
as
little
as
0
$1,
but
as
she
receives
$10
for
each
thingy,
she
is
gaining.
The
5
10
15
total
Quantity
producer
price
is
surplus
and
above
shown
by
Allocative
When
a
the
allocative
usually
the
supply
shaded
shown
curve.
triangle
by
In
the
area
Figure
under
3.6,
the
the
is
in
effects,
producer
surplus
efficiency.
is
said
This
to
be
means
with
no
socially
that
the
external
efficient
resources
influences
or
in
are
a
and
state
most
efficient
way
from
society’s
point
of
view .
The
of
allocated
38
the
F igure
market
bcd.
equilibrium,
it
of
thing ies
equilibrium
efficiency
market
noexternal
is
20
concept
of
in
3.6
for
Producer
thing ies
surplus
in
the

3
efficiency
someone
that
is
maximum
is
you
viewed
output
quite
different
might
as
be
operating
with
a
from
familiar
given
the
with.
efficiently
level
of
everyday
In
if
s/he
input.
meaning
everyday
In
of
language
produces
economic
the
price
ecirP
“efficiency”
equilibrium,
mechanism,
and
market
efficiency
)$(
allocative
Market
a
S
=
Marg inal
social
cost
(M SC)
the
terms
this
Consumer
surplus
kind
of
efficiency
is
known
as
productive
efficiency.
We
will
address
Community
c
+
P
b
productive
efficiency
later
with
Higher
Level
Surplus
students.
Producer
surplus
3.7
which
shows
the
consumer
surplus
and
D
surplus
when
a
market
is
in
equilibrium.
The
sum
of
consumer
and
surplus
is
known
as
community
surplus;
this
is
the
to
society.
At
supply,
community
the
equilibrium,
surplus
is
where
maximised.
demand
This
is
the
is
equal
(marg inal
no
other
could
a
Perhaps
producers
since
We
greater
allocation
whole.
supply
would
curves
introduce
willcome
for
a
social
cost
curve.
social
cost
curve
to
the
or
the
To
point
is
are
to
This
of
optimum
using
If
we
then
take
the
are
schedule,
graph
and
is
equilibrium
This
has
is
best
the
Q
Q
S


marginal
of
the
another
shown
is
400
there
Community
surplus
that
society
as
and
demand
and
3.7
is
the
and
quantity
to
and
of
an
the
the
or
then
are
by
service
in
the
curve
is
a
of
the
marginal
the
brings
the
demand
analysis
we
refer
to
(MSB).
free
market
maximised,
society’s
point
where
of
so
it
view.
marginal
equilibrium
functions
function
schedule
price
and
the
for
and
a
the
on
a
equilibrium
product
supply
equilibrium
schedules
quantity
graph.
price
Using
and
supplied.
example.
supply
costs
industry
benefits
or,
we
supply
cost.
supply
and
the
represents
analysis,
supply,
which
determined
good
market
showing
and
is
a
this
surplus
supply
illustrate
the
benefit
from
demand
demanded
of
efficiency
social
and
here
industry’s
society,
efficiency
equal
the
through
2,000
In
of
that
to
resources
and
function
of
earlier,
curve
call
curve
social
equilibrium
way
quantity
to
function
derive
these
price
the
costs
Community
marginal
supplied,
demand
D
to
by
we
assume
benefits
illustrating
demand
able
view
learnt
supply
analysis
we
demand
calculate
demanded
the
and
to
diagram
prices
language
we
the
the
benefits.
demand
equal
linear
we
the
allocation
is
Calculating
if
the
social
as
As
demand
efficiency.
where
benefit
to
of
with
situation
therefore
lower
efficient
consumption
introduction
allocative
occurs
social
the
this
The
the
Again,
curve
that
then
efficiency
that
but
the
is
point
determined
assume
(MSC).
represents
chapters.
society
equivalent
conclude
the
In
the
prefer
prices,
on
This
(000s)
maximised.
largely
we
to
benefits,
demand
leads
costs
consumers.
market
curve
the
from
sophisticated
later
is
When
to
more
in
demand
quantity
allocatively
is
and
surplus.
would
higher
the
surplus
to
equal
utility,
is
some
and
resources
prefer
market
production.
price
supply
community
of
this
back
of
this
consumers
community
curve
Given
combination
give
optimal
a
efficiency.
utility)
to
F igure
allocative
(M SB)
Q
total
Quantity
benefit
= benefit
d
0
producer
social
producer
s cim on o c e or ci M
Figure
1
Marg inal
Consider
Let
us
function
assume
shown
that
a
product
below:
200P

400P
39

3
Market
Firstly,
equilibrium,
we
can
andsupply
Table
use
price
these
schedule,
mechanism,
functions
just
as
we
to
did
and
market
produce
in
efficiency
a
Chapter
demand
2.
This
is
schedule
shown
in
3.1.
Price
C alculation
($)
Q
s cim on o c e or ci M
0
Q
2
Q
1
3
Q
4
Q
5
Q
6
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3.1
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Q
1
T
able
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D
D
D
D
D
D
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0
2,000
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1,800
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400
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800
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and
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0
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that
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Figure
we
plot
have
the
produced
relevant
the
demand
demand
and
and
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supply
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schedules
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shown
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40
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S
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price
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equilibrium
equilibrium,
s cim on o c e or ci M
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Market
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price
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_____
P

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we
found
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have
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Q
Q
Q
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price
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us
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and
demand
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a
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equilibrium
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Q
Q
Q
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D
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start
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to
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6
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shift
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5
fewer
we
demand
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4
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the
units
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3
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is
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2
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unit
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D
be
or
function:
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the
at
units
eliminate
the
in
left,
the
supplied
600
can
shown
the
Figure
with
new
3.9.
600
original
but
and
plot
only
so,
excess
as
600
we
supply.
are
know,
41

3
Market
equilibrium,
the
price
mechanism,
and
market
efficiency
)$(
ecirP
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
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D
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2
1
1
0
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800
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2,000
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Excess
F igure
3.9
The
Price
will
supplied
As
of
once
before
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this
800
demand
until
equal.
units
new
units
curve
quantity
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are
equilibrium
equations.
D
S


1,400
400
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is
demanded
achieved
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at
demanded
and
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a
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could
also
relevant
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calculated
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and
using
supply
functions
Thus,

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
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fall
again
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equilibrium
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to
new
600
now:
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a

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are
of
continue
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equilibrium
price
addition
supply
equilibrium:

400P
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to
both
sides
we
get:
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adding
400
to
both
sides
we
get:
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both
sides
by
600,
the
equilibrium
price
is:
1 800
_____
P


$3
600
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we
found
the
by
have
supply
Q
Q
Q
D
D
D
the
equilibrium
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the
price
price
into
the
equilibrium
either
the
quantity
demand

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200P

1,400
(200

1,400
600
the
equilibrium
demanded
42
be
or
function:
or


3)
Q
Q
800
units
Q
S
S
S

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
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400

1,200
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can
function
and
price
supplied
is
is
$3
800
per
unit
units.
and
the
800

3)
units
equilibrium
quantity

3
wanted
to
simply
Q
Q
Q
D
D
D
calculate
put
the
the
price

1,400
200P

1,400
(200

1,400
800
excess
of
$4
supply
into
the
Q


4)
Q
600
at
the
above
units
Q
S
S
S
original
So
at
a
price
of
supply
Student
The

Q
D

S
1
Make
the
2
a
and
a
is
D
600
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900
table
3
Illustrate
4
Using
i.e.
and
Q
600
units.
is
S
and
market
efficiency
we

400

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400

1,600
1,200
1,200
units,
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
4)
units
there
is
an
3.3
functions
for
a
product
are
g iven
below:
100P
to
show
when
diag ram
represent
units
600,
mechanism,
200P
product
Draw
Q
1,200
workpoint
demand
Q
$4
of
price
functions:

excess
price
the
1
we
could
equilibrium,
s cim on o c e or ci M
If
Market
the
the
the
prices
to
show
demand
$0,
the
and
equilibrium
simultaneous
demand
are
schedule
$1,
$2,
demand
supply
price
and
equations,
$3,
and
$4,
curve
and
schedules
quantity
calculate
supply
and
supply
that
you
bought
the
schedule
for
$5.
curve
have
and
equilibrium
that
made.
sold.
price
and
quantity.
Now
let
us
Q
S
5
Make
assume

a
may
6
Add
300
new
function
not
the
that

table
when
take
place
supply
you
7
Illustrate
the
new
8
Using
the
and
9
the
supplied
Finally,
change
in
the
the
$0,
some
that
in
for
the
product
changes
to:
of
supply
of
$2,
schedule
$3,
these
represents
$4,
for
and
the
$5.
new
(Hint:
supply
supply
prices.)
the
new
schedule
to
the
2.
excess
equilibrium
and
function
$1,
equilibrium
have
identify
are
drew
concept
why
show
at
curve
that
supply
200P
to
prices
diag ram
explain
the
price
and
demand,
price
and
quantity
and
bought
referring
equilibrium
to
and
your
quantity
sold.
diag ram,
demanded
changed.
explain
original
two
supply
factors
that
might
have
caused
the
function.
43
3

Market
equilibrium,
the
price
mechanism,
and
market
efficiency
e
s cim on o c e or ci M
Copper
but
The
a
hot
price
tonne
of
for
breaks
metal
copper
the
first
passed
time
through
prices
$8,000
in
ahead
may
at
its
demand
20
$8,000
soon
present
was
per
likely
fall
barrier
cool
copper
part
because
stimulus
pace,
to
tonne
of
last
year’s
$586
programme,
billion
but
this
is
1
months
it
was
yesterday,
proof
recovery
setback
that
it
a
when
about
Exchange
tonne
in
2008,
a
day.
The
part
by
slipping
price
that
it
is
copper
prices
of
end
was
the
driven
economy
in
in
the
the
under
copper
their
building
last
for
of
be
$3,000
China
driving
a
up
the
already
beginning
finished.
Overall
investment
for
the
since
three
will
expo
October,
swamped
the
fall
in
companies,
for
more
copper
in
low
tonne.
demand
from
which
than
needs.
electricity
half
are
the
Huge
cable
government
is
also
fall.
at
market
recycled
also
Chinese
made
utility
responsible
country’s
quantities
were
laid
orders
buying
as
in
South-East
Asia
said
massive
investments
economy
44
that
even
continued
if
the
to
Chinese
storm
infrastructure.
projects
were
Many
this
are
10
of
the
rates
that
is
of
and
cent
those
prices
buildings
copper
of
every
demand
for
machines,
products
should
help
to
at
rise
miles
the
socket
is
end
a
washing
and
need
to
world.
And,
fridges
that
mean
spending
require
power
new
fall
high
growth
continue
wiring.
new
about
argue
not
that
the
and
other
copper,
keep
the
which
price
up.
for
Adapted
from
The
Times
in
of
brought
those
forward
David
as
April
7
,
2010,
Rober tson
a
copper.
consumer
in
by
talking
who
prices
Chinese
fall
cable
observe
strongest
of
to
will
Property
is
reduced.
the
less
economic
new
be
in
already
per
Chinese
the
to
that
expected
year
copper
Online,
yesterday
is
However,
that
Source:
Traders
spending
dramatically
closes
with
grid
producers
weeks’
stopped
significant
the
power
quarter
pavilions
have
copper
the
end
in
will
the
after
A
year’s
it
of
been
prices
doors
Indeed,
could
have
When
time,
expected
main
Expo
summer.
with
now
government
preparations
open
data
recovery
from
last
amounts
were
projects,
metal.
after
from
large
wiring,
demand
to
of
confidence
demand
been
use
construction
Moreover,
and
August
recently.
behind
prices
rise
a
yesterday,
back
the
employment
has
force
at
London
$8,009.75
since
renewed
published
But
hit
big
Shanghai
fall
the
trading
tonne
American
strong
on
level
before
$7,970
the
early
highest
which
keeping
prices
Metal
the
many
said
again.
Copper
so
copper
a
traders
to
that
global
suffered
copper
be
hopes
sustained
promptly
may
steeply
of
but
Leo
Lewis
and

3
Assessment
Whenever
a xes
and
advice :
you
copper/tonne
this
run
all
and
and
more
the
price
mechanism,
and
market
efficiency
response
diag rams,
you
accordingly,
“quantity
evaluation
effects
For
in
a xes
equilibrium,
may
of
be
should
e.g.
in
copper
best
use
(2),
also
by
looking
on
evaluation,
at
a xes
(thousands
achieved
advice
values
the
how
by
the
see
from
would
of
tonne)”.
considering
various
Chapter
the
be
text
In
the
Where
your
of
par t
shor t-
stakeholders
34.
on
“price
(4)
of
and
are
appropriate,
diag rams
should
(above
marks)
5
H ea d l i n e :
ot h e r s
Hints:
Demand
task
can
proper
a
basic
find
in
that
of
this
internal
your
go
get
up
achieve
the
reference
s ev e ra l
to
top
the
marking
level
text.
local
b usinesses,
b ut
demand
to
as
actual
ar ticle
and
You
diag rams.
Also
a
oil
of
d ia g ra m s
and
think
and
of
two
supply,
at
a
a
this
are
as
now
you
and
good
a
m a r k et s
t hat
suffer.
able
it
or
don’t
really
supply
of
star t
not
piece.
service.
number
to
would
sophisticated
demand
to
two
would
However,
stage,
par ticular
l ea s t
( IA )
you
sufficiently
using
at
t hat
assessment
references
and
item
to
that
note
of
a
preparing
be
advisable
have
enough
Nonetheless,
analysis
In
this
markets
specifically
good
be
the
is,
is
to
explain
chapter,
such
from
news
want
a
are
as
for
LCD
any
identify
explain
and
research.
currently
Make
sure
source.
chang ing,
and
any
why
neatly-labelled
paribus
items
to
possibility.
media
to
and
with
ceteris
is
have
chang ing
a
finds
might
as
also
market
you
answer
the
you
possibilities,
comes
why
your
that
“demand”
That
might
suppor t
are
and
explain
that
name
rubber
analysis.
remember
eng ine
the
“supply”
will
supply
should
search
plus
news
economic
chang ing.
demand
commentaries.
write
been
Entering
an
into
IA
price
“price”
such
items.
to
in
and
commentary
the
words
appropriate
turn
to
direct
copper.
ar ticle,
the
you
order
h ea t
w ea t h e r
commentary
have
and
an
popular
of
there
Commodities
An
writing
h ot
demand
knowledge
do
televisions
type
In
make
supply
c o m m u n ity
from
basic
movement
example,
To
of
a
conceptual
the
(4).
to
C ha n g e s
and
a
advice :
covered
attempt
you
up
b e n e f it
Assessment
to
in
t e m p e rat u r e s
c o n c e pt :
Make
would
the
used
necessary
Warm
D ia g ra m :
for
be
is
suffer
Economics
Having
it
t
alis
journ
the
be
ou
Y
also
s cim on o c e or ci M
1
affected.
the
($)”
question,
long-
can,
label
data
Market
you
have
to
determinants
they
and
assumption
are
accurate
where
appropriate.
It
is
so

difficult
to
evaluate
a
g reat
deal
at
this
stage,
but
you
could
attempt
to
do
by:
explaining
how
different
stakeholders
might
be
affected
by
possible
price
changes

explaining

looking
You
will
at
find
the
most
how
more
the
important
market
information
reasons
might
about
for
change
any
in
internal
changes
the
long
in
the
market
run.
assessment
in
Chapter
34.
45





4














Elasticities
By
the
end
of
this
s cim on o c e or ci M
the
chapter,
explain

define
elasticity

define
and

illustrate
different
demand
curves
1

concept
explain

define

explain

define

explain

define
elasticity

define
and

illustrate

explain

understand
the
the
and
low
Elasticity
price
values
of
cross
range
of
to:
of
of
values
of
values
demand
of
using
demand
demand
for
elasticity
of
demand
elasticity
elasticity
range
cross
of
for
elasticity
of
demand
demand
income
elasticity
of
demand
supply
price
values
elasticity
of
determinants
some
able
elasticity
price
income
calculate
different
price
of
possible
possible
the
elasticity
calculate
of
be
demand
calculate
the
should
elasticity
determinants
and
price
of
supply
elasticity
price
implications
of
of
of
elasticity
supply
of
elasticity
using
supply
curves
supply
information
for
businesses
governments
explain

of
calculate

and
of
you
a
problem
price
is
something
a
for
elasticities
measure
changes
thatdetermines
it.
of
demand
of
primary
and
there
now
is
look
a
at
commodities
due
to
the
supply.
responsiveness.
when
We
producers
of
It
measures
change
in
elasticity
one
in
of
how
the
terms
of
much
factors
demand
andsupply.
Elasticity
Elasticity
of
aproduct
that
to
of
demand
demand
changes
determine
is
a
when
demand.
measure
there
is
There
of
a
are
how
much
change
three
in
the
one
demand
of
elasticities
the
of
for
factors
demand
consider:
1
price
elasticity
of
demand
[PED]
2
cross
elasticity
of
demand
[XED]
3
income
Price
elasticity
Formula
Price
and
of
product.
of
of
demand
demand
[YED].
[P ED]
definition
elasticity
demanded
the
elasticity
of
a
It
demand
product
is
usually
Percentage
is
a
measure
changes
when
calculated
change
in
by
of
how
there
using
quantity
is
much
a
the
the
change
quantity
in
following
demanded
of
the
price
equation:
the
product
___________________________________________________
46
PED

Percentage
change
in
price
of
the
product
of







4
an
example.
price
number
of
of
one
200,000
price
elasticity
The
publishing
their
magazines
from
1
A
of
price
change
to
has
of
that
230,000.
of
demand
fallen
10%.
firm
monthly
by
This
are
bought
With
for
this
the
50¢
is
discovers
magazines
by
that
from
customers
information,
magazine
from
an
calculated
when
$5
in
the
they
each
we
lower
$4.50,
the
month
can
rises
calculate
the
question:
original
by
to
price
of
$5,
which
is
a
1
the
Elasticities
equation
s cim on o c e or ci M
Take

50
_____

100

10%.
100
The
2
quantity
demand
by
the
of
demanded
200
000,
has
which
increased
is
a
by
change
30
of
000
15%.
from
This
an
is
original
calculated
equation
30
000
________

200
3
If
we
100

15%.
000
put
the
two
values
above
into
the
equation
for
PED,
we
get
15%
_______
PED

,
which
gives
a
value
of
1.5.
10%
The
4
negative
between
simplify
that
range
The
possible
range
to
values
price
values
infinity.
lie
in
an
and
case,
ignore
simply
the
inverse
the
give
PED
relationship
However,
for
in
order
negative
the
the
to
value
answer
as
a
monthly
1.5.
of
of
this
is
elasticity
for
The
price
two
of
demand
elasticity
extreme
of
demand
values
are
usually
theoretical
and
between.
D
tcudorp
real
be
in
there
demanded.
usually
equation
Thus,
values
zero
that
quantity
economists
the
would
of
indicates
the
)$(
The
the
from
figure.
magazine
from
and
matters,
comes
positive
goes
value
price
fo
P2
PED
have
is
equal
no
change
effect
in
to
zero,
on
the
quantity
then
a
change
quantity
demanded
in
the
demanded
would
at
price
all.
therefore
of
The
be
a
product
will
percentage
zero
and
so
ecirP
If
would
P
the
value
anything
on
is
the
top
zero,
no
of
the
matter
PED
equation.
what
the
Since
zero
percentage
divided
change
in
by
price,
the
Q
0
PED
value
will
be
zero.
A
demand
curve
with
a
PED
value
of
zero
is
Quantity
shown
in
Figure
inelastic—it
is
4.1
and,
completely
in
this
case,
demand
unresponsive
to
is
price
said
to
be
A
is
PED
P
1
,
P
2
value
,
or
of
infinity
elastic.
P
changes.
1
,
infinity,
value
shown
in
At
even
by
is
best
Figure
the
quantity
Whether
will
be
4.1
A
per fectly
inelastic
demand
Q.
price
explained
4.2.
P
1
demanded
the
smallest
,
In
this
the
is
by
using
case,
demand
infinite.
amount,
a
diagram
demand
curve
if
will
and
said
goes
However,
demand
is
on
price
fall
to
to
for
is
the
be
ever
raised
zero,
an
P
change.
equation
demanded
would
no
will
Because
be
matter
be
of
infinity.
what
this,
the
Since
the
value
infinity
percentage
on
the
divided
change
top
by
in
of
the
PED
anything
price,
the
D
ecirP
infinite
quantity
fo
above
the
tcudorp
perfectly
the
price,
)$(
is
so
other
product
curve
situation
and
any
of
perfectly
F igure
price
demanded
is
PED
infinity.
0
As
stated
before,
it
must
be
remembered
that
the
extreme
values
Quantity
of
PED
would
are
simply
possess
a
theoretical
PED
value
and
of
there
zero
or
are
no
infinity.
single
products
Normal
demanded
of
product
that
products
F igure
4.2
A
per fectly
elastic
demand
47
have
values
of
PED
between
the
two
and
we
will
now
look
at
curve
4

Elasticities
those
values.
three
categories.
1
Inelastic
zero.
the
If
The
demand:
a
will
to
the
will
price
$1.20,
12
price
is
causing
out
the
a
firm
to
by
if
This
10
of
in
price
be
of
quantity
cartons.
the
a
split
and
is
and
units
an
yoghurt
the
quantity
a
price
of
quantity
quantity
the

than
total
the
price
of
example.
is
demanded
Thus
the
the
so
sold
by
in
in
raised,
into
greater
change
change
shown
strawberry
the
one
comparison,
may
800
fall
then
number
that
using
than
smaller
the
in
(the
finds
10%
PED
that
carton
cartons
demand,
much
increase.
a
less
normally
raised
per
20%
from
week
increase
demanded.
We
falls
in
can
ecirP
work
000
by
is
fo
from
means
firm
is
proportionally
the
of
the
PED
PED
inelastic
a
fall
by
of
of
snot rac
1
$1
value
This
not
gained
product)
When
it.
to
values
)$(
s cim on o c e or ci M
of
demanded
of
has
leads
demanded
revenue
The
product
product
the
range
equation:
1.20
%

in
Quantity
Demanded
10%
__________________________
PED
we
the
can
The
is
the
the
firm
has
Figure

in
PED
by
total
the
0.5,
revenue
0.5
1.00
20%
less
Before
firm
increased

Price
is
inelastic.
gained
increase,
in
see,
yoghurt
revenue
a

%
As
_____

than
the
was
12
000
becomes
revenue
by
one,
price
10
so
the
increase,

$1
800
raising


the
demand
the
$12
000.
$1.20
price.
for
D

After
$12
This
is
the
960.
a
is
getting
After
the
quantity
boxa”,
Since
than
“revenue
if
a
increase
Student
A
a
the
In
box
firm
its
Quantity
that
the
a”
c”
(10
loses
800


box
cartons,
are
0.20
$1
the


why
when
price
b”

“revenue
cartons
800
inelastic
it
workpoint
weekly
10
show
revenue,
before
“revenue
firm
(1,200
clearly
but
from
600
candles
quantity
demand
should
for
raise
demand
the
c”,
sold
the
is
Calculate
quantity
the
48
for
car tons
strawberry
for
box
c”.
because
$1.20
clearly
firm’s
each.
larger
total
its
the
product
price
of
and
the
week
candles
from
$4
demanded
to
wishes
to
product.
and
explain
lowers
to
of
the
$3.60
the
price
and
of
3
finds
candles
Calculate
will
the
change
experience
in
total
following
revenue
the
fall
in
that
the
firm
price.
goes
Draw
a
“revenue
box”
diag ram
to
illustrate
the
630.
percentage
changes
in
price
and
on
following
quantity
the
demanded
price
change
and
for
the
total
revenue
scented
candle.
demanded.
Calculate
scented
demand
“revenue
at
5
2
The
firm
effect
1
4. 3
yoghur t
4.1
illustrate,
decorative
per
price
“revenue
box
$2,160)
$1,200),
the
gains
now
a
rise,
4
up
of
$960.
has
scented
to
total
case,
to
the
falls
revenue,
producing
of
in
this
equal
thinker—calculate,
one
diagram
remaining
box
by
firm
total
the
increase,
demanded
rises
in
increase
revenue
price
“revenue
Thus,
an
inelastic.
because
revenue
Be
boxes”
causes
product
was
12
4.3.
“revenue
increase
10.8
0
shown
F igure
The
c
b
total
the
price
candles.
elasticity
of
demand
for
the
Was
the
scented
firm
sensible
candles?
to
Explain
lower
your
the
price
answer.
of
the
(000s)
4
demand:
infinity
of
the
If
a
The
value
product
product
has
leads
to
a
quantity
demanded
of
quantity
demanded
will
revenue
of
to
10%
price
180
fall
of
that
the
hot
dogs.
fall.
dog
quantity
hot
in
a
firm
a
5%
if
price
number
raised
be
is
$2
week
increase
We
of
in
to
is
work
the
the

hot
200
the
the
dog
hot
causing
out
the
example.
a
from
price
in
so
sold
$2.10,
price
can
and
an
than
the
raised,
by
falls
less
in
change
units
shown
from
per
demanded.
and
comparison,
may
demanded
Thus
quantity
is
in
(the
This
one
change
ecirP
dogs
the
finds
will
that
more
a
proportionate
means
by
the
than
than
then
fo
seller
product)
This
fall
greater
toh
When
the
greater
it.
by
is
demand,
sgod
price
gained
PED
)$(
total
of
elastic
1
Elastic
Elasticities
s cim on o c e or ci M
2

a
2.10
PED
a
by
using
the
equation:
%

in
2.00
Quantity
Demanded
10%
__________________________
PED
we
can
hot
dog
the
hot
total
is
see,
the
elastic.
dog
in
PED
was
2,
greater
the
200
becomes

price

180
$2

2
D
5%
Price
is
Before
seller
revenue

than
rise,

$400.
$2.10

1,
the
so
the
total
After
$378.
demand
revenue
the
The
for
increase,
seller
the
gained
has
by
fall
The
in
revenue
“revenue
increase
a
seller
is
was
After
box
c”,
because
total
box
each.
smaller
if
a
increase
firm
A
a
pizza,
the
has
elastic
the
price
Margherita,
weekly
it
workpoint
the
quantity
clearly
the
show
a”
when
price
“revenue
hot
dog
falls
remaining
(20
shown
(180

$2
to


box
180
$0.10
the
b”


60
per
week
from
demand
should
hot
Calculate
quantity
the
3
Unit
has
dogs
for
hot
gains
sold
is
at
clearly
dog
seller’s
for
not
its
product
raise
the
and
price
wishes
of
the
to
product.
illustrate,
of
its
$5
and
most
to
$4.50
of
the
explain
popular
and
takeaway
finds
pizzas
goes
3
Calculate
that
pizzeria
the
will
change
in
experience
total
revenue
following
the
that
fall
the
in
price.
up
Draw
a
“revenue
box”
diag ram
to
illustrate
the
72.
percentage
changes
in
price
and
on
following
quantity
the
demanded
price
change
and
for
the
total
revenue
the
price
elasticity
of
demand
Was
for
the
firm
Margherita?
sensible
Explain
to
your
lower
the
Margherita.
price
of
the
answer.
pizzas.
elastic
unit
leads
hot
demanded.
Calculate
the
for
dog
but
now
5
2
demand
“revenue
effect
1
The
4.2
demanded
to
4.4
“revenue
$18)
the
dogs
price
dogs,
are
4
from
a
hot
4.4.
demand
loses
hot
dogs
$40),
the
of
caused
Figure
why
rise,
seller
hot
in
200
Quantity
$22.
revenue,
lowers
to
the
box
c”
is
revenue,
demanded
the
This
before
equal
box
thinker—calculate,
pizzeria
case,
“revenue
by
total
increase,
because
falls
price.
diagram
in
revenue
quantity
a”,
the
the
this
“revenue
total
Student
In
price
Since
than
revenue
Thus,
Be
the
in
decrease
earning
c”.
$2.10
a
elastic.
box
“revenue
raising
boxes”
causes
product
by
180
0
the
F igure
a
c
b

%
As
_____

to
demand:
elastic
a
The
value
demand,
proportionate,
demanded
of
it.
This
then
of
a
PED
opposite,
means
is
change
that
if
equal
in
change
price
is
to
the
in
one
price
the
raised
If
of
a
product
the
product
quantity
by
a
certain
49
4

Elasticities
and
by
the
firm
the
so
(the
quantity
PED
is
number
demanded
equal
of
to
units
1
will
and
sold

the
the
fall
by
total
the
same
revenue
price
of
the
gained
product)
slaem
then
percentage,
)$(
percentage,
fo
not
shown
The
change.
in
A
Figure
rectangular
curve
4.5.
It
that
is
has
unit
known
hyperbola
is
as
a
drawn
elasticity
at
rectangular
in
such
a
every
point
ecirP
will
is
hyperbola.
way
that
price
times
a
s cim on o c e or ci M
quantity
at
“revenue
any
point
boxes”
is
constant.
always
have
This
the
means
same
area
that
and
the
if
total
the
of
the
revenue
b
does
not
Thus,
change
in
Figure
when
4.5,
price
the
changes,
two
then
rectangles
PED
a b
must
have
the
be
c
unity.
same
D
area,
0
Quantity
and
as
the
two
rectangles
a b
is
equal
to
of
meals
bc.
1
A
mathematical
It
is
a
common
measure
of
the
the
price
slope
at
for
of
students
the
any
This
is
shown
to
demand
point
on
downward-sloping
falls.
F igure
4.5
where
P ED
A
rectangular
hyperbola,
elasticity
in
assume
curve
the
and
curve.
demand
Figure
that
elasticity
that
This
is
curve,
the
not
the
is
value
the
value
1
at
every
point
is
case.
of

a
For
PED
a
falls
ecirP
as
mistake
same
straight-line,
about
)$(
always
note
P ED
=
3.3
(elastic)
a
20
4.6.
b
When
price
falls
from
$20
to
$18,
quantity
demanded
increases
from
15
P ED
60
to
80
units.
Thus
the
PED
value
=
0.625
is:
c
10
d
%
QD
33.3%
_______
PED
_______


%

3.3
10%
P
5
D
The
value
of
PED
is
3.3,
elastic,
when
we
move
from
point
a
to
point
b.
0
When
price
falls
from
$10
to
$8,
quantity
demanded
increases
50
100
150
200
Quantity
160
to
180
units.
Thus
the
PED
value
QD

%
The
value
point
Thus
of
we
can
because
see
curve.
products
have
expensive
Different
of
1
elastic,
0.4,
inelastic,
The
a
is
when
we
move
from
point
c
to
are
for
a
will
the
closer
demand.
they
elasticity
the
as
we
move
happen.
than
down
the
when
price
the
a
Low-priced
high-priced
when
are
are
PED.
meal
What
are
closeness
that
of
price
products,
an
of
an
of
is
a
values
may
have
petrol
actually
number
substitutes:
fair
more
substitutes
demand
for
available
It
the
of
different
demand
There
product,
the
falls
should
demand
than
have
inelastic.
of
PED
concerned
restaurant
and
determinant
rises
of
this
rises.
product?
number
that
less
price
a
value
inelastic
are
whereas
which
for
of
for
the
logical
product
ofsubstitutes
50
0.625,
more
products
demand
PED
a
is
product
Determinants
is
20%
that
It
consumers
inexpensive
it
is
demand
0.625
d.
demand
the

P
PED
4.6
P ED
12.5%
_______

to
is
for
a
say
of
a
the
example,
of
PED
3,
i.e.
value
value
of
determinants:
The
that
the
For
value
have
determines
will
available,
PED.
PED
may
number
certainly
elastic
(units)
is:
F igure
%
_______
PED
the
the
be
more
the
more
and
most
closeness
important
substitutes
demand
elastic
for
will
it.
be
250
from
there
Also,
the
curve
values
for
a
normal
4
example,
the
lead
to
a
another
large
types
Products
2
as
necessity
necessary
for
die,
so
food
food
to
more
demand
such
as
to
of
defined
be
but
elastic.
F igure
4.7
inelastic,
and
Once
of
oil,
available
brand
will
their
demands
with
lots
products,
to
of
types
of
meat,
demand.
will
demand
since
again,
tend
to
falling
the
if
it
we
that
price
have
relatively
into
chicken
shown
in
we
are
expect
can
many
define
and
easily
one
chicken
if
would
demand
products,
Figure
isdefined:
food,
However,
lamb,
of
have
would
then
the
consumer
the
is.
meat,
beef,
product
not
we
there
if
the
do
Thus
which
assume
definition
widely
we
consider
narrowly,
is
if
chicken,
another,
branded,
Level
how
necessary.
since
This
and
Indeed,
inelastic,
more
the
butter
one
up.
reasonably
even
household
as
consider
to
products
such
very
elastic,
for
with
of
of
changing
substitutes,
demand,
product
less
price
elastic
very
be
of
brands
the
have
narrowly
meat
identical,
more
is
demand
tend
product.
and
again
relatively
type
it
in
customers
brands
goes
the
of
the
different
increase
to
vegetables.
narrowly
once
of
many
an
will
few
price
is
will
as
fruit,
The
a
Thus
inelastic
the
are
so
number
such
of
with
relatively
little
and
brand.
substitutes,
and
there
market
1
on
Elasticities
s cim on o c e or ci M
For

the
we
we
demand
define
expect
the
alternatives,
meat
pork,
for
As
products
demand
more
we
each
change
rises.
Food
then
could
would
from
the
and
be
one
product
is
then
becomes
even
4.7.
51
4

Elasticities
It
is
worth
change
different
For
remembering
from
tastes
example,
population
in
Italy,
s cim on o c e or ci M
be
and
in
and
where
Necessity
to
consumer
go
not
to
alcohol,
is
valued
extremes
or
many
such
hard
as
necessity
different
subjective
very
it
is
have
view.
popular
less
will
people
elastic
among
than
it
the
would
be
highly.
when
as
a
is
for
goods,
since
often
chicken
demand
“necessary”,
cigarettes,
inelastic
necessity
the
is
for
consumer,
Malaysia,
so
it
may
very
that
to
individuals
habit-forming
drugs.
Such
consider
goods,
products
products
like
tend
to
have
demand.
1
3
The
time
takes
habits.
then
period
time
PED
As
consumers
thus
becomes
measured
For
considered:
for
tends
more
the
to
to
be
elastic,
price
change
more
the
of
a
their
product
buying
inelastic
longer
the
in
the
time
changes,
and
it
often
consumption
short
period
term
it
and
is
over.
example,
when
heating
oil
prices
rose
sharply
in
Austria,
the
Student
demand
amount
for
than
inelastic,
their
demand
that
that
the
since
products
for
oil
change
people
they
central
for
winter
oil
price.
not
to.
However,
began
to
by
a
proportionately
Demand
really
switch
heating.
heating
in
did
could
changed
have
They
over
fall
as
was
relatively
many
still
the
needed
people
Be
very
heating
few
started
years,
to
a
thinker—identify
For
oil
of
the
you
change
each
heating
PED,
when
systems
to
ones
more
over
a
that
used
longer
gas,
time
coal,
period,
or
wood.
was
the
and
following
identify
would
expect
price
the
to
pairs
one
have
elasticity
that
the
of
The
demand
measured
of
goods,
higher
their
4.3
explain
alternative
next
workpoint
smaller
and
explain
your
certainly
choice
by
referring
one
the
to
at
least
elastic.
of
determinants
of
elasticity.
Price
elasticity
Governments
they
impose
of
demand
need
to
indirect
government
puts
a
be
aware
taxes,
tax
and
on
taxation
of
such
a
the
as
possible
sales
product,
consequences
taxes,
then
its
on
products.
price
will
Heineken
1
when
If
usually
rise.
A
2
(This
is
dealt
quantity
will
in
demanded
have
Ifthe
with
more
of
the
consequences
demand
for
the
detail
in
product
for
Chapter
in
question
employment
product
is
very
5.)
in
is
the
elastic,
This
means
likely
to
industry
then
a
that
fall
the
and
this
result
of
the
imposition
of
a
tax
on
the
product
will
A
to
reduce
to
blood
tablet
reduce
headache
pressure
pain
increase
Milk
3
asa
prescription
tablet
concerned.
price
Beer
beer
a
lead
to
Orange
a
juice
relatively
the
large
demand
significantly,
a
in
the
demand
production
increasing
Student
Be
fall
for
Workpoint
suggest
would
based
that
a
reduce
on
10%
product.
the
in
This
industry
the
is
means
likely
5%.
The
same
of
increase
the
in
and
US
the
consumption
10%
that
fall
economy.
price
by
explain
population
of
1
cigarettes
adults
by
increase
would
reduce
Calculate
cigarettes
the
by
youths
by
adults
of
demand
and
for
among
US
youths.
Suggest
possible
of
reasons
elasticity
for
the
between
different
the
two
g roups.
13%.
3
Explain
would
52
elasticity
US
the
magnitude
consumption
price
among
3%
2
to
to
4.4
consider,
studies
overall
the
in
unemployment
thinker—calculate,
Estimates
for
workers
two
possible
place
a
ta x
reasons
on
why
cigarettes.
a
government
4
governments
normally
inelastic,
so
significant
Cross
Cross
a
that
amount,
and
product.
is
and
will
keen
products
demand
of
of
for
the
thus
demand
demand
changes
It
usually
on
to
increase
where
product
not
lead
will
to
unemployment,
demand
not
high
is
relatively
fall
by
a
unemployment.
(XED)
definition
elasticity
product
not
taxes
the
elasticity
Formula
are
place
1
they
Elasticities
when
usually
is
a
measure
there
is
calculated
Percentage
change
a
by
in
of
how
change
using
in
the
quantity
much
the
the
price
equation
demanded
demand
of
s cim on o c e or ci M
Since

for
another
below:
of
product
X
_________________________________________________
XED

Percentage
For
example,
competitor,
to
$1.80,
from
400
to
1
slices
The
number
380,
by
we
price
the
of
of
the
of
pizza
pizza
of
in
price
stand
lowers
slices
the
calculate
the
price
of
a
stand,
because
can
from
original
owners
hamburger
the
information,
pizza
the
a
change
lower
the
find
the
that
of
that
price
they
priced
cross
product
when
of
sell
a
each
of
their
burger
burger.
elasticity
Y
week
With
from
$2
falls
this
demand
for
the
stand.
competitor’s
$2,
which
burgers
is
a
has
change
fallen
of
by
10%.
20¢
This
from
is
an
calculated
equation
20
_____

100

10%.
200
2
The
an
quantity
original
calculated
demanded
demand
by
the
of
of
the
400,
pizza
which
slices
is
a
has
change
fallen
of
by
5%.
20
from
This
is
equation
20
_____

100

5%.
400
3
If
we
put
the
two
values
above
into
the
equation
for
XED,
5%
_______
we
get
,
which
gives
a
value
of
0.5.
10%
The
range
XED
price
majority
of
value
sign
is
the
the
XED
of
may
Products
that
higher
close.
Two
substitutes
the
price
demand
the
of
for
one
it
positive
it
a
tells
two
a
be
close
than
of
lead
large
for
then
may
in
a
two
for
be
Thus
in
PED,
and
the
very
the
there
in
other.
have
are
and
is.
goods
each
will
that
significant
increase
for
question
the
consumers
to
vast
the
substitutes
products
the
negative
what
goods
demand
products.
value
or
substitutes
margarine.
value
us
of
where
positive
positive
margarine
will
between
positive,
to
view
and
competitor’s
high
of
the
be
the
very
value
types
in
is
said
are
positive
elasticity
demand,
have
since
XED
be
of
may
between
question
cross
relationship
important,
value
for
elasticity
products
of
relationship
If
values
explains
Unlike
the
of
not
a
so
close
so
fall
a
rise
in
demand
would
in
the
be
for
a
XED.
53
4
If

Elasticities
the
be
value
said
to
of
be
complements
not
so
close.
played
the
on
price
quantity
s cim on o c e or ci M
games.
Some
Thus
will
A
it
of
XED
may
have
a
be
demanded
there
in
for
then
each
lower
close
it
and
as
a
may
a
price
housing
value
strong
of
to
so
the
are
demand
value
of
for
are
are
are
A
rise
fall
in
for
the
in
the
XED.
not
connected.
have
XED
close
that
that
consumers.
the
may
very
products
games
would
value
question
significant
houses,
matchsticks
and
a
negative
and
the
for
fallin
in
that
than
and
lead
large
goods
Products
machine
matchsticks
the
two
complements
so
be
the
other.
negative
machine
would
such
increase
demand
of
for
gaming
very
gaming
products,
onthe
negative,
computer
the
Thus
an
is
complements
no
for
effect
the
two
1
products
Firms
would
need
produce.
It
to
is
the
demand
the
price
aware
demand
In
of
of
a
addition,
power
price
tools
be
their
close
their
and
change
XED
that
In
in
of
arise
the
the
if
that
unrelated.
that
they
possible
there
same
price
are
products
complementary
need
one
products
the
goods
is
a
impact
change
way,
they
they
make
need
reduces
the
“Light-Bites”
sandwiches
price
to
of
to
be
aware
product
that
they
might
also
products,
of
the
have
such
effect
on
the
630
2
Explain
3
Calculate
produce.
Remote
Close
Substitutes
Substitutes
and
the
Explain
of
its
streng th
the
per
cross
and
and
shop,
falls
and
from
wraps,
that
wraps
relationship
when
from
400
$5
between
its
rival,
to
$4.60,
sandwiches
“Super-Snack”
the
demand
products
for
a
finds
soft
“Super-Snack”
,
the
week
that
demand
to
following
drinks
for
340
rises
the
from
fall
600
week.
elasticity
of
demand
“Super-Snack”
cross
the
explain
finds
addition,
relationship
the
the
In
of
4.5
chicken
chicken
sandwiches
Positive
Products
cans
the
any
demand
Unrelated
week.
sandwiches
that
Complements
sandwiches
Calculate
as
Remote
price
a
be
Complements
sandwich
their
to
the
Zero
thinker—calculate
a
on
on
in
products.
produce
on
two
aware
may
change
rival’s
for
are
products.
any
workpoint
“Light-Bites”
,
4
XED
firms
the
Close
values
Student
1
that
Negative
4.8
cans
of
make
Value
in
the
accessories,
they
XED
a
say
products
that
complementary
Be
of
that
close
firms
We
rival’s
impact
Relationship
54
aware
for
F igure
zero.
essential
for
the
for
be
above
elasticity
the
of
chicken
in
terms
demand
“Super-Snack”
relationship
above
in
soft
terms
between
“Light-Bite”
wraps.
of
cross
elasticity
between
of
demand.
“Super-Snack”
drinks.
of
cross
elasticity
of
demand.
4
elasticity
Formula
Income
for
a
and
elasticity
It
is
demand
(YED)
definition
product
income.
of
Elasticities
of
demand
changes
usually
is
when
a
calculated
Percentage
measure
there
change
is
by
in
a
of
how
change
using
the
quantity
in
much
the
equation
demanded
the
demand
consumer’s
below:
of
the
product
1
Income

___________________________________________________

Percentage
Take
an
example.
$60,000
on
per
holidays
calculate
1
Her
A
person
to
from
her
$2,500
has
which
has
$66,000.
income
income
$60,000,
the
year
change
to
risen
a
an
She
by
of
increase
of
of
in
the
With
this
from
for
an
10%.
consumer
annual
increases
demand
$6,000
change
income
then
$3,000.
elasticity
is
in
s cim on o c e or ci M
YED
her
income
annual
information,
from
spending
we
can
holidays.
original
This
is
income
calculated
of
by
equation
6,000
_______

60
2
The
100

10%.
000
quantity
original
demanded
demand
calculated
by
of
the
of
holidays
$2,500,
which
has
is
a
increased
change
of
by
$500
20%.
from
This
an
is
equation
500
______

100

20%.
2,500
If
3
we
put
the
two
values
above
into
the
equation
for
PED,
20%
_______
we
get
,
which
gives
a
value
of
2.
10%
The
range
of
XED,
the
Like
case,
a
the
normal
normal
good
For
as
good
falls
as
normal
than
zero
the
for
for
increase
demand
have
more
purchase
number.
the
and
is
important.
product
Remember
of
increase
and
in
the
is
in
the
we
that
demand
demand
to
that
change
they
is
i.e.
in
are
the
for
In
this
looking
demand
an
said
YED
the
at
for
is
a
inferior
demand
quantity
then
demanded
a
be
a
to
is
value
YED
be
increases
demanded
value
is
between
income-inelastic.
greater
greater
than
than
the
one
is
income-elastic.
have
very
not
positive,
increase
income,
then
said
does
that
is
quantity
products
will
YED
percentage
income,
bread
feel
the
low
little
increase
already
if
income
income
elasticity.
rises.
significantly
have
enough
as
For
The
example,
income
bread
and
rises,
so
will
consumption.
goods
for
value
If
demand
them
people
Superior
rises
demand
equation
whether
income
in
are
the
of
rises.
increase
the
from
us
good.
obtained
goods
demand
because
not
is
elasticity
inferior
the
increase
and
demand
as
tells
percentage
percentage
Necessity
an
rises
goods,
one
obtained
the
or
income
obtained
increases.
percentage
for
YED
income
the
and
sign
of
good
income
less
If
sign
values
are
them
income
products
For
products
changes
and
that
example,
that
have
are
the
have
high
significantly
satisfied
wants,
i.e.
demand
if
income
income
their
elasticity.
rises.
needs,
they
non-essential,
for
holidays
in
in
As
The
people
begin
to
greater
foreign
countries
55
islikely
to
be
income-elastic.
4

Elasticities
inferior
decreases
goods,
as
expenditure
for
from
goods,
Curve
for
a
time,
4.9.
the
falls
shows
the
product
We
goods
can
as
is
negative,
start
that
now
to
they
afford.
income
rises
because
switch
had
For
the
been
buying
example,
because
demand
their
the
people
to
demand
switch
to
jeans.
nineteenth-century
Figure
they
YED
People
can
relationship
over
time.
German
see
for
begin
fall
is
between
named
economist.
as
the
potatoes
Such
income
may
in
increase,
income
after
a
a
curve
the
Engel,
is
country
then
and
Ernst
a
shown
rises
become
in
over
constant,
1
demand
that
It
ytitnauQ
Engel
demand
inferior
jeans
branded
of
fo
s cim on o c e or ci M
An
the
which
inexpensive
buying
value
increases.
seotatop
superior
the
income
dednamed
For
and
then
to
as
people
begin
to
buy
superior
products
0
Income
instead,
such
as
pasta.
F igure
4.9
An
relationship
Student
Be
A
a
workpoint
thinker—calculate
consumer
$80,000
had
per
an
year
increase
to
$100
expenditure
on
holidays
expenditure
on
g ym
expenditure
on
locally
1
Calculate
2
Explain
her
what
holidays
in
income,
000
per
increased
produced
of
from
her
In
the
$8,000
remained
clothes
elasticity
value
following
year.
of
fell
the
income
to
for
salary
$10
same,
from
demand
a
following
rise,
year,
000,
and
$2,000
from
her
her
her
to
$1,500.
holidays.
elasticity
of
demand
for
means.
3
Calculate
4
Explain
her
what
Calculate
income
the
membership
5
demand
explain
membership
income
the
4.6
and
her
elasticity
value
of
her
of
demand
income
for
g ym
elasticity
of
membership.
demand
for
g ym
means.
income
elasticity
of
demand
for
locally
produced
clothes.
6
Explain
what
produced
Elasticity
Price
Price
and
of
her
income
elasticity
of
demand
for
locally
means.
supply
of
of
changes
usually
value
supply
(P ES)
definition
elasticity
product
Itis
of
elasticity
Formula
the
clothes
supply
when
calculated
Percentage
is
a
measure
there
by
is
a
using
change
the
in
of
how
change
in
equation
quantity
much
the
the
price
of
supply
the
of
a
product.
below.
supplied
of
the
product
_________________________________________________
PES

Percentage
For
example,
monthly
increase
With
for
56
their
this
the
a
publishing
magazine
for
supply
magazine
in
firm
$5.50
from
information,
change
we
in
realises
instead
200
can
question.
price
000
of
to
that
of
they
$5.00.
230
calculate
the
In
000
the
product
can
now
light
of
magazines
price
sell
this,
per
elasticity
of
their
they
month.
supply
for
Engel
Curve
between
potatoes
showing
income
and
the
the
4
1
The
price
change
has
of
risen
10%.
by
50¢
This
is
from
an
original
calculated
by
the
price
of
$5,
which
is

Elasticities
a
equation
50
____

100

10%.
500
quantity
supply
the
of
supplied
200,000,
has
which
increased
is
a
by
change
30,000
of
15%.
from
This
an
is
original
calculated
by
1
The
equation
30
s cim on o c e or ci M
2
000
________

200
If
3
we
100

15%.
000
put
the
two
values
above
into
the
equation
for
PES,
15%
_____
we
get
,
which
gives
a
value
of
1.5.
10%
The
4
value
The
range
The
possible
from
both
on
matter
zero.
and,
in
completely
any
other
A
as
the
for
then
a
the
our
curve
unresponsive
to
be
is
a
price
the
at
of
in
of
so
by
is
goes
of
will
percentage
the
value
anything
the
PES
shown
in
is
value
price
is
S
P2
Figure
inelastic—it
Whether
be
product
would
perfectly
will
a
the
price,
zero
usually
examples
economics.
Thus
and
changes.
supplied
of
divided
change
be
supply
across
price
all.
zero
to
of
come
study
value
said
supply
zero
Since
with
quantity
in
supplied
percentage
supply
of
will
change
would
positive.
elasticity
we
continue
equation.
case,
the
price
PED,
supplied
PES
supply
price,
elasticity
quantity
what
this
we
be
ecirP
be
4.10
the
values
always
fo
will
no
of
price
Unlike
zero,
quantity
almost
tcudorp
to
effect
in
of
values
equal
top
of
infinity.
is
the
zero,
range
no
change
on
to
will
values
extreme
PES
have
of
PES
)$(
If
zero
of
P
1
P
is
,
P
2
,
or
Q.
Q
0
Quantity
In
the
very
period,
it
short
is
run,
sometimes
impossible
for
firms
known
to
as
increase
the
immediate
matter
what
happens
to
price,
and
so
their
the
supply
supply
straight
curve
the
one
employed.
in
Figure
Thus
a
4.10,
perfectly
until
new
inelastic
factors
supply
of
production
curve
is
a
product
away,
would
4.10
A
per fectly
inelastic
look
supply
like
of
time
F igure
no
supplied
could
curve
be
possibility.
)$(
PES
value
of
infinity
situation
is
shown
perfectly
elastic.
in
At
is
best
Figure
the
explained
4.11.
price
P
,
the
by
this
using
case,
supply
a
diagram
supply
curve
is
goes
said
on
and
to
the
be
forever
and
fo
1
In
tcudorp
A
P
the
even
quantity
by
change.
would
the
smallest
Because
be
matter
supplied
of
infinity.
what
the
is
infinite.
amount,
this,
Since
the
supply
value
infinity
percentage
However,
will
on
the
divided
change
in
fall
price
to
top
by
if
zero,
of
the
the
an
PES
anything
price,
falls
is
PES
below
P
1
S
ecirP
so
,
infinite
equation
infinity,
value
will
no
be
0
infinity.
Quantity
In
international
trade,
it
is
often
assumed
that
the
supply
F igure
commodities,
such
as
wheat,
available
to
a
country
for
import
long
the
as
The
they
market
perfectly
this
in
consumers
are
in
the
elastic
more
in
prepared
country
at
detail
the
in
the
to
country
pay
will
current
Chapter
the
have
world
can
have
current
a
“world
market
all
world
that
they
market
supply”
price.
want
price.
curve
(We
of
product
will
4.1
1
A
per fectly
elastic
is
supply
infinite.
supplied
of
that
deal
curve
as
Thus
is
with
22.)
57
4

Elasticities
Normal
now
into
1
products
look
at
three
If
supply:
a
less
the
to
supplied
infinity
of
PES
is
and
we
will
normally
split
a
a
of
of
PES
inelastic
less
it,
than
and
so
is
less
supply,
than
then
one
a
proportionate
the
value
of
and
greater
change
in
change
PES
is
the
in
than
price
of
the
greater
than
zero
one.
supply:
If
value
has
leads
than
infinity.
of
and
values
The
value
product
product
S3
of
has
leads
to
PES
is
elastic
a
greater
supply,
greater
than
than
then
one
a
and
change
proportionate
less
in
ecirP
Elastic
zero
of
fo
2
range
tcudorp
s cim on o c e or ci M
quantity
The
product
product
and
between
The
)$(
the
values
values.
categories:
Inelastic
zero.
have
those
than
the
change
S
S4
price
in
the
1
S2
quantity
and
3
less
supplied
than
Unit
elastic
unit
elastic
of
it,
and
so
the
value
of
PES
is
greater
than
one
infinity.
supply:
The
supply,
value
then
a
of
PES
change
is
in
equal
the
to
one.
price
of
If
the
a
product
product
has
leads
0
to
a
proportionate
value
of
Examples
Figure
In
of
4.12,
length.
This
passing
Curve
S
3
has
because
the
quantity
supplied
of
it
and
so
the
Quantity
correct
has
Curve
S
is
4
a
with
PES
say
a
a
than
it
is
the
value
in
the
the
S
different
have
2
the
values
less
to
in
of
PES
value
of
percentage
of
change
that
an
any
are
shown
along
is
in
along
price
F igure
4.12
values
of
Supply
of
its
supply
entire
curve
of
supply
one.
length.
greater
than
mathematical
supply
For
This
the
reasons,
starting
from
it
the
one.
greater
than
change
change
in
in
one
along
quantity
price.
For
its
entire
supplied
length.
is
always
mathematical
it
is
correct
to
say
that
any
straight-line
supply
curve
the
y-axis
has
a
PES
value
greater
than
Different
is
of
for
of
cans
elastic,
0.5,
a
price
products
supply
supply
of
elasticity
will
have
of
soft
a
whereas
which
product?
is
a
thinker—illustrate,
drink
the
are
values
may
supply
a
firm
How
as
a
much
costs
producer
producer
will
rise
as
output
have
of
What
for
a
PES.
PES
of
For
value
electricity
actually
number
attempts
to
not
the
raise
is
producing
may
example,
of
2,
have
determines
i.e.
a
the
the
an
demand
its
cuddly
of
price
to
determinants:
for
dog,
increase
PES
value
increased:
increase
supply
If
total
supply
and
so
costs
then
the
it
is
rise
significantly
of
$18.
likely
elasticity
of
that
the
supply
from
product
rises
to
will
make
be
relatively
increasing
the
in
In
per
inelastic.
supply
It
would
take
large
however,
price
raise
total
the
costs
quantity
do
not
rise
supplied
worthwhile.
significantly
and
take
then
the
of
increase
in
costs
to
benefit
from
the
higher
prices,
of
output
per
The
from
the
of
week
a
demand
diag ram,
the
has
price
of
the
to
$15
firm
toy
5,500
and
explain
the
toy
increased.
Calculate
the
elasticity
of
low
making
for
the
toy
a
an
producer
the
thus
rises
the
product,
popularity.
toy
its
supply
58
toys
in
week.
Using
why
advantage
its
response,
supply
2
will
main
because
the
5,000
dog
If,
stuffed
increase
for
1
the
calculate
experiences
increases
1
and
supply
different
inelastic.
There
of
4.7
one.
A
Determinants
workpoint
starting
explain,
PES
different
their
Be
value
with
P ES
Student
reasons,
the
curves
in
is
supplied.
always
For
one
straight-line
elasticity
one
supplied.
than
value
quantity
price
straight-line
percentage
in
say
has
than
change
less
PES
percentage
origin,
of
a
change
correct
quantity
any
value
PES
because
greater
because
that
PES
has
and
1
percentage
change
to
x-axis
from
supplied
one.
percentage
through
the
percentage
is
the
S
reasons,
curve,
This
to
curves
curves
to
mathematical
is
equal
supply
alwaysequal
is
is
in
4.12.
Figure
entire
PES
change
dog.
4
There
rise
a)
are
in
a
do
such
existence
a
firm
has
productive
be
able
to
If
a
be
firm
which
b)
will
mobility
to
two
larger
The
time
to
period
the
their
that
In
of
the
but
of
PES
of
the
long
factors
run
elastic.
to
of
Primary
will
be
costs
more
a
of
of
them.
significant
if
it
has
fully
of
significant
used,
supply
then
great
for
it
will
cost
the
product
The
stock:
if
the
be
the
increase
resources,
that
the
firm
at
time
able
will
to
as
all
or
to
so
time
very
raw
of
the
than
able
and
be
size
the
able
periods
of
to
the
PES
the
is
time
increase
they
production
quantity
and
factors,
of
their
the
of
and
price
inelastic.
the
value
to
since
such
time
quantity
PES
of
some
labour,
as
factory.
immediate
increase
the
is
be.
materials
their
use
it
place.
longer
factors
increase
such
use
of
take
which
the
really
the
switching
will
will
if
plastic
when
of
increases,
number
litre
over
terms
not
price
PES
cost
productive
example,
one
bottles,
supply
are
one
For
change
of
the
increase
be
from
extra
general
firms
all,
of
employ
their
In
elastic
look
to
inelastic.
elastic.
plastic
the
amount
they
may
difficult
unlikely
moved
and
elastic
at
to
is
productive
relatively
litre
employ,
that
be
then
value.
more
therefore
great
may
it
in
manufacturing
two
up,
if
then
will
The
period.
of
be
production
the
all
of
much
in
much
6.
If
a
firm
product,
swift
relatively
is
able
then
supply
to
they
store
will
increases
high
be
and
levels
able
so
to
the
of
stock
react
PES
to
for
the
elastic.
commodities
elasticity
Commodities
materials,
the
preventing
without
relatively
from
be
able
will
with
and
easily
be
value
Chapter
increases
product
be
is
period
they
firms
store
if
uses
production
increase
The
be
It
more
time
they
We
in
(inventories)
Price
not
that
detail
price
the
firms
will
more
ability
its
machines
more
The
not
much,
that
may
in
i.e.
increase
will
are
goes
affect
run
value
the
3
short
factors
firm
being
elasticity
of
will
considered:
employ.
not
capacity
PES
PES
immediately
they
at
factors
will
very
number
In
of
immediate
they
assist
easily
significant
bottles
will
the
capacity,
are
the
manufacturing
supply
the
case
expensive.
considered
cannot
that
production
period
measured
as
capacity
output
supply.
bottles
that
unused
production
litre
significantly
high.
a
then
shift
bottles
of
of
another
easy
In
be
The
factors
of
producing
without
increase
to
lot
this
will
If
2
is
rise
quickly
factors
unused
relatively
supply
of
resources
In
not
as:
of
a
will
increase
increase
increases.
will
costs
not
number
costs,
The
If
Total
inputs
1
profits.
factor
Elasticities
s cim on o c e or ci M
more

(or
such
of
demand
primary
as
cotton
for
commodities
commodities)
or
coffee.
is
Such
another
products
word
tend
for
to
raw
have
59
inelastic
demand
as
they
are
necessities
to
the
consumers
who
buy
4

Elasticities
them
the
and
they
industries
example,
coffee
green
but
s cim on o c e or ci M
a
by
a
not
targets
in
want
would
raw
coffee
the
1
coffee,
hand,
there
price
are
have
the
for
and
smaller
of
be
remember
finished
the
buy
their
the
choice
demanded
if
there
processing
have
For
(raw
little
Similarly,
as
they
who
have
quantity
the
coffee
and
products.
coffee
companies
thus
that
manufacturing
green
consumers
coffee
more
set
of
amount.
green
been
into
price
processing
coffee
must
to
were
companies
production
no
use
for
further
price.
demand
many
for
more
manufactured
substitutes
goods
available
tends
to
to
be
more
consumers.
)ennot
other
of
the
We
tend
material
in
proportionately
On
as
the
instant
the
substitutes.
increase
the
already
regardless
the
no
commodities
proportionately
inputs,
elastic
an
buying
decrease
would
is
make
continue
or
process
then
to
few
primary
there
beans),
fall
be
of
which
if
coffee
to
will
to
have
consumers
Supply
rep
elasticity
cannot
lead
to
example,
therefore
unable
to
have
for
commodities
inelastic
proportionately
there
an
were
increase
respond
with
a
to
in
supply
large
be
an
the
as
change
increase
increase
price
a
of
proportionate
in
in
price
quantity
the
cocoa,
in
producers
increase
supplied.
demand
in
the
for
cocoa,
would
quantity
be
as
ecirP
and
a
if
supply
to
4000
fo
For
of
tend
reppoc
Commodities
$(
Price
3000
it
D
2
takes
time
resources
to
to
grow
the
the
cocoa
production
and/or
of
it
cocoa.
takes
time
Similarly,
to
if
D
re-allocate
there
were
1
to
be
0
a
Quantity
fall
in
the
price
accordingly
as
of
cocoa
the
then
cocoa
the
crop
quantity
might
supplied
already
have
would
been
not
the
more
other
elastic
response
The
for
a
to
a
combination
on
the
a
reason
of
and
copper
the
you
demand.
can
changing
Chapter
China,
change
asthe
3
see
the
in
price
article
producers
topic
that
in
case
price
shift
In
in
what
and
tends
quantity
to
be
supplied
in
in
the
return
a
within
more
in
the
high
the
year
two
look
text
at
the
price
years,
price
the
had
there
Part
elasticities
and
of
the
was
150%.
commodity
costs
supply
supply
which
the
than
low
industrial
the
change
case
price
up
be
of
of
such
time
the
to
very
in
of
will
and
to
year
same
vulnerability
in
D1
comes
downswings
later
due
one
also
the
demand
copper
from
in
might
but
in
of
largely
tonne
goes
to
to
a
tonne,
of
lies
Take
or
as
involved
changes.
the
gains
per
inelastic
demand
prices.
previous
an
to
and
the
According
Thus,
demand
per
inevitable
shall
of
due
in
in
down)
demand,
revenue
the
or
4.13,
a
prices
we
the
$5,000
to
The
tonne.
(up
demand
$8,000
fluctuations
in
vulnerable
3.
around
2008.
copper.
upswings
goods
decrease
swings
Chapter
per
of
large
or
changes
large
was
when
implies,
the
in
Figure
for
generating
commodity
In
manufactured
inelastic
any
inelastic
increase
resulted
in
is
supply
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to
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As
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price
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copper
copper
highest
in
is
change
commodity
of
it
commodities
article
60
hand,
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result
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is
The
very
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prices.
commodity
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Y
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the
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ax
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e
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section
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on
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the
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C
market
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of
where
price
PED
the
price
elasticity
is
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elasticity
supply
than
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is
of
demand
relatively
value
of
PES.
is
relatively
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i.e.
elastic
where
shown
in
and
the
Figure
Y
value
5.3.
0
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market
at
price
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curve
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shifts
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to
like
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until
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bear
now
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in
this
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upwards
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XY
P
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unit
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2
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receive
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1
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the
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units
e
to
on
of
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a
to
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is
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is
CP
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and
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at
a
XY
and
producing
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the
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of
tax,
from
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1
1
from
tax
the
deal,
P
e
on
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little
the
of
pass
elastic
so
price
price
the
of
has
P
1
0P
e
to
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product
where
of
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a
is
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market
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will
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in
the
government.
unit.
to
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of
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1
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price
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per
e
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too
government
units.
1
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e
lot
producers
The
P
XY
P
a
and
themselves.
a
paying
great
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product.
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tax
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which
5.3
a
.
1
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receive
size
from
once
one
S
+ta x
S
ecirP
revenue
ta x
supplied.
the
rises
Qe
)$(
share
excess
demand
after
the
producers
and
buying
consumers
per
an
reached,
producers
because
contribute
of
the
is
is
demanded
tax,
the
there
Q
demanded
Quantity
per
from
to
being
e
than
price,
would
for
tax
the
equilibrium
both
consumers’
high
raise
that
most
income
After
new
is
1
of
product
.
equilibrium
vertically
at
consumers
to
e
to
a
However,
burden
P
in
consumers.
However,
fall
is
P2
again
T
ax
P
burden
for
consumers
X
have
implications
for
the
level
of
employment
in
the
market.
Z
Pe
In
this
case,
the
burden
of
the
indirect
tax
is
much
heavier
on
W
the
T
ax
burden
for
C
producers
Y
producers
the
than
values
of
on
the
the
consumers.
This
is
because
of
the
difference
in
elasticities.
D
0
In
the
second
case,
consider
a
market
where
the
price
elasticity
Q
Qe
of
Quantity
demand
is
relatively
PES.
This
relatively
elastic,
is
i.e.
shown
inelastic
where
in
and
the
Figure
the
price
value
of
elasticity
PED
is
less
of
supply
than
the
is
value
of
Figure
ta x
5.4.
on
than
The
market
at
price
a
curve
would
tax
to
of
shifts
like
the
is
P
in
e
.
equilibrium
After
the
vertically
to
raise
of
upwards
the
consumers.
tax
with
price
to
Q
XY
P
2
being
per
from
However,
e
S
and
at
unit
1
to
so
that
S
supplied
is
1
imposed,
tax.
pass
price,
and
on
The
all
there
of
is
5.4
a
The
imposition
product
where
of
P ED
a
is
specific
less
P ES
demanded
the
supply
producers
the
an
cost
of
excess
the
65
5

Indirect
supply
ta xes,
and
so
which
is
In
case,
this
because
stop
of
at
tax
s cim on o c e or ci M
majority
the
rises
the
paying
a
small
receive
has
of
is
to
1
,
on
to
price
fall
tax
amount,
tax
1
XY
The
revenue
the
on
lot
few
price
of
of
P
e
of
to
the
the
P
.
e
to
e
to
CP
1
and
supplied.
of
of
for
The
the
the
tax,
would
the
burden
the
contribute
receive
The
.
1
XY
they
now
0CYQ
most
product
government.
reached,
consumers
Thus
1
is
and
burden
have
the
Producers
WQ
equal
a
equilibrium
demanded
consumers
from
0P
new
both
and
the
unit.
to
from
a
is
1
pass
Thus
per
e
of
Q
inelastic
them.
P
until
can
substantially
P
controls
where
fairly
tax,
the
high
P
product.
passed
of
and
producers
demand
consumers
after
price
price
the
buying
the
falls
a
subsidies,
C
income
per
of
producers
government
market
the
unit,
falls
will
in
size
1
from
one
again
In
producing
have
this
case,
consumers
derive
a
the
set
of
1
the
the
Where
product,
the
3
the
the
This
is
have
the
yet
this,
not
some
in
cause
will
Be
1
a
A
of
PED
the
and
is
units.
1
much
use
so
fall
in
the
of
in
This
the
why
then
and
tax
orig inal
the
revenue
the
on
state
the
heavier
the
the
the
a
the
tax
than
place
such
the
the
above
to
on
the
PES
be
be
for
and
Draw
should
study
effect
demand
a
of
diag ram
the
product.
of
and
to
products
high
be
taxes
amount
the
also
Label
the
of
to
such
and
think
of
goods.
to:
the
ta x
A
product
relatively
a
diag ram
producer
after
2
show
d
the
amount
of
the
ta x
paid
by
the
consumers
e
the
amount
of
the
ta x
paid
by
the
producers.
such
than
revenue
able
on
that
By
macroeconomics.
imposition
corresponding
producer
for
on
explain
inelastic
received
sensible
on
a
and
specific
carefully
a
by
the
government
government
elasticities?
Explain
to
ta x
your
a
answer.
has
relatively
elastic
then
show
tax
and
supply.
the
on
the
orig inal
b
the
revenue
of
areas
the
of
demand
a
and
diag ram
the
product.
the
revenue
of
elastic
Draw
effect
the
state
a
is
revenue
a
greater
cigarettes.
smaller
gain
put
on
and
ta x
with
for
greater
PES
taxes
will
You
of
will
the
be
product,
producers.
alcohol
we
of
will
value
proportionately
when
a
consumers.
indirect
as
for
equally
product.
imposed
on
PES
value
imposed
on
than
any
the
the
governments
areas
revenue
of
than
of
shared
c
product
on
taxes
imposed
it
once
5.2
supply.
show
tax
be
of
than
government
further
relatively
b
Would
will
market.
examples
indirect
value
will
employment.
workpoint
inelastic
any
to
by
the
the
producers
less
of
tend
to
greater
of
is
changes
a
is
tax
can
imposed
product
reasons
percentage
carefully
Q
employment
incidence
equal
demand,
and
large
has
is
burden
addressed
product
is
and
thinker—illustrate
this
of
We
the
product
inelastic
a
relatively
66
of
the
price
Student
to
burden
the
value
good
be
producing
indirect
tax
PED
governments
other
These
of
demand
change
of
the
then
relatively
doing
PED
any
consumers
consumers
why
of
of
value
then
product,
the
one
level
producers.
relating
value
producers
Where
of
to
the
consumers:
the
the
for
the
burden
between
2
on
rules
and
then
units
e
burden
than
producers
Where
Q
implications
to
imposition
Label
the
of
this
a
diag ram
corresponding
the
also
show
to:
producer.
producer
after
the
ta x
imposed
c
the
ta x
d
the
amount
of
the
ta x
paid
by
the
consumers
e
the
amount
of
the
ta x
paid
by
the
producers.
Would
it
product
revenue
be
received
sensible
with
such
for
a
by
the
government
government
elasticities?
Explain
to
ta x
your
a
answer.

5
Assessment
In
HL
paper
supply
3
you
may
from
be
linear
asked
to
functions
plot
and
demand
then
and
illustrate
A
specific
effects
of
the
imposition
of
an
indirect
ta x
of
ta x
market
in
Draw
terms
of
price,
quantity,
controls
producer
surplus,
or
revenue,
producer
$1.50
is
placed
upon
the
product.
and
label
of
a
new
the
curve
specific
to
show
the
effect
of
the
tax.
government
surplus.
You
Identify:
revenue,
may
also
be
a
the
new
equilibrium
price
b
the
new
equilibrium
quantity
asked
Here
face
to
is
explain
an
and
any
example
of
of
suggested
the
the
above
kinds
changes
of
or
questions
calculations.
that
you
may
5
us
assume
supply
Q
that
function
D

a
product
shown
2,000
has
the
demand
function
1

S
400
government
Calculate
the
amount
a
consumers
and
are
b
producers

Illustrate
ta x.
of
ta x
paid
by:
the
label
$0,
area
showing
the
loss
of
consumer
and
400P
the
$1,
demand
$2,
$3,
$4,
and
$5,
supply
and
curves
surplus.
when
Explain
why
the
consumers
bear
more
of
the
burden
of
$6.
ta x
2
the
200P
8
prices
from
below:
producer
Graph
revenue
sold
and
7
Q
the
and
responses.
6
Let
Calculate
bought
s cim on o c e or ci M
1
consumer
price
consumer
4
expenditure,
and
on
imposition
the
subsidies,
and
3
the
ta xes,
Advice
curves
calculate
Indirect
than
the
producers.
Identify:
The
a
the
equilibrium
price
b
the
equilibrium
quantity
bought
and
required
diag ram
is
shown
below:
sold.
)$(
ecirP
6
D
(Q
=
2,000
–
200P)
S
+
$1.50
D
indirect
ta x
5
S
(QS
=
–400
+
400P)
4
3.5
Loss
of
consumer
3
and
producer
surplus
2
1
0
400
800
1,000
1,200
1,600
2,000
Quantity
The
equilibrium
shown
The
of
as
new
new
shown
price
and
supply
$1.50,
The
$4
is
curve,
drawn
and
equilibrium
as
$5
and
and
1,200
quantity
bought
and
sold
are
The
units.
showing
the
effect
of
the
indirect
ta x
labeled.
price
1,000
and
The
asked,
you
could
quantity
bought
and
sold
are
loss
You
units.
have
the
explained
that
total
1,000

increases
from
$4

1,200

The

paid
by
the
producers
is
$0.50

consumer
the
and
shaded
explain
of
that
ta x
product
is
producer
surplus
is
shown
on
the
area.
consumers
than
would
producers
inelastic
at
that
bear
because
price,
more
the
which
of
demand
may
be
consumer
$4,800
to
$5
from
the
diag ram,
and
so
producers
are
able
to

pass
on
their
quantity
revenue
from
this
ta x
is
$1.50
on
1,000
more
of
the
burden
demanded
will
of
ta x
fall
by
to
consumers,
relatively
less
since
than
units
the

ta x
$5,000)
Government
sold
of
by
could
the
of
$500.
burden
seen
expenditure

diagram
for
(If
amount
1,000
price
increases.
$1,500.
amount
of
ta x
paid
by
the
consumers
is
$1

1,000
$1,000.
67

5
Indirect
effect
of
of,
a
a
and
price
controls
subsidy
on
the
demand
for,
and
S
ecirP
supply
subsidies,
)$(
The
ta xes,
product
$2
S
A
subsidy
per
unit
may
is
of
give
an
amount
output.
a
of
There
subsidy
for
a
money
are
a
paid
by
number
product
and
the
of
the
government
reasons
main
why
ones
a
to
a
–subsidy
firm,
government
are:
$2
s cim on o c e or ci M
1
To
lower
In
this
product
2
To
the
way,
price
the
will
be
guarantee
are
essential
increased,
the
necessary
of
government
supply
for
the
goods,
hopes
such
that
encouraged
of
products
economy.
by
that
This
as
the
milk,
the
the
may
to
consumers.
consumption
be
lower
of
the
price.
0
government
because
the
Q
goods
1
for
the
economy,
such
as
a
basic
food
supply
or
a
like
coal.
employment
It
that
may
also
would
be
be
that
lost,
the
thus
industry
causing
creates
a
economic
5.5
The
effect
on
a
supply
curve
power
of
source
supplied
are
Figure
essential
Qe
Quantity
thinks
lot
and
a
specific
subsidy
of
social
problems.
(a)
3
To
enable
a
subsidy
industry.
is
compete
(This
granted
to
a
is
with
dealt
firm
overseas
with
on
a
in
more
certain
trade,
detail
product,
thus
in
Chapter
then
Increase
in
producer
revenue
protecting
the
22.)
supply
ecirP
If
home
to
)$(
the
producers
S
D
W
S
–subsidy
Pe
X
curve
of
for
the
the
product
subsidy,
will
because
it
shift
vertically
reduces
the
downwards
costs
of
by
the
production
P
amount
for
the
Z
P2
firm,
Y
and
more
will
be
supplied
at
every
price.
As
with
indirect
taxes,
the
D
amount
of
of
lower
the
subsidy
prices,
and
that
the
is
passed
amount
on
that
is
to
the
consumers
retained
by
the
in
the
form
0
producers,
Qe
Q
Quantity
will
depend
Although
upon
the
percentage
relative
elasticities
subsidies
are
of
demand
sometimes
and
granted,
they
are
rare
(b)
we
specific
for
will
concentrate
amount
example,
a
of
on
money
subsidy
of
specific
that
$2
per
is
subsidies.
given
unit.
It
for
A
each
thus
has
specific
unit
the
of
subsidy
the
effect
is
product,
of
shifting
ecirP
a
so
Change
supply
curve
vertically
downwards
by
the
amount
of
the
consumer
S
W
S
this
case
original
by
$2,
supply
at
every
curve
and
price.
S
–
1
This
is
subsidy
shown
is
the
in
Figure
curve
after
5.5.
the
S
is
1
–subsidy
X
subsidy,
Y
Z
P
in
expenditure
D
Pe
the
in
)$(
and
supplied
supply.
the
P2
subsidy
is
D
granted.
0
If
we
take
a
normal
demand
and
supply
curve
and
then
assume
Qe
Q
that
Quantity
the
government
diagrams
shown
market
at
price
Aswe
can
of
From
P
curve
increase
price
is
in
e
.
1
,
until
Q
5.6(a),
1
a
Q
of
e
and
the
a
supplied
per
unit
from
producers
demanded
product,
we
get
supplied
the
(c).
being
WZ
equilibrium
both
on
downwards
5.6(a),
new
is
(b),
with
subsidy
vertically
Figure
where
Figure
the
subsidy
5.6(a),
equilibrium
in
output
P
Figure
After
shifts
see
specific
is
S
is
1
to
lower
reached,
and
and
demanded
granted,
S
1
–
the
subsidy.
their
prices
which
is
(c)
at
and
a
ecirP
supply
of
in
a
Amount
of
government
)$(
The
a
grants
S
D
W
S
Pe
–subsidy
X
Z
P
supplied.
subsidy
P2
Y
we
can
see
that
the
price
to
consumers
falls
from
D
P
e
to
P
1
,
not
the
whole
amount
of
the
subsidy,
which
would
need
a
0
fall
of
to
0P
and
P
e
P
.
XQ
1
The
e
to
on
Q
e
0DWQ
is
paid
the
Figure
original
income
of
the
producers
rises
from
the
original
Qe
Q
amount
Quantity
DWZ
subsidy
From
2
Q
1
at
.
to
The
the
consumers
producers
pay
by
0P
the
1
ZQ
1
for
their
government
as
we
a
the
Figure
see
that
price,
P
,
1
the
consumers
thus
saving
get
the
to
buy
the
expenditure
P
P
1
XY
.
e
68
However,
they
do
5.6
subsidy
can
lower
purchase
more
units,
Q
Q
e
,
1
because
the
supplied
purchases
units.
5.6(b),
units
1
price
is
lower,
on
The
a
g ranting
product
of
a
specific
5
Figure
YZQ
e
5.6(c)
government
and
so
must
as
raise
the
P
is
1
us
consumer
savings
that
DWZ.
an
take
Total
relative
shows
is
there
either
building
extra.
1
upon
the
This
or
extra
cost
has
cost
away
infrastructure
total
money
opportunity
money
expenditure
and
of
to
here.
from
providing
increase
or
Be
a
The
workpoint
demand
the
be
subsidy
found
again,
areas
public
of
to
from
Q
fall,
the
the
government
amenities,
or
it
such
must
Make
$0,
1
table
explain
functions
for
a
product
Now
are
$2,
a
let
us
assume
a
5
Add
6
Illustrate
the

new
7
Calculate
to
show
$3,
for
$4,
diag ram
the
the
$5
to
supply
curve
supply
schedules
demand
product
and
show
schedule
when
and
prices
the
4
the
Using
are
that
the
represent
that
you
a
price
number
is
demand
the
curve
demand
have
of
other
W

hether
the
not
to
have
A

lthough
price,
Who
a
they
is
W

hat
things
cost
of
subsidy
may
the
will
it
do
to
the
debate
to
the
g raph.
price
and
quantity.
the
increase
is
in
producer
revenue
when
g iven.
are
8
Calculate
9
Explain
the
total
expenditure
by
the
government.
why
both
consumers
and
producers
benefit
and
the
g ranting
of
the
subsidy.
Identify
possible
and
losers
explain
from
why
the
they
g ranting
may
of
the
lose.
bought
to
receive
the
their
of
production.
This
on
spending
to
be
to
when
buy
who
the
a
subsidy
in
a
“free
products
are
in
projects.
inefficient,
producers
sales
their
if
they
do
market”.
at
funding
prices
such
is
a
and
it
is
in
themselves
by
country
developing
products
major
the
give
farmers
charged
High-income
in
foreign
concerning
subsidies
low
of
a
the
issue
producers
governments?
countries
small-scale
products
selling
evaluated
subsidy:
spending
firms
over-production
subsidies.
dumping
a
from
lead
damaging
accused
to
lower
subsidy.
taxes?
subsidies
with
be
of
taxpayers
subsidies
not
to
consumers
the
high-income
compete
need
foreign
that
receive
curve
equilibrium
the
granting
government
with
be
calculate
allow
allows
also
international
do
new
and
quantity
government
subsidies
who
the
made.
and
that
the
will
compete
damage
highly
g ives
unit.
quantity.
alternative
paying
of
of
subsidy
receiving
deal
price
equations
and
considering
opportunity
terms
not
equilibrium
simultaneous
government
T

he
supply
government
per
sold.
equilibrium
There
the
subsidy
subsidy
and
the
$1
$6.
10
Illustrate
of
200P
from
3
that
subsidy
200P
schedule
$1,
Draw
600
200
a
supply
2
supply
and
producers

S
1
and

D

controls
somewhere
expenditure,
below:
Q

price
5.3
thinker—illustrate
g iven

and
taxes.
Student

subsidies,
expenditure.
Once
other
may
ta xes,
1
Q
depending
Indirect
s cim on o c e or ci M
spending

at
of
There
billions
to
their
argued
and
that
then
are
countries.
contention
at
is
to
who
do
accused
is,
their
the
of
These
countries
That
beneath
this
are
great
dollars
have
farmers
farmers
a
farmers.
developing
the
prices
of
who
is
of
they
costs
World
are
of
Trade
69
Organization
(WTO).
5

Indirect
ta xes,
Student
Be
subsidies,
Cotton
the
—
Read
subsidy
hope
s cim on o c e or ci M
cotton-producing
Brazil's
success
Organisation
in
its
in
cotton
“True,
don't
to
benefit
with
the
with
and
from
US
are
the
United
text
follow
countries
case
against
subsidies
following
which
battle
African
controls
5.4
the
questions
producers
Brazil's
price
workpoint
inquiring
answer
and
happy
World
States'
with
Trade
continued
use
of
production.
Workers
1
said
to
we
Prosper
the
the
African
and
The
“The
Nations
C4
is
countries
Chad
issue
of
are
the
W TO
directly
Vokouma,
United
C4.
benefit
of
the
ruling
Geneva
g rouping
which
gold'
g ives
and
of
Benin,
members.
'white
the
representative
in
the
from
on
it
Burkina
zones
US
Faso
at
Rupa
spin
market.
says.
“It
is
a
strong
balls
Millers
into
in
lint,
Photo/ANTHONY
Athi
most
River
of
expor t
which
is
processing
shipped
to
the
K AMAU
of
Faso,
According
to
additional
revenue
the
charity
Oxfam,
this
would
translate
into
Mali,
helped
put
that
could
feed
one
million
more
the
children
per
children
in
year,
or
pay
the
school
fees
of
two
million
agenda.
”
the
C4's
criticism
of
West
Africa.
demands,”
Adapted
Vokouma
Cotton
cotton
cotton-expor ting
has
to
ruling,”
coordinator
four
W TO
leg itimacy
of
Burkina
“But
the
W TO
the
from:
http://www.businessdailyafrica.com/-
massive
/539552/886028/-/6d5i0y/-/
and
distor ting
body
has
subsidies.
confirmed
The
that
W TO
US
dispute
subsidies
settlement
damage
other
1
countries'
producers
because
of
their
impact
on
Using
an
appropriate
know
that
the
US
has
a
bad
conscience
issue.
Some
2,500
large
farmers
share
more
billion
between
them
every
year,
whereas
20
to
African
cotton
producers
live
in
misery
them,”
of
their
says
hard
work
is
not
even
Studies
by
enough
world
US
3
organisations
subsidies
would
show
the
that
increase
Price
price
The
ar ticle
not
it
consumers,
choose
to
or
There
maximum



minimum
We
now
look
Maximum
This
is
below
raising
prices,
a
for
are
the
the
Maximum
in
in
the
two
an
optimum
best
general,
market
key
situation,
outcomes
in
and
situations
for
so
order
at
each
of
price
all
the
free
producers
C4
governments
to
where
achieve
this
a
market
and
often
different
occurs:
the
above
price
prices
are
the
in
government
price,
it.
is
situations
turn.
controls
where
equilibrium
price
these
which
These
not
usually
are
able
set
then
to
to
sets
a
maximum
prevents
sometimes
go
above
protect
known
“the
price,
producers
as
from
ceiling
ceiling”.
consumers
and
they
are
70
normally
imposed
in
markets
where
the
was
by
of
market
prices”
could
and
"increase
14%”.
advantages
US
cotton
written
with
in
and
the
disadvantages
subsidies.
March
regard
countries
change
prices
(low)
since
be
the
world
subsidies"
to
2010.
US
Research
cotton
in
Africa
product
in
question
is
a
in
their
circumstances?
the
subsidies.
experienced
world
prices
situation
the
to
to
society
intervene
outcome.

seem
lead
on
US
the
the
14%.
may
always
of
price
the
situation
controls
Although
does
by
on
abolition
positive
cotton
impact
cotton
Comment
Have
of
their
abolition
to
Vokouma.
international
abolition
of
“the
current
total
“U S
because
of
product
feed
why
producers
30
2
million
the
explain
countries'
than
the
$3
other
regarding
how
this
damage
prices.
”
because
“We
diag ram,
world
subsidies
market
a
5
and/or
market
may
set
a
were
merit
good
allowed
maximum
prices
(a
good
that
to
operate
in
agricultural
would
freely).
For
and
be
underprovided
example,
food
if
governments
markets
during
times
ta xes,
subsidies,
and
price
controls
S
daerb
the
Indirect
)$(
necessity

fo
shortages
maximum
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prices
affordable
ensure
on
low-cost
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food
for
accommodation
for
those
on
the
in
low
poor,
an
or
they
attempt
to
may
set
ensure
Pe
incomes.
PMa x
5.7
shows
the
situation
that
may
exist
if
the
government
Ma ximum
were
Excess
to
implement
a
maximum
price
in
the
market
for
government
interference,
the
equilibrium
imposes
bread.
a
and
maximum
However,
demanded
Thus
not
we
actually
have
falls
excess
sold
the
and
buy.
the
a
from
of
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a
Essentially,
shift
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Second,
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being
supplied
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to
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and
can
supply
see
curve
Max
will
1
at
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be
who
make
2
of
lead
the
attempts
to
the
to
5.7
The
market
bread,
loaves
of
can
is
left,
of
until
limit
attempt
at
to
the
price
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in
and
the
allowed
consumers,
eliminate,
offer
government
to
it
the
shift
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or
the
a
supply
number
to
of
at
the
the
at
do
to
the
product,
to
with
ways
firms
to
price.
curve
price,
of
try
attempt
reached
maximum
maximum
are
may
could
consumption
subsidies
produce
First,
equilibrium
the
the
There
start
the
options.
imposing
reached
to
in
of
the
the
more
doing
this.
industry
more.
to
produce
the
product
themselves,
supply.
had
previously
release
if
some
the
Figure
the
then
bread
bread
does
of
product
stored
the
some
stocks
were
of
the
(stored
perishable,
product,
goods)
like
onto
bread,
the
this
5.8,
right,
S
if
by
the
government
subsidising,
is
direct
able
to
shift
provision,
or
the
equilibrium
being
S
Pe
using
Excess
stored
for
product
maximum
for
Figure
bread
may
going
of
be
supplied.
developing
“fair”
loaves)
price.
where
the
is
will
government
shortages
queues
Q
be
lower
market),
,
possible.
in
to
the
consumers
ecirP
we
is
really
which
two
would
point
could
However,
be
the
could
the
could
not
Q
P
of
government
fo
would
to
demanded.
government
market.
in
have
this
the
them
increasing
they
to
If
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the
price
only
Q2
(000s
daerb
then
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but
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need
it
decide
not
.
e
bread
)$(
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to
are
P
help
between
also
of
consumption
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illegal
may
to
the
but
that
problems.
ways
curve
government
thus
3
of
would
equilibrium
encourage
The
now
At
though
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price
demand.
find
start
a
order
fallen,
even
There
government
until
1
it
against
right,
in
somewhere
may
at
Qe
of
shortage.
price,
goes
,
1
,
e
arises.
excess
will
problems
may
demand
maximum
Q
Q
Max
has
market
price.
number
this.
of
they
price,
these
P
be
now
creates
black
the
of
price
to
e
producers
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are
Q
higher
reduce,
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the
situation
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least
price
further,
equilibrium
shops
to
at
a
would
problem
demand
emergence
is
a
because
intervene
The
supplied
D
quantity
Quantity
demanded
demand
bread.
0
Without
price
1
Figure
s cim on o c e or ci M
food
ecirP
of
will
demanded
be
and
reached
supplied.
at
P
Max
,
with
However,
it
Q
is
demand
PMa x
2
fair
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price
to
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say
that
this
especially
may
in
the
well
case
mean
of
a
that
the
subsidy,
government
and
that
this
incurs
will
have
a
cost,
Q
0
an
Quantity
opportunity
bread
area,
cost.
industry,
such
as
it
If
the
may
government
have
education
or
to
spends
reduce
health
money
expenditure
care.
supporting
in
some
Qe
of
bread
Q2
(000s
of
loaves)
the
other
F igure
the
5.8
Government
problem
of
excess
action
to
solve
demand
71
5

Indirect
ta xes,
Student
Be
A
a
subsidies,
in
size.
price
workpoint
a
In
city,
wishes
by
doing
this,
they
s cim on o c e or ci M

provide
low-cost

provide
more
1
Draw
on
a
the
to
diag ram
to
cost
and
of
suggest
cheap
ma ximum
rents
solutions
rented
on
accommodation
proper ties
of
a
cer tain
to:
rented
for
the
legal
aim
rented
market
explain,
keep
imposing
controls
5.5
thinker—illustrate,
government
low
and
accommodation
accommodation
show
the
rented
effect
of
for
for
the
people
people
on
on
ma ximum
low
low
rent
incomes
incomes.
leg islation
accommodation.
1
2
Explain
the
situation
facing
situation
facing
those
people
who
those
people
who
rent
out
their
proper ties.
3
Explain
4
Suggest
the
measures
achieve
Assessment
HL
paper
aims
wish
take
to
to
you
the
shor tage,
proper ties.
that
be
asked
ceiling
changes
to
calculate
diag ram
in
they
above.
The
may
price
rent
ensure
possible
including
expenditure
required
and
the
total
is
an
and
is
shown
below:
S
2
of
the
the
kinds
of
questions
that
you
may
responses.
market
for
cooking
oil
in
a
1.50
fo
Below
example
suggested
gnikooc
face
is
lio
expenditure.
Here
diag ram
rep
possible
stated
might
Advice
3
from
their
government
ertil
effects
of
the
)$(
In
both
that
country.
Price
)$(
ecirP
1
ceiling
ertil
S
rep
D
2
lio
gnikooc
0
0.5
1
1.5
2
Quantity
of
cooking
(millions
of
oil
litres)
fo
ecirP
1
The
equilibrium
and
1
million
The
ceiling
You
could
price
litres
price
and
of
is
quantity
cooking
indicated
are
shown
as
$1.50
oil.
at
$1.
D
0
1
2
Quantity
of
cooking
(millions
of
oil
million
litres
of
million
litres
will
government
price
ceiling
of
of
$1
the
per
country
decides
to
impose
a
legal
an
Indicate
the
excess
Consumer
million
litre.
after
1
equilibrium
price
and
that
at
cooking
be
the
oil
ma ximum
will
supplied.
be
price
demanded
This
means
of
$1,
but
that
1.5
only
there
0.5
will
litres)
be
The
explain
quantity
on

the
demand
for
expenditure
$1.50

$1.5
ma ximum
cooking
before
the
million.
price
was
oil
of
1
million
ma ximum
Consumer
0.5
million

litres.
price
was
1
expenditure
$1.00

$0.5
the
million.
Therefore,
consumer
expenditure
on
cooking
oil
g raph.
has
2
Show
3
Explain
the
price
ceiling
on
the
fallen
much
cooking
oil
will
be
demanded
following
the
imposition
of
the
price
Calculate
the
change
in
consumer
oil
following
the
expenditure
imposition
of
the
Explain
to
two
achieve
measures
their
aim
of
that
the
g iving
price
government
less
expensive
they
that
if
need
the
to
government
eliminate
might
be
done
to
achieve
demand.
by:
Direct
provision
may
take
cooking
setting
up
of
of
cooking
oil
government
by
the
owned
government,
cooking
i.e.
oil
manufacturers.
oil
Granting
subsidies
to
cooking
72
more
wants
excess
ceiling.
b
to
the
on
the
5
explain
then
ceiling.
a
cooking
could
aim
This
4
million.
and
its
supplied
$1
diag ram.
You
how
by
people.
encourage
g reater
supply.
oil
producers
in
order
to
5
is
above
a
(high)
situation
the
price
controls
where
equilibrium
the
price,
government
which
then
sets
a
minimum
prevents
price,
since
price
the
below
price
is
it.
These
not
able
and
price
controls
are
to
sometimes
producers
go
below
known
“the
as
from
PMin
Minimum
ecirP
prices,
the
subsidies,
S
fo
reducing
ta xes,
taehw
This
Indirect
)$(
Minimum

floor
floor”.
price
Pe
prices
are
mostly
set
for
one
of
two
reasons.
1
To
attempt
that
the
products.
large
to
raise
incomes
government
They
may
fluctuations,
for
thinks
be
or
producers
are
helped
because
of
important,
because
there
is
goods
such
their
a
lot
and
as
prices
of
services
agricultural
are
foreign
subject
to
D
competition.
Q
0
2
To
protect
workers
workers
earn
by
setting
enough
to
lead
a
minimum
wage,
a
reasonable
to
ensure
that
Quantity
5.9
shows
the
situation
that
might
exist
if
the
to
implement
Without
a
minimum
government
demanded
imposes
a
and
interference,
supplied
minimum
price
would
price
of
be
P
in
the
Q
in
,
the
e
market
equilibrium
at
a
price
order
to
of
Q2
wheat
(000s
of
tonnes)
5.9
of
A
minimum
price
in
the
government
market
were
Qe
existence.
F igure
Figure
s cim on o c e or ci M
1
Minimum
for
for
wheat
wheat.
quantity
P
.
The
e
increase
the
government
revenue
of
Min
the
producers
priceP
Q
2
Min
will
of
only
now
be
wheat.
Q
However,
be
supplied.
government
of
does
wheat
a
problem
demanded
Thus
not
we
have
intervene
actually
falls
now
because
a
the
arises.
price
situation
further,
from
Q
e
of
they
to
Q
,
At
has
excess
will
at
but
supply.
find
albeit
1
the
risen,
that
taehw
consumption
will
1
)$(
Ifthe
,
a
excess
have
supply
surpluses
controls
and
creates
and
sell
will
their
problems.
be
tempted
excess
Producers
to
supply
try
for
a
to
will
get
find
that
around
lower
price,
the
Minimum
they
Pe
price
P
Min
and
P
Q
order
to
maintain
government
will
the
have
minimum
to
price,
intervene.
This
it
is
is
likely
shown
that
in
government
buying
the
Q
would
to
the
demand
with
The
up
be
D
it
always
foreign
some
farmers
aside”
could
option,
are
question.
nothing
their
cases,
land
is
but
avoids
and
it
they
actually
storage
and
a
store
and
to
excess
F igure
5.10.
supply
price,
new
new
who
will
the
This
surplus,
be
causes
have
paid
or
a
The
tends
thus
of
wheat
buying
(000s
of
tonnes)
5.10
Government
problem
of
excess
action
to
solve
supply
by
shifting
equilibrium
demand
to
angry
claim
price
price
costs
to
for
the
destroying
destroy
rather
at
P
Min
,
curve
that
it,
products
are
an
then
the
same
for
the
is
the
are
being
policy,
paid
to
product
estimated
and
industries.
agricultural
and
attempt
abroad
from
domestic
produce
or
expensive
Selling
reactions
their
Union
used
be
wasteful.
harm
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is
given
can
to
the
revenues,
and
profit
product
output
a
run
Costs,
that
time
only
the
be
fixed
output
a
firm
period.
produces,
As
increased
we
by
using
have
its
already
applying
more
factors.
that
is
produced,
on
average,
by
1
Average
marg inal
is
variable
output
units
and
(TP)

each
unit
of
the
variable
factor.
AP

,
where
TP
is
the
total
s cim on o c e or ci M
TP
___
output
V
produced
Marginal
and
V
is
product
the
number
(MP)
is
the
of
units
extra
of
the
output
variable
that
is
factor
produced
employed.
by
using
ΔTP
____
an
extra
unit
of
the
variable
factor.
MP
,

where
ΔTP
is
the
ΔV
change
the
in
total
variable
Take
an
output
factor
example.
increases
its
Production
ΔV
is
the
change
in
the
number
of
units
of
employed.
A
output
figures
and
firm
by
for
has
using
each
four
machines
more
week
are
given
1
Quantit y
labour
(fixed
operators
to
in
factors)
work
Table
the
6.1.
2
of
(V)
3
Tot al
Average
produc t
0
and
machines.
( TP )
produc t
4
Marginal
(AP )
produc t
( MP )
0
10
15
As
we
add
additional
of
labour,
output
an
20
unit
(TP)
The
of
more
extra
output
produced
is
25
produced
unit
is
of
units
that
are
when
each
labour
added
20
15
10
5
Table
6.1
T
otal,
Assessment
In
HL
paper
product
average,
marg inal
product
per
week
advice :
3,
from
and
a
you
set
may
of
be
data
asked
and/or
to
calculate
total,
average,
and
marg inal
diag rams.
79

6
Costs,
Now
revenues,
we
can
and
plot
profit
these
curves.
tcudorp
tcudorp
150
TP
latoT
latoT
100
AP
s cim on o c e or ci M
50
MP
1
0
2
3
Quantity
4
of
5
variable
6
7
factor
8
Quantity
(labour)
of
variable
factor
(labour)
1
F igure
The
6.1
The
law
From
total
of
the
product
diminishing
table,
we
F igure
curve
can
6.2
Average
and
marg inal
product
returns
deduce
the
following
definitions.
Definitions
The
hypothesis
diminishing
As
extra
added
the
units
to
from
factor
two
angles.
of
quantity
each
a
eventually
whole
entrepreneur
young
small
of
a
very
small
implements
When
he
himself.
tomatoes,
Ben
so
finds
he
manage
even
to
more
another
with
Demand
working
means
joined,
the
can
his
a
a
eventually
given
per
of
returns
variable
quantity
unit
of
the
factor
of
a
are
fixed
variable
factor,
factor
diminish.
relationship
be
popular
so
50
worked
Ben
Nick
in
from
different
common
variable
so
his
total
40
of
sense.
they
the
hour.
They
output
total
The
factors.
to
and
the
up
that
up
Niki
of
they
the
With
jobs
and
become
need
work
each
the
again,
hour.
four
hour.
per
burgers
30
burgers,
the
burgers
burgers
hour
output
90
per
50
was
enough
hamburgers
Niki.
20
was
per
some
everything
lettuce,
divide
in
was
When
and
is
consists
the
fixed
divide
agree
burgers
product
the
make
produce
output
grill,
also
which
stand
hour.
They
bring
burgers
all
The
prepares
cannot
124
business,
hamburgers
per
help.
and
a
are
onion,
Caroline
burgers.
factor),
the
he
them.
marginal
are
and
the
each
produce
the
was
sells
task,
rise,
number
product
a
cuts
to
new
There
These
and
a
corner.
refrigerator,
alone
and
joins
alone,
him,
Caroline’s
total
high
burgers
they
a
up
street
burgers
Caroline,
and
to
and
20
sets
burgers.
burgers,
buns,
to
produce
the
works
make
friend,
joined
the
of
He
the
continues
marginal
units
makes
together,
that
of
eventually
matter
busy
burgers.
Ben
specialising
Ben
Caroline
a
Ben
a
containing
making
out,
worker,
each
When
for
demand
hires
same
really
on
preparing
heats
customers.
the
is
a
output
will
named
stand
shop,
for
starts
He
at
units
to
of
average
example.
hamburger
countertops
the
the
diminish.
look
A
of
extra
added
factor,
unit
concept
an
As
are
fixed
additional
hypotheses
The
factor
of
hypothesis
diminishing
returns
variable
will
The
eventually
Consider
a
80
a
given
output
variable
The
a
of
marginal
hour.
per
burgers.
rose
to
joined
90,
When
so
(we
burgers
hour.
This
Nick
Nick’s
are
rose
When
to
adding
124
per
curves
6
hour,
making
marginal
was
this?
workers,
grill,
people.
Well,
but
are
all
marginal
it
fell
the
started
output
to
of
to
space
became
get
in
extra
the
by
Note
the
the
an
up
to
counter
there
way
great
that
and
so
profit
Why
tops,
and
the
more
could
as
and
three
were
amount
revenues,
the
workforce.
people
when
other’s
as
to
shop,
efficient
each
burgers
burgers.
added
add
in
less
34
was
Costs,
not
when
the
previous
worker
Whether
factor
we
factor
eventually
is
the
have
In
order
cost
used
to
by
that
by
of
direct
has
firm
money
Any
costs
its
are
in
costs
her
of
costs.
cost
unit
of
variable
the
inefficiency
of
a
job
as
depends
cost
is
is
the
cost
must
of
next
made.
production
In
the
best
this
(resources)
case
that
service.
production
others
and
a
the
and
we
not
are
them
For
not
and
separate
the
already
the
other
costs
any
owned
the
example,
opportunity
Any
already
in
of
costs
a
or
firm
if
may
should
it
needs
be
be
to
use
a
if
a
firm
to
on
sort
firm
by
the
alternative
cost
things
this
to
the
hires
firm
which
are
the
known
that
a
is
as
involve
as
to
a
accountant.
have
this
needs
or
not
still
to
if
it
sold
pay
accounted
Implicit
had
employed
them
$100000
the
it
close
to
an
to
examples:
in
if
have
be
be
costs.
accountant.
that
very
had
out
earn
tax
since,
The
will
will
implicit
included
argue
it
there
through
presumably
covering
then
hired
able
cover
firm
which
as
could
had
job,
would
t he
owns
known
understood
firm
by
However,
their
are
that
would
upon
for
bought.
them.
use
some
tax
production
owne d
alternative
firm
a
it
sort
best
of
then
costs
uses
cost
Indeed,
that
opportunity
decision
of
paid
wage
involved
entrepreneur
the
per
extra
money.
that
it
this
best
opportunity
the
or
cost
spent.
a l re a dy
are
owner
next
of
earnings
Implicit
is
of
good
from
is
been
week
been
another
firm.
The
the
that
opportunity
factors
Explicit
cost
the
factors
a
factors
another
a
us
by
categories:
that
worker’s
are
costs
of
have
when
opportunity
good
factors
the
two
price
payment
If
a
economic
cost
have
costs.
that
for.
added
tells
economic
the
purchased
the
that
Factors
a
logic
that
an
of
into
$1,000
could
explicit
out
amount
added
firm
could
for
cost
the
are
the
that
$1,000
the
when
cost
firm
simply
worker
producing
producing
opportunity
things
the
of
out
a
owned
is
the
amount
product),
Remember
in
work
Factors
firm
or
the
occur.
foregone
used
The
2
to
opportunity
been
factors
1
product)
production.
alternative
it
from
cost
economic
firm’s
it
(average
begin
Economic
added.
measure
(marginal
variable
The
was
s cim on o c e or ci M
1
the
Niki
efficient
because
it
product
when
was
fixed,
They
increase
the
product

is
it
firm’s
the
is
down
existence
in
important
met,
the
year
economic
most
not
per
This
the
firm
of
the
and
take
firm
cost.
81
6

Costs,
revenues,
A
b
firm
and
owns
buildings
month.
As
we
The
is
have
been
can
see
s cim on o c e or ci M
different
the
profit
1
Student
be
that
rented
opportunity
rent
that
is
purchased
from
do
buildings
could
itself
accountants
profit
above,
not,
then
levels
for
if
it
cost
to
that
to
produce
other
the
firms
firm
and
of
the
its
for
goods.
using
things
The
$15000
the
that
per
buildings
could
money.
economists
same
workpoint
to
foregone
with
economists
the
uses
out
count
and
these
costs
accountants
and
would
report
firms.
the

6.2
owner
another
Be
a
thinker
revenues
–
and
identify
the
calculate
different
the
costs
small
firm
has
been
$70
000
year
they
operating
for
one
year.
paid
$40

paid
$100
000

used
in
wages
and
000
their
for
own
rented
The
owner
raw
received
In
the
in
$40
firm
small
out
Firms
types
for
factory,
$90
wor th
000
a
its
$20
of
in
own
000
second
the
that
week
start
worker
which
electricity
is
machinery,
We
of
value
could
the
Total
We
Total
firm
is,
per
in
figures
costs.
costs:
need
and
year
has
been
light
of
the
facts
fixed
uses
is
at
to
above,
1
Identify
2
Calculate
the
costs
and
firm
from
000
(the
of
rate
of
his
own
interest
during
has
and
$70
000
an
accountant
an
economist
reduced
tear
and
be
to
producing
able
to
whatever
understand
understand
example
assume
from
that
machines)
The
outcome
can
to
are
cost
(TFC):
a
given
explain
separate
the
the
equal
to
asset.
In
(four
machines
is
time
fixed,
firm
fixed
TFC
the
where
of
Ta b l e
cost
and
the
costs
complete
the
the
total
period.
TFC
produces
the
is
a
one
number
example
the
good
or
different
those
of
that
this
6.1,
a
machine
the
on
and
cost
the
of
costs
per
a
of
different
into
costs
two
a
of
ways
of
groups:
producing
output.
of
in
cost
Since
constant
unit
or
fixed
Table
of
the
the
fixed
number
amount.
one
assets
6.2,
It
assets
of
is
hundred
times
TFC
the
per
that
fixed
the
$100
each)
at
every
level
same
units.
cost
week
of
a
assets
is
of
each
$400
82
costing
the
b
measures:
in
5%)
of
the
explain
a
6.2.
we
tend
costs
the
four
week.
definition,
whether
TFC
paid
above:
services
which
when
and
will
are
Ta b l e
We
Total
three
by
We
(there
$200
use
with
firm
as
explicit
or
implicit.
have
wear
of
costs
face
looking
shown
measuring
$60
business
revenue
because
hand
firms
costs.
$100
are
Using
by
some
is
invested
the
profits/losses
000
total
different
provide.
costs
can
a
has
into
originate.
adding
1
by
many
they
of
job
been
year
costs
have
service
firm
$450
has
Shor t-run
We
000
uses
value
now
costs
per
addition:

a
materials
the

up
have
salaries
In
used
g iven
would
have:


has
he
During
the
been
firm
answer.
money
the
the
where
and

A
of
firm,
output.
point
of
view
of:
made
by
6
1
2
3
4
Tot al
of
produc t
labour
Output
revenues,
Average
9
cost
Average
variable
tot al
cost
cost
( TC )
cost
(q)
profit
Marginal
fixed
( TFC )
and
8
cost
variable
cost
Costs,
7
Average
Tot al
fixed
( TP )
(V)
or
6
Tot al
Tot al
Quantit y
5

(AFC )
( T VC )
cost
(AVC )
( MC )
(ATC )
0
0
400
0
400
-
-
-
1
10
400
200
600
40
20
60
s cim on o c e or ci M
1
20
13.33
2
25
400
400
800
16
16
32
10
3
45
400
600
1,000
8.89
13.33
22.22
8
4
70
400
800
1,200
5.71
1
1.43
17.14
5
90
400
1,000
1,400
4.44
1
1.1
1
15.55
6
105
400
1,200
1,600
3.81
1
1.43
15.24
10
13.33
20
7
1
15
400
1,400
1,800
3.48
12.17
15.65
40
8
Table
b
120
6.2
T
otal,
Total
average,
marg inal
cost
(TVC):
is
firm
equal
to
the
variable
one
uses
more
TVC
in
of
a
the
is
per
is
the
given
So
of
in
being
3.33
13.33
16.67
week
total
time
variable
number
factor.
worker
costs
2,000
cost
period.
the
TVC
variable
increases
as
factor.
variable
the
of
factors
current
employed
times
example,
and
$1,200
the
TVC
when
cost
is
$200
tsoC
each
when
a
uses
1,600
)$(
of
that
firm
TVC
and
variable
assets
the
400
2500
2000
TC
six
T VC
1500
c
workers
are
Total
(TC):
cost
factors
being
used
TC
to
used.
is
the
total
produce
a
cost
certain
of
all
the
output.
fixed
It
is
and
equal
variable
to
1000
TFC
500
TFC
plus
So
TVC.
in
the
current
example
the
total
cost
of
producing
50
0
105
100
150
Output
units
plus
of
output
the
per
variable
week
cost
of
is
$1,600.
It
is
the
fixed
cost
of
$1,200.
F igure
The
2
different
Average
total
costs:
cost
These
curves
are
are
costs
(units)
$400
shown
per
unit
in
of
Figure
output.
and
6.3.
We
use
6. 3
total
T
otal
fixed
cost,
total
variable
cost,
cost
three
measures:
a
Average
fixed
cost
(AFC):
AFC
is
the
fixed
cost
per
unit
of
output.
TFC
____
It
is
calculated
by
the
equation
AFC

,
where
q
is
the
q
level
of
output.
Because
TFC
increases.
output
is
In
10
is
a
the
constant,
current
units
and
AFC
always
example,
falls
to
AFC
$3.33
per
falls
is
as
$40
unit
output
per
unit
when
when
output
83
increases
to
120
units.
6

Costs,
revenues,
Average
b
and
profit
variable
cost
(AVC):
A
VC
is
the
variable
cost
per
unit
of
TVC
____
output.
It
is
calculated
by
the
equation
A
VC

,
where
q
is
q
the
level
A
VC
tends
again
as
s cim on o c e or ci M
the
As
more
In
fall
as
of
the
per
the
falls
of
unit
of
per
to
eventually
factors
the
unit
example
to
increases,
continues
variable
cost
current
units,
output
output
hypothesis
so
the
10
to
output
and
output.
the
by
the
of
of
output
$11.11
per
is
then
This
diminishing
are
variable
A
VC
and
increase.
applied
factor
unit
per
the
rise
returns.
factors,
falls,
begins
when
output
to
fixed
eventually
unit
when
start
explained
average
to
eventually
$20
to
is
to
rise.
output
rises
to
is
90
1
units
to
and
rise
to
Average
c
It
is
then
120
total
equal
increases
$13.33
when
output
continues
units.
cost
to
to
(ATC):
AFC
ATC
plus
is
A
VC.
the
It
is
total
cost
calculated
per
by
unit
the
of
output.
equation
TC
___
ATC

,
where
q
is
the
level
of
output.
as
output
q
As
to
with
start
the
A
VC,
to
current
as
example
falls
to
and
ATC
$15.24
then
to
the
fall
output
is
per
$60
per
unit
increases
to
increases,
continues
unit
when
to
when
output
$16.67
when
and
then
increase.
output
rises
In
is
to
tsoC
105units
tends
again
)$(
10units,
ATC
rise
output
MC
20
ATC
continues
to
rise
to
120
units.
AVC
15
3
Marginal
extra
cost
unit
(MC):
of
MC
output.
is
It
the
is
increase
calculated
in
by
total
the
cost
of
producing
an
equation:
10
ΔTC
____
MC

,
where
ΔTC
is
the
change
in
total
cost
and
Δq
is
the
Δq
change
in
the
level
of
output.
5
AFC
MC
tends
to
fall
as
output
increases,
and
then
to
start
to
rise
again
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price
of
$6
per
pizza,

$6

400

$2,400
per
Average
revenue
unit
unit
week.
increase
is
the
revenue
factors
(AR)
that
a
1
firm
receives
per
unit
of
its
of
using
the
p
TR
___
AR

can
find
that
output
their
rises
sales.
It
amount
if
Distinguish
up
of
to
a
output.
between
reasoning
and
is
reasoning.
formula:

2
q


Is
the
example
above
a
P
q
see,
of
of
piece
of
deductive
reasoning
we
reduce
_____
q
As
a
Ceteris
production
level
inductive
calculated
will
the
deductive
AR
scale
costs.
firms
per
certain
2
to
then:
they
TR
of
up
output.
considered.
paribus,
If
scale
of
the
long-run
quantity
of
level
Economies
where
from
formula:
economies
TR
suggests
is
since
TR
is
(p

q),
q
is
common
to
the
top
or
inductive
and
reasoning?
bottom
of
the
Thus,
the
formula
and
so
AR
is
the
same
as
p.
3
if
firm
sells
400
pizzas
at
a
price
of
$6
per
pizza,
Do
you
think
economic
$2,400
deductive
_______
AR


$6(the
same
as
the
price
per
that
most
then:
reasoning
or
is
inductive?
Why?
unit)
400
3
Marg inal
MR
a
is
the
product
revenue
extra
in
a
(MR)
revenue
given
that
time
a
firm
period.
It
gains
is
when
calculated
it
sells
by
one
using
more
the
unit
of
formula:
ΔTR
____
MR

,
where
Δ
means
“the
change
in”.
Δq
Thus,
that
if
our
their
pizza
weekly
firm
sales
lowered
rose
to
$2500
$2400
____________
MR

extra
revenue
gained
price
of
pizzas,
a
pizza
to
$5
and
found
then:
$100
____

100
The
the
500

$1
100
from
selling
an
extra
unit
is
$1.
89
6

Costs,
revenues,
Revenue
We
now
curves
need
increases.
1
We
Revenue
a
firm
s cim on o c e or ci M
wishes
1
A
firm
Price
Table
We
price
not
sell
This
and
has
a
figures
($)
to
its
not
a
firm’s
revenue
as
output
situations.
change
lower
when
with
output
Chapter
perfectly
in
(when
faces
in
building
the
increases
a
and
perfectly
theory,
their
theoretical
but
it
models
market
is
of
form
demand
Quantit y
Tot al
revenue
curve
might
have
the
Average
($)
Marginal
revenue
($)
revenue
1
5
5
5
5
2
10
5
5
5
3
15
5
5
5
4
20
5
5
5
5
25
5
5
5
6
30
5
5
5
7
35
5
5
can
that
industry,
total
Therefore
the
and
the
firm
that
for
is
they
supply,
firm
sell
all
firm
very
can
industry
can
a
with
a
small
in
increase
and
that
thus
it
per fectly
elastic
terms
their
price,
the
output
in
produces
of
any
at
the
demand
size
of
curve
without
significant
same
(a)
the
AR
&
MR
when
PED
=
infinity
way.
price.
ecirP
affecting
figures
($)
)$(
whole
assume
revenue
of
6.3.
demanded
Possible
very
how
5
6. 3
it
elastic
7).
elastic
Table
output
it
happens
are
with
as
then
only
they
start
(see
price
product,
situation
shown
to
different
infinite)
they
competition
happens
two
does
is
of
economists
that
what
have
more
work
revenue
output
consider
curve.
markets
perfect
and
demand
does
to
profit
consider
shall
of
to
demand
useful
to
when
elasticity
If
and
D=AR=M R
5
If
we
graph
Figure
In
the
6.9(a)
these
revenues,
and
graphs,
we
will
get
the
curves
shown
in
(b).
we
can
see
that,
when
price
elasticity
of
demand
5
0
is
perfectly
elastic,
then
price,
average
revenue,
marginal
10
revenue,
Output
and
demand
are
all
the
same.
In
this
case,
they
are
all
$5.
(b)
Total
each
extra
Revenue
at
when
curve
demand
falls
when
the
we
ones
price
is
as
look
output
adds
a
constant
$5
to
total
rate
as
output
revenue.
falls
output
at
what
decreases
above.
If
as
downward
a
output
Marginal
i.e.
(when
when
revenue
the
90
control
price
face
the
a
if
the
it
price
wants
at
to
we
get
a
wishes
which
figures
it
increase
downward-sloping
revenue
PED
=
infinity
TR
35
the
elasticity
of
to
TR,
very
to
AR,
and
different
sell
more
of
MR
set
its
as
of
price
curves
output
falls
0
sells,
demand.
demand
relating
to
then
it,
In
curve.
is
it
have
simpler
An
shown
will
and
it
Table
lower
terms,
example
in
to
of
6.4.
it
7
Output
from
F igure
can
when
increases)
happens
firm
increases
sloping,
TR
increases,
$5.
demand
When
sale
at
RT
isconstant
2
increases
)$(
since
revenue
will
this,
and
6.9
Curves
for
P ED
5
infinity
6
Price
($)
Quantit y
Tot al
demanded
revenue
50
Average
0
($)
Marginal
revenue
($)
revenue

Costs,
revenues,
and
profit
PED
($)
0
45
45
2
90
45
9.00
40
4
160
40
35
6
210
35
30
8
240
30
s cim on o c e or ci M
1
35
4.00
25
2.33
15
1.50
5
25
10
250
25
1.00
5
20
12
240
20
15
14
210
15
0.67
15
0.43
25
10
16
160
10
0.25
35
5
18
90
0
20
0
5
0.1
1
45
Table
we
Output,
would
expect,
since
products.
This
the
is
and
AR
is
price
shown
P ED
figures
equal
has
to
clearly
to
be
in
for
a
firm
price
and
lowered
Figure
with
a
so
in
normal
it
falls
order
6.10,
to
where
demand
as
output
sell
the
curve
ecirP
increases,
revenue,
)$(
As
6.4
more
250
225
TR
demand
is
ma ximum
200
curve
is
now
labelled
D

AR.
175
MR
also
falls
as
output
increases,
but
at
a
greater
rate
than
AR.
In
150
fact,
as
we
can
see
in
Figure
6.10,
the
MR
curve
is
twice
as
steeply
125
sloping
as
the
AR
curve
and
also
goes
below
the
x-axis.
This
is
a
100
TR
relationship
that
holds
for
all
downward-sloping
AR
curves
and
P ED
the
=
1
75
MR
curves
that
relate
to
P ED
them.
>
1
50
P ED
MR
is
below
AR
because
in
order
to
sell
more
products
the
firm
has
<
1
25
D
to
lower
the
price
of
all
products
sold,
losing
revenue
on
the
0
that
could
have
been
sold
at
a
higher
price
in
order
to
get
=
AR
ones
5
10
15
the
MR
=
20
MR
0
-25
Quantity
revenue
from
the
extra
F igure
For
example,
in
Table
6.4,
when
price
is
dropped
from
$40
to
quantity
demanded
increases
from
4
units
to
6.
Before
6.10
the
M R,
$210
the
TR
($35

was
$160
($40
4).
After
the
price
drop,
TR
and
relationship
P ED
for
a
between
D,
normal
curve
becomes
6).
50
___
ΔTR
____
The

TR,
price
demand
drop,
The
$35,
AR,
the
(units)
sales.
MR
is
$25

(
Δq

25)
2
91
6

Costs,
There
are
product
order
$40
(4

two
are
to
this,
been
$5).
and
profit
events
sold
do
has

revenues,
at
a
the
affecting
price
price
dropped
The
overall
to
of
of
the
$35
effect
the
$35
4
and
is
TR.
and
an
First,
so
units
so
two
TR
that
there
increase
extra
rises
by
could
is
in
a
units
$70.
have
loss
of
revenue
of
been
sold
revenue
of
the
However,
of
$70
in
for
$20
$20
$50.
s cim on o c e or ci M
For
a
but
will
normal,
the
extra
downward-sloping
eventually
revenue
units
is
were
being
start
gained
outweighed
sold
to
at
by
a
fall
from
the
output
in
price
curve,
price
revenue
and
TR
increases.
dropping
loss
higher
demand
as
now
and
from
rises
This
selling
the
have
at
is
to
more
units
be
first
because
that
sold
at
the
1
lower
price.
For
example,
the
quantity
price
drop,
becomes
in
Table
6.4,
demanded
the
$160
TR
was
($10

when
$210
MR
is
is
from
($15

dropped
14
14).
units
After
from
to
the
16.
$15
to
$10,
Before
price
the
drop,
TR
16).
ΔTR
____
The
price
increases
$25
50
____

(

25)
Δq
2
The
negative
when
price
sold
the
each,
for
$15
has
of
$20
$70
are
are
already
This
assess
the
the
If
firm
the
that
total
total
easily
However,
of
if
the
increase
in
the
the
fall.
MR
units
the
14
$10,
of
is
so
effect
negative
the
units
and
overall
is
a
price
price
fall
very
we
by
of
a
they
there
is
a
because,
product
that
could
is
fall
a
in
the
r a is e s
to ta l
ca us e
tree,
are
sold
have
loss
at
revenue
for
the
firms
price
6.10.
information
and
revenue.
value
when
elasticity
Figure
of
they
PED
are
of
their
product
inelastic
then
the
for
a
trying
will
to
have
receive.
is
because
pr ice
a nd
re ve nue
the
increase
in
firm
will
price
find
will
see
demanded.
d ema nd
wil l
r e la tive l y
is
in e l as t ic
de c r ea s e,
l ar g er
fa ll
then
be c a u se
t he
in
the
q uan t i t y
or
inelastic,
demanded.
So,
will
92
if
a
firm
know
knows
what
a
been
of
total
price
from
using
elasticity
between
quantity
a
between
identify
logic
the
demand
increase,
in
in
can
price
useful
change
that
tha t
wi l l
relationships
that
study
and
will
fi r m
find
TR
relationship
TR
that
smaller
will
to
The
explained
revenue
raises
thefirm
and
in
and
revenue
relatively
of
important
AR,
impact
upon
$5).
will
extra
price
dropped

very
knowledge
curve
TR
two
$50.
discovered
demand
the
been
MR,
most
but
(14

some
demand,
They
a
$70
that
lowered,
$10
There
of
means
is
of
revenue
of
MR
price
whether
pricing
their
policy
to
demand
adopt
to
is
elastic
increase
their
they
revenue.
6
is
Therefore
point
demand
g reater
F igure
The
1
curve,
6.1
1
basic
When
When
When
leave
A
a
Here
Price
of
1
P ED
PED
is
equal
will
tree
to
1,
P ED
0.
a
Therefore
the
point
be
the
to
where
demand
explaining
profit
1
When
less
the
curve,
than
varying
right
P ED
=
1
P ED
of
falls
=
as
demand
0
price
falls
on
curve
the
on
will
MR
the
be
1.
values
of
P ED
on
a
demand
curve
are:
is
is
raise
PED
the
elastic
any
inelastic
its
firm
wishing
to
increase
revenue
should
is
unity
price
then
firm
any
unchanged,
workpoint
some
($)
any
wishing
to
increase
revenue
price.
thinker—solve
are
=
the
on
to
and
price.
Student
Be
=
log ic
PED
its
left
P ED
MR
1.
rules
should
3
the
P ED
than
lower
2
to
where
equal
ma ximised
Therefore
where
is
revenues,
1
TR
P ED
Costs,
s cim on o c e or ci M
When

figures
wishing
revenue
to
is
increase
already
revenue
should
maximised.
6.4
the
for
firm
since
problems
the
price
and
and
illustrate
quantity
Quantit y
Tot al
demanded
revenue
20
1
18
2
16
3
14
4
12
5
10
6
8
7
6
8
4
9
the
demanded
outcomes
of
a
product:
Average
($)
revenue
Marginal
($)
revenue
PED
($)

16
12
36
93

6
Costs,
1
revenues,
Copy
the
2
out
other
On
a
a
s cim on o c e or ci M
Plot
0
table
of
the
and
fill
in
the
missing
values
in
6
Using
to
g raph
Price
to
against
profit
columns.
horizontal
from
3
the
piece
labelled
and
($),
a xis,
paper,
going
draw
from
labelled
a
ver tical
12
Quantity
to
demand
curve
on
the
demanded).
Then
Demanded,
graph
Label
(i.e.
the
Average
Revenue
curve.
What
do
plot
curve
you
add
“
the
elastic

the
inelastic

the
point
7
Complete
notice?
In
1
Plot
the
plot
it
Total
Revenue
Marg inal
at
the
Assessment
the
Revenue
half-way
advice :
6.4,
you
between
demand,
It
should
look
It
is
very
if
This
the
is
wor th
data
curve,
marks
you
economist
The
on
the
“Why
total
is
and
The
very
remembering
the
what
and
said
how
total
that?”
you
horizontal
elastic
falls,
the
(costs
(earnings
“I
said
you
on
your
to
cost
cost
his
I
In
the
inelastic
falls,
Total
firm
P ED
the

demand
curve
1.
sentences:
of
the
revenue
showing
the
total
relationships
paper
revenue
is
relationship
revenue,
and
P ED.
to
3,
be
to
able
of
these
without
to
calculate
use
total
relationships
any
and
figures.
interpret
average
and
diag rams.
the
or
“I
As
an
the
but
that
asked
cost
that
was
of
Nermin,
$80
000.
and
said
take
would
of
had
is
cost
it
case
do
of
the
say
profit,
same
that
and
employed
there
not
healthy.”
includes
money)
if
minus
very
definition
not
I
revenue
is
profit
is
explicit
implicit
its
only
include,
but
view
factors
one
but
it
is
the
faces.”
accountant.
of
the
economist.
opportunity
do
you
accounts
firm,
figures
figure
Economic
have
of
total
your
Nermin’s
firm
the
is
payment
could
the
the
year
set
profit
we
of
just.
economist
include
the
the
only
with
cost.
In
for
same
the
about
owner
“Profit
that
direct
ways).
the
the
out
is
talking
the
profit
at
agree
firm
opportunity
her
that
economic
that?”
said
the
accountant.
would
cost
were
that
satisfied,
costs.
other
I
said
understand
the
down
and
move
reg ion
total
of
cost
“If
in
owner
an
the
of
the
owner
long
on
to
their
next
revenue
is
demand
curve,
as
_____________.
the
demand
curve,
as
_____________.
ma ximized
_____________
firm,
does
run
the
not
then
manage
they
will
to
close
94
the
curve
to
understanding
have
and/or
looked
work
involve
that
is
be
the
that
important
include
demand
where
P ED
is
equal
a xis.
revenue,
the
also
HL
data
because
economist,
in
entrepreneur,”
cover
of
in
showing
accountant
would
that
production
“Which
an
minus
costs
most
asked,
set
accountant
calculate
revenue
implicit
a
when
costs
of
of
reg ion
total
6.10.
However,
be
diag ram
marg inal
confident
however,
need
to
the
following
diagrams
impor tant
diag ram
happy
owner
cost
“Yes,”
are
from
an
of
revenue,
Figure
the
may
economist,
that
on
be
of
reg ion
where
theory
company.
would
like
you
draw
revenue
Profit
a
if
use
drew
practising!
and
marg inal
An
can
the
average
much
helpful
you
reg ion
the
revenue
and
try
curve.
to
workpoint
calculated,
AR”
.
the

In
have
Now
price
5
you
Plot

Plot
that
going
price
D.

price
4
figures
add

the
PED
a xis,
60.
10.
quantity
the
identify:
best
alternative
occupation.
and
where
_____________.
the
marg inal
6
Thus,
the
tocover.
opportunity
It
Nermin’s
$80
000
down
That
is
case,”
per
the
said
the
since
and
that
cost
is
difference
year,
firm
means
is
most
economist,
she
went
she
the
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general
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lowest
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the
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note
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the
D
0
Quantity
Quantity
F igure
In
7.4
Shor t-run
Figure
7.4
maximizing
MC=MR.
greater
each
a
the
firm
profits
However
than
unit.
loss,
losses
the
ofoutput,
the
The
at
price
is
still
because
per fect
competition
selling
at
producing
output
shaded
firm
in
is
by
quantity
q
0
Q
and
so
area
q,
the
the
other
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the
is
the
at
the
output
price,
quantity
cost
firm
shows
producing
any
the
at
per
unit
making
total
q,
loss.
is
a
P
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and
C,
loss
which
of
create
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is
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Although
on
making
“profit-maximizing”
would
is
where
greater
level
loss.
105
Ineffect,
they
are
loss
minimizing.

7
Per fect
The
competition
movement
from
shor t
run
to
long
run
in
per fect
competition
If
firms
losses,
until
are
an
s cim on o c e or ci M
us
shown
1
Since
is
to
first,
start
This
is
is
profits
to
7.5.
will
but
that
have
as
no
more
profits,
this
by
real
firm
long
is
and
no
also
the
more
because
firms
industry
entry,
good
the
curve
for
long.
firms
will
start
abnormal
firms
The
profits
continue
make
enter
supply
to
the
the
profits.
abnormal
not
barriers
to
change
profits
abnormal
will
short-run
to
run.
normal
produce
chance
or
starts
making
situation
effect,
and
the
the
short-run
The
could
attracted
in
profits
situation
long-run
of
knowledge
industry
the
reached
situation
Figure
abnormal
and
perfect
industry,
are
to
profits.
relatively
industry,
attracted
will
to
start
shift
right.
industry
price
to
fall
to
The
be
supply
will
industry
are
and
means
start
react
area,
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the
point
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in
short-run
to
shaded
the
this
industry
in
at
However,
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of
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small.
by
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there
enter
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first
shown
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look
process
firms
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Let
making
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the
demand
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profits
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to
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curve
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P
1
.
towards
to
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q
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7.5
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process
price
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the
of
P
the
equal
firms
in
enter
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106
units.
is
P
the
are
1
in
no
.
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as
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demand
making
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to
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point,
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price
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per
of
find
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smaller
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MR
profit
profits
reaches
entrepreneurs
because
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normal
abnormal
are
with
into
long-run
curve
firms
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firms
leave.
units,
are
H o w e v e r,
equilibrium
to
supply
profits
C
costs.
more
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profit
there
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satisfied,
attract
long-run
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normal
unit,
opportunity
profit
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shor t-run
continue
cost
their
and
industry
and
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abnormal
industry
price
1
from
Eventually
firms
to
covering
1
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i n d u s t r y.
where
q
movement
Quantity
one
no
and
will
much
each
so
the
now
bigger
producing
7
Shor t-run
Now
take
Figure
7.6.
shaded
Some
losses
the
As
area,
firms
we
but
in
At
long-run
can
this
the
first
of
see,
the
firm
situation
industry
this
will
normal
short-run
will,
have
after
no
The
making
not
process
losses
remain
a
real
competition
profits
losses.
is
will
Per fect
time,
the
start
effect,
is
shown
shown
by
in
the
same.
to
leave
because
the
the
firms
are
1
industry.
to
situation

small.
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unable
to
achieve
to
to
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shift
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the
to
price
industry
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means
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will
are
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curve
and
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begin
to
starts
rise
price-takers,
their
that
more
profit,
more
firms
industry
leave
supply
the
curve
industry,
will
start
left.
industry
industry
as
normal
s cim on o c e or ci M
relatively
demand
losses
from
the
curves
that
they
to
shift
P
towards
price
will
had
from
that
start
been
S
P
they
to
towards
1
.
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can
shift
the
S
begin
,
the
firms
charge
upwards.
making
1
to
in
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start
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get
smaller.
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industry
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firm
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7.6
The
process
industry.
price
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is
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unit,
are
1
.
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P
1
satisfied,
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now
industry
one
a
will
firms,
each
will
can
short-run
adjust
profit
the
so
1
with
are
profit
and
firms
situation
is
is
that,
now
per
no
do
a
one
will
Q
S
price
that
equal
to
in
all
of
be
no
more
1
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their
the
the
and
are
cost
per
industry
costs,
to
leave
However,
into
The
with
1
reason
firms
leave.
P
firms
the
in
where
of
equilibrium
units,
made
,
the
elsewhere.
now
1
being
firms
would
long-run
only
the
covering
attract
profit
reaches
find
the
better
normal
losses
unit
of
There
to
in
producing
1
price
not
are
curve
“taking”
We
exactly
could
industry
q
1
costs.
the
situation.
outcome
slightly
will
larger
units.
equilibrium
in
the
profits.
abnormal
the
are
.
long-run
there
entrepreneurs
they
producing
as
to
supply
=MR
the
enter
normal
with
long
=AR
abnormal
industry
losses
firms
firm
the
conclude
make
1
as
industry
opportunity
now
Long-run
We
D
Now
no
and
smaller
is
because
as
shor t-run
the
profits,
.
their
industry
there
1
the
point,
curve
=C
from
continue
this
normal
i.e.
including
be
will
Eventually
demand
making
No
movement
Quantity
in
This
profits
entering
or
or
per fect
long
is
run,
because,
short-run
leaving
competition
firms
the
in
even
losses,
perfect
if
they
the
industry
competition
are
making
industry
until
a
will
normal
reached.
107
7

Per fect
The
competition
industry
The
firm
MC
)$(
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S
Student
workpoint
7
.1
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AC
Be
a
thinker—explain
and
illustrate
D=AR=M R
P
P
1
Why
is
a
firm
competition
s cim on o c e or ci M
2
Draw
the
in
a
per fect
“price-taker”?
following
D
diag rams.
0
ruler
Quantity
and
7.7
Long-run
equilibrium
in
per fect
1
the
Figure
They
7.7,
are
industry.
MC
producing
normal
the
selling
q,
is
firms
at
the
equal
and
at
are
making
price
to
that
P
,
MR
normal
which
so
they
output
Also
P
is
they
are
profits
are
in
maximizing
equal
to
the
taking
AC
so
long
from
profits
they
run.
a
the
be
minimum
A
firm
in
this
making
b
there
is
no
incentive
for
firms
to
enter
or
leave
A
firm
in
so
the
equilibrium
will
persist
until
there
is
a
the
industry
demand
curve
or
in
the
costs
that
the
change
firms
per fect
does
A
firm
in
face.
per fect
happen,
with
or
then
short-run
firms
firms
entering
Productive
per fect
will
of
the
be
making
either
At
the
until
allocative
will
short-run
long-run
once
again
abnormal
equilibrium
efficiency
profits
adjust,
is
restored.
in
efficiency
efficiency
A
at
Figure
industry
long-
earning
firm
the
is
measures
said
lowest
to
be
used
by
economists
productively
possible
unit
cost
efficient
(average
is
that
if
it
cost).
of
productive
produces
This
is
its
shown
MC
tsoC
in
and
leaving
the
)$(
efficiency.
product
or
and
its
equilibrium
competition
Productive
One
losses
in
If
normal
profits
making
losses
in
run
this
earning
profits
competition
either
at
AC.
the
c
and
AC
7.8.
output
q,
the
firm
in
Figure
7.8
is
able
to
produce
at
the
most
c
efficient
This
is
level
the
of
cost
output,
c.
So
q
is
i.e.
the
known
lowest
as
the
average
cost
productively
of
production.
efficient
level
of
output.
q
0
We
know
and
so
from
we
can
chapter
say
that
6
that
the
MC
always
productively
cuts
AC
efficient
at
its
level
lowest
is
point,
Out

Productive
producing
efficiency
combining
not
being
their
optimal
of
level
Allocative
is
important
productively
resources
by
as
in
economics,
efficient
level
efficiently
inefficient
as
of
because
output
possible
if
a
then
and
firm
they
resources
use.
efficiency
measure
optimum
108
the
wasted
Allocative
This
AC
at
efficiency
of
of
sometimes
also
called
the
socially
output.
efficiency
mix
is
occurs
goods
and
where
services
suppliers
required
are
by
ut
where:
F igure
MC
a
that
cross
of
competition
situation
use
per fect
abnormal
profits.
industry
sure
curves
competition
by
are
MC
economic
In
to
accurate
competition
your
In
sure
include
Quantity
labels.
F igure
Be
q
0
Q
producing
consumers.
the
is
are
are
7.8
Productive
efficiency
7
Price
on
cost
a
reflects
the
to
society
good,
If
of
all
price
consumers
the
the
to
are
be
used
profit
good
meet
in
than
more
at
on
the
a
good
Marginal
for
the
marginal
than
it
optimal
and
cost
producing
required
greater
the
to
place
revenue).
resources
value
stakeholders
consumers
normal
were
would
that
(average
an
extra
firm
cost
to
to
make
then
the
unit
stay
then
competition
shown
reflects
cost,
mix,
is
Per fect
of
in
the
it.
If
both
output
would
expand
Similarly,
society
value
if
would
it
gives
Allocative
one
more
unit).
to
the
the
be
to
using
the
where
cost
more
consumers
efficiency
unit)
Thus
point
marginal
is
occurs
equal
to
The
=
to
and
equals
be
resources
where
marginal
greater
to
output
would
cost
(the
level
of
cost.
the
the
price,
good
then
than
the
fall.
revenue
efficient
than
produce
marginal
average
allocatively
MC
price
were
s cim on o c e or ci M
1
of
value
curve
including
business.
sets
the
demand

(the
cost
price
output
is
of
producing
received
for
a
where:
AR
cost
The
value
=
to
producers
to
consumers
)$(
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D=AR=M R
D=AR
q
0
q
0
2
MR
Output
F igure
In
a
7.9
Figure
firm
elastic
2
7.9,
with
a
efficiency
we
can
normal
demand
where
q
Allocative
the
Allocative
situation
at
of
1
better
this
off
in
the
allocatively
is
is
both
the
curve
cases
firm
without
in
level
firm
of
with
looking
normal
level
where
when
are
a
a
for
output
a
for
perfectly
the
demand
economics,
efficient
making
detail
we
efficient
for
output
curve
and
elastic.
important
optimality”
more
and
with
perfectly
allocatively
“Pareto
look
Chapter
the
In
for
demand
person
at
q
efficiency
producing
see
demand
curve.
MCAR
when
Output
it
of
is
else
consider
if
a
there
impossible
someone
we
because
output
to
worse
market
firm
is
make
off.
We
failure
is
a
one
will
in
12.
Productive
and
allocative
efficiency
in
the
shor t
run
in
per fect
competition
If
a
firm
is
making
competition,
we
producing
the
MCMR),
at
and
the
output,
(where
1
see
profits
from
firm
allocatively
is
not
in
Figure
profit-maximizing
the
MCAR),
q
abnormal
can
the
7.10
level
efficient
producing
at
short
that
of
output,
level
the
run
in
perfect
although
of
most
q
they
are
(where
output,
q
efficient
2
(where
level
of
MCAC).
109
7

Per fect
competition
The
industry
The
firm
)$(
)$(
S
MC
ecirP
ecirP
AC
P
P
D=AR=M R
Abnormal
C
s cim on o c e or ci M
D
0
q
0
Q
q
q2
Quantity
Quantity
1
Figure
In
7
.
10
the
Productive
same
way,
competition,
we
producing
the
at
MCMR),
MCAR),
level
of
and
once
output,
The
and
if
a
can
allocative
firm
see
is
efficiency
making
from
allocatively
again
q
the
firm
(where
1
7.11
level
efficient
is
short-run
losses
Figure
profit-maximising
the
with
not
in
the
that
of
profits
short
perfect
run
although
output,
level
in
of
producing
q
in
they
perfect
are
(where
output,
at
competition
the
q
2
(where
most
efficient
MCAC).
industry
The
firm
)$(
)$(
S
MC
AC
ecirP
ecirP
C
Losses
D=AR=M R
D
0
q
0
Q
q
q2
Quantity
Figure
7
.
1
1
Productive
Productive
and
and
Quantity
allocative
allocative
efficiency
with
efficiency
short-run
in
the
losses
long
in
perfect
run
in
competition
per fect
competition
As
we
run
in
can
see
perfect
long-run
their
and
in
cost
the
so
average
The
Figure
average
knowledge
curves,
in
7.12,
competition
produce
at
curves.
Because
we
industry,
they
costs
are
by
profit-maximizing
all
all
all
of
the
selling
producing
at
firms
the
where
industry
firms
lowest
assume
will
same
in
that
face
price
the
point
there
the
and
same
long
their
is
perfect
cost
minimizing
firm
)$(
)$(
MC
ecirP
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P
of
MC AC.
The
S
the
AC
P
D=AR=M R
D
0
0
Q
q
(MC=M R)
q
(MC=AC)
1
q
(MC=AR)
2
Quantity
Quantity
110
F igure
7.12
Productive
and
allocative
efficiency
in
the
long
run
in
per fect
competition
7
Also
shown
firms
in
the
allocatively
in
Figure
long
run
efficient
7.12
in
is
the
perfect
level
of
fact
that
all
competition
output,
of
the
are
because
Per fect
competition
profit-maximizing
also
they

producing
produce
at
the
where
1
MCAR.
Fill
in
the
workpoint
spaces
in
the
7.2
table
below
with
either
a
yes
or
a
s cim on o c e or ci M
Student
no.
Per fec t
Abnormal
Losses
Allocatively
Produc tively
competition
profits
possible?
ef ficient?
ef ficient?
possible?
Shor t
Long
run
run
EX AM I NATION
Paper
1
W ith
a
in
help
shor t
the
for
fir m
a
the
help
1
a
in
1,
a
diagram,
e xplain
competition
to
how
ear n
it
is
possible
abnor mal
for
profit s
in
e xplain
competition
to
how
ear n
it
is
the
or
is
not
a
fir m
in
per fec t
produc tively
and
[10
mark s]
[10
mark s]
[10
mark s]
[10
mark s]
[15
mark s]
impossible
abnor mal
profit s
competition
alloc atively
ear ning
ef ficient .
question
charac ter is tic s
of
a
per fec tly
competitive
s tr uc ture.
Evaluate
per fec t
diagram,
per fec t
essay
E xplain
a
run.
profit s
market
b
of
whether
abnor mal
Paper
of
questions
run.
long
E xplain
(a)
per fec t
W ith
in
3
par t
the
fir m
the
2
1,
QU ESTIONS
the
e x tent
to
competition
which
to
ear n
it
is
possible
abnor mal
for
profit s.
a
fir m
in
111





8





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Monopoly
By
the
end
of
s cim on o c e or ci M
HL
explain
HL
define,
this
the
chapter,
assumptions
explain,
barriers
to
you
of
should
be
able
to:
monopoly
and
g ive
examples
and
illustrate
of
sources
of
monopoly
power/
entry
HL
define,
explain,
a
HL
explain
and
illustrate
the
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explain
and
illustrate
possible
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illustrate,
and
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compare
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one
firm
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efficiency
per fect
in
monopoly
competition.
model
monopoly,
only
the
situations
price
Assumptions
In
and
profit
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assume
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the
product
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firm
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industry.
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in
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example,
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vegetables
and
firms
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kind
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new
entry
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particular
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but
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really
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Microsoft
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widened
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her e
how
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competition
112
firm
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stop
monopoly.
barriers
vegetables
available.
have
a
the
profits
software.
extent
worrying
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all
important
of
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be
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have
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have
the
shop
monopoly.
monopoly,
out
of
of
of
a
define
producer
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monopoly
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exist,
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consequence
make
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8
Student
each
case
monopolies
that
you
1
the
2
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is
able
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to
of
of
Economies
we
have
in
a
that
to
is
large,
wishing
relatively
are
start
have
the
with
be
the
from
entry
number
the
only
3
the
local
refuse
disposal
4
your
5
the
national
telephone
6
the
national
postal
service
industry
the
the
school
service
service.
entry
in
an
industry
industry
possible
to
producer
entering
to
of
may
to
by
the
are
barriers
gain
known
lead
enter
industry
in
some
known
to
entry
as
as
to
the
if
way.
barriers
follows.
come
of
scale.
cost
savings
and
be
lower
experiencing
will
not
monopolist.
that
economies
advantages
bulk-buying,
will
as
cost
labour,
industry
so
size
as
average
of
will
and
same
economies,
firms
division
they
way
the
6,
are
the
then
economies
managerial
to
firms
these
small
enjoyed
up
are
of
power/barriers
Chapter
economies
firm
ones
width
scale
in
increases:
monopoly
Any
of
seen
a
specialization,
financial
the
school
continue
other
are
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size
your
preventing
1
as
in
may
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such
which
define
monopoly
stop
ways
their
suggest
also
experience
doctor
to
entry.
8.1
own
assuming:
canteen
monopoly
it
below,
and
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your
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workpoint
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if
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costs.
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of
to
economies
new
monopolist,
Things
and
economies
probably
have
were
still
research
If
a
scale.
start
of
industry,
and
as
up
scale
able
not
such
as
and
development.
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knows
equal
that
it
monopolist,
normal
scale
the
acts
monopoly
At
average
as
a
able
simply
level
costs
the
to
a
to
would-be
compete
have
to
new
would
deterrent
be
firms
with
reduce
entrant
higher,
that
entrant
the
price
would
so
might
the
to
industry
existing
to
be
to
the
level
making
lack
want
the
of
of
losses,
economies
enter
a
monopoly
are
monopoly
classified
if
there
are
as
natural
only
monopolies.
enough
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economies
industry
of
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scale
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profits.
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economies
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available
in
the
market
to
support
one
firm.
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is
best
shown
by
LR AC
a
diagram,
such
as
Figure
8.1.
b
In
this
case,
the
monopolist
is
the
industry
and
has
the
demand
curve
D
D
1
.
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long-run
average
cost
curve
faced
by
the
monopolist
is
=AR
LRAC
D2=AR2
and
its
position
and
shape
are
set
by
the
economies
of
scale
that
the
q
0
firm
is
experiencing.
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monopolist
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able
to
make
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q
2
profits
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by
producing
revenue
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output
greater
than
between
the
q
1
average
and
cost
q
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,
for
because
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the
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demanded
average
of
output.
F igure
8.1
A
natural
monopoly
113
8
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If
Monopoly
another
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case
same
where
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industry,
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is
to
then
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both
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.
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firm
monopolist’s
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for
above
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them
AR
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demand
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assume
firms
to
that
would
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take
curve
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level
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output.
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In
this
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shaped
will
all
only
of
the
because
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demand
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economies
abnormal
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market
the
of
scale
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market.
will
only
if
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support
1
one
firm.
supply
3
Examples
utilities
Legal
In
only
This
is
only
situations,
producer
the
case
producer
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a
and
invention.
successful,
firm
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research
for
own
to
found
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may
number
the
industries
that
gas.
firms
of
put
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years,
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is
to
right
be
right
of
then
as
copied
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legal
a
be
to
money
as
it
do
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more
be
20
the
it
has
years.
to
encourage
into
soon
to
be
after
allowed
means
to
monopoly.
to
years
approximately
incentive
then
a
right
firm
for
time
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is
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exist
were
given
legal
number
valid
Patents
copyrights
rights.
mind.
their
Just
so
ideas.
setting
then
simply
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as
as
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they
were
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likely
very
up
a
a
to
if
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protected
invest
in
the
is
produce
other
right
examples
refers
rights
the
example
to
allow
creators
of
patent
of
the
people
of
ideas
to
the
protection
is
industry.
nationalised
banning
sell
property
good
are
property
guarantee
barriers
to
trademarks,
private
patents
A
legal
right
and
Intellectual
pharmaceutical
example
and
or
that
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certain
invention
property,
grants
by
service,
it
the
a
been
the
producers
would
its
with
the
own
Another
do
of
in
country
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if
property
physical
rights
include
and
development.
along
creations
other
find
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product.
there
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and
intellectual
to
have
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are
individuals
then
may
patents,
the
only
knows
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monopolies
electricity,
industry,
product
expires
sell
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inventions,
a
firm
an
Patents
patent
produce
water,
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in
with
of
invented.
When
natural
as
barriers
certain
the
of
such
to
be
where
a
industry,
firms
a
the
product
from
sole
government
to
a
such
single
as
entering
supplier
to
a
a
of
firm.
state
that
a
It
may
postal
industry,
private
firm,
or
such
Student
as
the
right
to
be
the
only
network
provider
for
mobile
phones,
Be
again
banning
other
workpoint
8.2
once
reflective—use
your
own
firms.
experience
Can
4
Brand
you
think
products
It
may
be
that
a
monopolist
produces
a
product
that
has
brand
loyalty.
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consumers
think
of
the
product
as
market
For
example,
in
the
early
days
of
the
vacuum
cleaner
simply
loyalty
is
industry,
product
strong
114
other
so
known
strong
since
that
brand
their
then
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will
by
be
will
brand
new
feel
firms
that
sufficiently
loyalty.
name,
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they
Hoover.
be
are
different
put
not
in
off
the
from
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order
If
to
to
brand
entering
produce
generate
is
so
heavily
known
by
that
its
the
brand
they
name
were
any
dominate
the
product
brand.
that
gained
the
huge
of
loyalty
rather
name?
the
a
such
Can
products
market
than
you
that
its
have
dominance
competitors?
product
think
of
lost
to
any
this
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8
Student
workpoint
the
information
advantages
patents
for
and
the
Discoveries
of
different
new
improvements
would
have
hadn’t
had
in
onto
and
the
15
to
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possible
and
new
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and
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new
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able
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recover
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figures,
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companies
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and
and
$800
from
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market.
patent
providers
In
fact,
lobby
protection
that
guarantee
ma ximize
justified.
continually
surprising
some
exclusive
costs
patents
it
to
so
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for
that
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time
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soon
as
the
patent
profits.
try
on
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drug
companies
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expires,
to
make
when
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have
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as
version
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the
dosage,
of
They
drug.
or
same
safety,
benefits.
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drugs
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said
are
brand
sell
be
generic
use,
producers
of
the
drug
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terms
risks,
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the
name
Anti-competitive
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monopolist
restrictive
war”
if
price
to
a
industry.
to
dissuade
In
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than
of
andmessaging
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are
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to
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2006,
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to
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much
lower
costs,
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its
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money
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on
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expiry.
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market.
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to
drugs
impor tant
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drug
pharmaceutical
adver tising
their
par ticularly
patent
stick
are
lot
consumers
hope
even
the
that
when
drug
is
companies
a
may
its
convince
the
brand
doctors
name
that
they
should
keep
drugs.
are
deep
on
ethical
preventable
buy
the
may
issues
life-saving
diseases
patented
be
made
involved
drugs.
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because
medicines,
available
at
the
that
they
even
a
in
fact
question
people
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though
fraction
of
die
afford
generic
the
price,
drug
currently
under
debate.
patent
for
It
appeal
into
thus
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its
an
to
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start
can
should
enter
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to
ability
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competitors
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operating
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Commission
Microsoft
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the
potential
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possibility
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of
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charge
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products.
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health
prescription
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pharmaceutical
drug
country’s
Drug
will
can
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their
simply
the
drug
that
governments
are
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patent
drugs
vastly
because
drugs
developing
from
the
it
the
companies
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onto
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expires.
research,
bring
costs
release
soon
significant
pharmaceutical
of
and
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8.3
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events
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concerned
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2
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the
Union
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competition
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with
or
European
software
the
artificial
legal
incentives
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and
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time
explain
the
series
quality
annotated
browsers
a
facing
normal
a
monopolist
demand
is
curve,
shown
with
in
Figure
marginal
8.2.
The
D=AR
revenue
q
0
MR
below
it,
where
and
maximizes
marginal
cost
is
profit
equal
by
to
producing
marginal
at
the
level
of
Output
output
revenue.
F igure
We
can
price
see
per
unit
in
of
the
monopolist
sells
a
quantity
q
at
a
8.2
The
demand
curve
facing
a
monopolist
is
monopolist
has
able
make
and
monopoly
abnormal
barriers
compete
to
away
profits
entry,
the
in
then
profits
the
short
other
that
are
run,
firms
being
and
if
cannot
earned.
MC
AC
a
P
Abnormal
ecirP
industry
to
effective
in
dna
monopolist
situations
tsoC
profit
a
the
case,
P
.
the
enter
this
)$(
Possible
If
that,
profits
b
C
In
this
long
situation,
run,
for
as
the
long
monopolist
as
the
is
able
barriers
to
to
make
entry
abnormal
hold
out.
This
profits
in
situation
the
is
D=AR
shown
in
Figure
8.3.
q
0
MR
The
monopolist
shown
the
116
by
the
industry
is
maximizing
shaded
this
area,
situation
profits
PabC.
will
and
Without
continue.
is
making
the
entry
abnormal
of
new
profits
firms
Output
to
F igure
run
in
8. 3
Abnormal
monopoly
profits
in
the
long
8
sometimes
there
option
variable
little
were
of
plan
or
that
true.
a
If
making
down
in
the
then
it
in
will
the
temporarily
run
to
earn
short
(if
it
for
see
always
earn
produces
not
production
long
will
monopolist
losses
continuing
ahead
monopolist
the
demand,
closing
costs)
would
not
abnormal
run,
was
the
abnormal
something
then
not
profits.
would
covering
time
whether
it
being.
for
If
have
its
AC
MC
C
Losses
P
ecirP
monopolist
the
it
is
is
dna
a
assumed
this
tsoC
which
but
Monopoly
However,
changes
could
be
1
is
profits,
)$(
It

so
that
normal
profits,
at
least,
could
be
earned.
If
this
were
s cim on o c e or ci M
D=AR
made
not
q
0
MR
possible,
then
the
monopolist
would
close
down
the
firm
and,
since
Output
the
firm
is
situation
the
is
industry,
shown
in
the
industry
Figure
would
cease
to
exist.
This
F igure
8.4.
in
Here,
the
average
Since
firm
cost
there
is
is
is
not
be
an
industry
will
be
no
industry.
and
a
monopolist
This
maximizing
monopolist
no
will
explanation).
This
firm
in
profits,
means
will
rectify
be
shown
run,
at
all
the
willing
to
since
levels
to

the
0
(see
monopolist
Figure
where
this
produce.
MC
monopolist
6,
There
revenue
will

MR,
Figure
reduce
losses
output.
8.5.
Chapter
making
run
the
of
situation,
maximise
in
producing
MR
that
to
decide
is
and
where
long
monopoly
may
situation
produce
done
the
revenue
ecirP
of
that
profits.
in
dna
Instead
which
be
maximization
possible
than
can
costs
average
A
MC
tsoC
is
rather
that
cover
the
8.4
long
)$(
It
in
to
than
nothing
will
Revenue
able
greater
the
the
PP M
AC
PR M
6.10
price
D=AR
from
P
PM
to
P
RM
and
at
the
same
time
increase
output
from
q
PM
to
q
RM
q
0
q
PM
MR
Output
The
revenue
since
it
is
the
maximizing
level
of
level
output
of
output
where
the
is
clear
MR
from
curve
a
cuts
diagram,
the
horizontal
Figure
axis.
It
can
also
be
identified
from
a
set
of
revenue
figures
such
as
8.5
opposed
ones
in
Table
Price ( $ )
10
Revenue
maximizing
as
the
to
profit
maximizing
in
monopoly
8.1.
Quantit y
10
(units )
TR
($)
MR
($)
100
80
9
20
180
60
8
30
240
40
7
40
280
20
6
50
300
0
5
60
300
20
4
70
280
40
3
80
240
117

8
Monopoly
Here
we
then
the
units,
can
clearly
revenue
i.e.
55
in
where
competition,
This
is
maximized
output
is
where
between
MR
50

and
0,
60
level
in
the
in
most
output,
monopolist
productive
Figure
producing
restricted
of
the
neither
at
,
are
2
profit-maximizing
to
efficient
q
at
the
nor
level
of
allocative
8.6.
the
order
produces
efficiency
force
level
not
of
being
up
the
level
price
output,
q
and
and
1
of
output,q.
to
the
ecirP
being
is
shown
is
However,
efficient
is
of
dna
1
profit.
level
monopoly
there
monopolist
is
revenue
MC
tsoC
perfect
output
Output
if
)$(
s cim on o c e or ci M
Unlike
The
that,
units.
Efficiency
efficiency.
see
maximization
AC
P
Abnormal
profit
C
maximize
allocatively
achieved.
D=AR
qq
0
q
2
MR
Output
Advantages
and
comparison
disadvantages
with
per fect
of
monopoly
in
F igure
competition
8.6
efficiency
Although
been
they
much
competition
The
are
debate
and
both
theoretical
about
the
market
relative
forms,
merits
and
there
has
demerits
always
of
perfect
monopolies.
advantages
of
monopoly
in
comparison
with
per fect
competition
Monopolies
because
of
industry
of
scale.
is
If
big,
this
monopolist
in
perfect
in
be
able
size.
then
the
pushes
may
and
achieve
large
do
monopolist
the
produce
perfect
Figure
to
Monopolies
competition.
monopoly
shown
may
their
MC
at
This
a
not
should
curve
down,
higher
idea
of
economies
have
is
gain
then
output
relative
competition
very
to
and
price
be
of
scale
big,
but
substantial
it
is
at
simply
if
possible
a
lower
and
The
that
price
output
debateable.
the
economies
the
than
in
situation
is
8.7.
)$(
Industry
supply:
per fect
ecirP
MC:
competition
monopoly
P
P2
D
=
AR
MR
0
Q
Q2
Output
F igure
In
perfect
8.7
competition,
where
demand
P
that
1
and
industry
MC
is
curve
a
a
this
is
is
the
maximizing
monopoly,
which
case,
be
is
then
profits
to
output
well
scale
in
supply.
of
Q
with
the
1
This
will
Q
,
2
at
a
be
industry
a
price,
P
2
and
means
quantity
that
produced.
the
supply
will
the
MC
price
of
scale,
curve
in
be
will
if
be
the
then
the
perfect
curve.
produce
greater
will
However,
economies
below
monopolist
producing
lower
price
significant
118
competition,
monopoly
equilibrium
substantially
the
and
of
the
equal
total
may
competition,
If
Economies
where
quantity
than
MC MR,
perfect
Productive
in
and
monopoly
allocative
8
A
second
advantage
investment
perfect
find
it
in
competition
difficult
monopolist
some
of
the
those
long
to
are,
invest
making
by
in
that
to
will
definition,
research
fund
benefit
there
development
abnormal
profits
run,
be
and
is
research
consumers,
higher
levels
monopolies.
relatively
and
profits
be
in
small,
development.
in
a
and
who
better
so
have
in
may
However,
situation
development.
would
of
Firms
and
Monopoly
to
This
better
a
use
would,
products
and
even
The
significant
perfect
Figure
,
restrict
8.8,
there
perfectly
perfectly
1
economies
may
monopolist
of
scale
output
will
are
lower
no
in
do
comparison
not
and
exist
charge
differences
competitive
produce
competitive
where
and
monopoly
with
in
a
a
monopoly,
higher
price
then
than
the
under
competition.
andthe
P
of
competition
monopoly
In
choice.
disadvantages
per fect
If
more
s cim on o c e or ci M
1
in
may
research

industry
output
Q
2
at
market
supply
would
market.
a
price
will,
meets
exist
in
If
costs
this
of
P
however,
industry
under
)$(
MC
2
,
(=
for
is
the
the
monopolist
case,
where
MC
produce
demand.
then
=
Q
at
1
the
MR.
Thus
a
The
price
higher
of
prices
monopoly.
supply
under
per fect
competition)
ecirP
P2
P
D
=
AR
MR
0
Q2
Q
Output
F igure
The
8.8
high
profits
especially
of
the
The
Monopoly
by
of
versus
monopolists
competitive
problem
monopoly
consequence
per fect
depends
profits
when
of
firms,
upon
competition
may
or
the
your
size
to
on
and
post
the
economies
considered
those
local
compared
be
without
low
office
of
of
may
a
the
The
scale
monopoly.
seem
giant
scale
unfair,
incomes.
power
profits
as
of
of
little
national
company.
To
summarize,
monopolies
in
there

They
are

They
can
charge

They
can
exercise
public
limit
three
productively
monopoly
These
are
comparison
a
possible
with
and
higher
problems
perfect
allocatively
price
for
anti-competitive
a
associated
with
competition.
inefficient.
lower
level
behaviour
to
of
output.
keep
their
power.
potential
interest.
monopoly
problems
As
a
mean
result,
power.
all
This
that
monopolies
governments
will
be
have
developed
in
can
act
laws
against
and
Chapter
the
policies
to
12.
119
8

Monopoly
EX AM I NATION
Paper
1,
par t
(a)
questions
1
E xplain
2
Using
a
3
Using
appropr iate
the
s cim on o c e or ci M
Paper
1
1,
level
of
diagram,
ef ficient
than
a
E xplain
b
Evaluate
out put
e xplain
at
the
diagrams,
fir m
essay
a
QU ESTIONS
in
which
a
concept
e xplain
per fec t
monopoly
of
a
fir m
natural
whether
a
will
produce.
monopoly.
monopoly
is
likely
to
be
more
ef ficient
or
[10
mark s]
[10
mark s]
[10
mark s]
[10
mark s]
[15
mark s]
less
competition.
question
three
the
bar r ier s
view
to
that
entr y
that
allow
gover nment s
a
fir m
should
to
be
always
a
monopoly.
prevent
fir ms
from
being
monopolies.
1
Assessment
In
essay
This
but
is
if
a
advice :
question
word
you
see
italics
here
know
that
in
it
1
that
it
a
(b)
the
often
on
order
is
essay
your
to
key
writing
word
appears
exam,
draw
word.
it
your
In
“always”
in
won’t
be
attention
your
is
in
italics.
examination
in
to
evaluation,
italics.
it
to
questions,
to
It
let
you
is
in
the
why
governments
monopolies,
where
you
are
explain
being
they
view
but
should
that
they
then
not.
That
should
should
prevent
discuss
is,
you
always
any
will
do
firms
be
arguing
so.
likely
e
Bitter
pill
for
pharmaceutical
Merck
Indian pharmaceutical companies
patent on 30 June. When a company
ability to create, manufacture, and
Ranbaxy
loses
market generic drugs at low prices,
and
Laboratories
major
are
Dr
R e d d y ’s
expected
beneficiaries
to
exclusive
branded
drug,
it
patent
is
no
for
longer
a
a
monopoly in the market, and the
advantage of a multi-billion dollar
market opens to generic drugmakers.
sales vacuum created by the patent
This
expiry of two popular drugs in the
80%
US. One of the drugs is a cholesterol-
in
cutting
well
drug
is
named
an
called
to
be
its
take
other
Zocor
and
antidepressant
the
drug
its
sales
expired
of
on
in
lead
the
major
as
of
whose
June.
Pfizer
patent
lost
its
to
a
drug’s
gain
the
Indian
Zocor,
23
a
can
versions
Zoloft.
Merck earned huge profits from
120
company
drop
for
nearly
resulting
consumers
makers
these
of
price,
of
as
generic
aided by the availability of cheaper
and
are
Simvastatin,
approval
Drug
good
billions
in
in
like
the
US
and Europe. They have a tremendous
generic
version
of
from
the
US
Food
and
Administration.
Including
in
are
markets
a
Zocor, after receiving the required
shape to gain from the patent expiries
developed
labour.
Ranbaxy is planning to produce
drugs.
companies
skilled
of
scheduled
2006.
those
dollars’
to
from
worth
come
from
circumstances
India,
of
off
drugs
patent
against



9







Monopolistic
By
the
end
of
HL
explain
HL
define
HL
explain
this
the
chapter,
you
assumptions
and
g ive
and
examples
illustrate
the
be
able
monopolistic
of
product
demand













competition
should
of

to:
competition
1

s cim on o c e or ci M

differentiation
curve
for
firms
in
monopolistic
competition
HL
explain
how
HL
explain
and
firms
illustrate
monopolistic
explain
HL
ma ximize
and
shor t
profits
run
in
profit
monopolistic
and
loss
competition
situations
in
competition
illustrate
the
long-run
equilibrium
in
monopolistic
competition
explain
HL
the
movement
from
shor t
run
to
long
run
in
monopolistic
competition
explain
HL
and
and
long
compare
HL
illustrate
run
in
and
productive
monopolistic
contrast
and
allocative
efficiency
in
the
shor t
competition
per fect
competition
and
monopolistic
competition.
The
theory
of
Chamberlin
with
the
two
competition
realistic
terms,
why
set
we
their
The
The
monopoly,
would
firms
have
own
The
industry

The
firms
any
of
where
is
are
that
each
it
is
the
firm
to
two
has
developed
at
the
devise
market
a
little
as
is
bit
He
by
Edward
was
time,
dissatisfied
perfect
something
existing
“monopolistic”,
of
made
theories.
one
of
firms
of
all
of
up
one
each
produce
possible
monopolistic
of
a
relative
competitors.
firms
wanted
monopolistic
small,
independently
The
so
was
economist.
existed
competitive
term
for
actions
its
that
between
assumptions
the
American
with
simple
many
market
have
more
In
power.
some
This
ability
to
prices.


sit
the
assumptions
that
competition
an
theories
monopolistically
competing
is
extreme
and
that
a
monopolistic
(1899–1967),
for
firm
The
fairly
to
are
the
large
size
are
as
number
of
unlikely
firms
the
to
assume
of
firms.
industry.
have
that
follows.
a
This
great
they
are
means
effect
able
to
on
act
other.
slightly
a
competition
competition
differentiated
consumer
to
tell
products.
one
firm’s
This
product
means
from
another.

Firms
there
The
only
are
are
goods
when
or
barriers
difference
competition
exists
completely
no
there
a
from
is
good
services
in
free
to
or
or
leave
is
way.
the
industry.
That
is,
exit.
competition
differentiation.
service
some
enter
perfect
product
or
to
entry
perceived
Products
to
is
that
in
Product
be
may
monopolistic
differentiation
different
be
from
differentiated
other
by
121
9

Monopolistic
brand
skill
name,
levels,
colour,
and
competitive
plumbers,
competition
appearance,
many
other
industries
and
are
it
of
competition,
s cim on o c e or ci M
structure.
of
brand
to
the
may
As
the
loyalty.
product
appear
and
may
to
it
with
plumber
be
this
products
This
example,
that
nail
design,
Examples
(manicure)
of
salons,
quality
of
service,
monopolistically
car
mechanics,
jewellers.
Although
perfect
packaging,
methods.
are
means
that
the
when
small
to
difference
a
markedly
differentiated
that
continue
be
a
leads
to
some
buy
it
if
customers
she
raises
of
of
her
there
the
the
a
from
the
different
will
be
consumers
price
goes
certain
prices
assumptions
market
some
will
up
a
local
loyal
little.
plumber
above
extent
be
will
For
stay
rivals,
1
because
they
believe
that
she
is
slightly
more
skilled
than
her
competitors.
This
brand
loyalty
independence
means
when
that
they
are
producers
deciding
have
on
some
price.
element
They
are,
of
to
an
Student
extent,
price-makers,
and
so
they
face
a
downward
sloping
Be
curve.
However,
demand
will
be
relatively
elastic
since
there
only
slightly
different,
9.1
a
thinker—consider
are
and
many,
workpoint
demand
explain
substitutes.
T
ry
to
think
market
in
of
monopolistic
reference
the
an
your
to
model,
example
area
that
is
competition.
the
of
a
in
With
assumptions
explain
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produce
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9.4
Long-run
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123
9
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you’ve
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example
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of
apply
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cuts
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at
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is
the
point
where
the
MC
shor t
competition
curve.
efficiency
cuts
the
AR
is
achieved
curve:
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at
the
socially
level
of
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output
level
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of
the
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output.
dna
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shows
competition
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efficiency
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9
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share
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it
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an
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600
and
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126
Monopoly
the
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90%
firms,
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differentiated
Whereas
tends
for
only
persuade
feature
to
4
very
highly
barriers
firms
index?
CR
different
be
and
this
needs
then
order
all,
reveal
three
the
products,
unexpected
tendency
in
other
of
the
oligopoly,
firms
Interdependence
surprises
to
but
low
than
slightly
large-scale
interdependence.
marketto
industry
would
concentration
may
same
budgets
competition
80%
divided
the
between
produce
firms,
may
be
each
the
index.
identical
examples
However,
is
industries
produce
the
dominant
there
distinguish
Some
huge
and
of
of
4
in
necessarily
Her findahl-Herschmann
exactly
Some
CR
to
from
indicator
almost
different.
A
were
market
share
doesn’t
concentration
that
Oligopolistic
spend
10.2
task
the
indicator
cars.
89.7%
43.2%
market
but
different
alternative
almost

4
the
firms,
market
be
produce

4
CR
Her findahl-Herschmann
What
CR
workpoint
tells
CR
four
if
637
firms,
inquirer
competition
but
494
s cim on o c e or ci M
1
mills:
Oligopoly
10.1
the
classify

with
as
a
there
is
each
share.
be
characterized
by
price
127
rigidity.
Prices
in
oligopoly
tend
to
change
much
less
than
in
more

10
Oligopoly
competitive
markets.
oligopolistic
firms
Collusive
Collusive
collude
s cim on o c e or ci M
a
and
charge
monopoly,
There
firms
are
two
openly
sometimes
1
Since
this
collusion
in
the
that
firms
on
the
price
Such
be
generally
have
any
a
banned
engaged
in
then
Formal
that
on
will
all
interest
of
country’s
firms
will
be
that
on
and
as
made.
when
although
called
a
cartel.
consumers,
is
and
against
such
with
this
so
the
authority
behaviour
penalized
be
place
consumers
anti-trust
acting
marketing
often
for
market
may
takes
or
is
output
governments
a
changes,
effect
charge,
share
oligopoly
less
in
profits
anti-competitive
the
oligopolistic
collusion
they
and
the
by
If
an
products,
market
collusive
countries.
in
their
monopoly
prices
against
production-cost
unchanged.
oligopoly
firms
for
collusion.
higher
to
of
up
agreement
instead.
in
the
prices
are
prices
as
fines
law
finds
price-
or
punishments.
Formal
collusion
example
is
sets
any
prices
of
a
when
formal
may
firms
prices
in
an
collusion.
charge
dominant
and
the
firm
the
for
be
permitted.
the
is
price
not
as
oil
as
or
the
difficult
at
by
the
prime
Countries),
markets.
charge
another
industry,
The
Exporting
world
oligopoly
This
same
in
may
Petroleum
same
as
it
looking
prices
of
MC
at
the
AC
a
P
Abnormal
ecirP
firm
quotas
for
dna
A
governments
Organisation
tsoC
exists
without
sounds.
(the
production
collusion
prices
between
OPEC
)$(
which
the
of
be
agreements,
other
Tacit
may
deemed
is
there
their
when
same
divide
types
majority
fixing
so
results
usually
exists
the
agree
it
expenditure
is
and
when
leave
non-collusive
oligopoly
to
Even
often
profit
b
C
main
competitors.
charge
the
same
It
is
not
necessary
to
communicate
to
be
able
to
prices.
D=AR
q
0
In
both
formal
and
tacit
collusion,
the
process
is
the
same.
The
MR
firms
Output
behave
price,
like
make
share.
This
Collusive
try
monopoly
is
If
making
to
monopolist
shown
oligopoly
oligopoly.
are
a
keep
firms
their
Non-collusive
not
collude
firms
when
firms
in
an
strategies
order
to
often
Game
For
the
firms
light
will
a
large
that
according
price
formally
very
the
to
firms
aware
We
of
these
tacitly,
market
in
and
then
they
they
may
continues.
an
oligopoly
reactions
that
as
possible
in
in
the
say
behaviour
all
or
rigidity
profits,
situation
the
decisions.
behave
so
the
of
look
equal
the
optimum
different
at
a
This
costs,
initial
128
(Rather
of
monopoly
when
account
firms
market.
have
evenly,
exists
be
monopoly
the
they
actions
of
other
behaviour
must
situations,
of
do
of
develop
rivals.
In
economists
theory”.
we
up
order
to
the
assumptions!)
strategy
possible
situation
is
F igure
10.2
monopolist
either
strategic
into
considers
making
market
is
how
the
simplicity
firms
that
in
in
them
explanation
long-run
pricing
oligopoly
theory
of
have
take
one
share
charge
10.2.
colluding,
stable
so
“game
undertake
are
making
explain
use
offers
producer),
and
Figure
oligopoly
and
that
profits,
in
share
prices
(single
where
known
identical
demand
for
that
a
decisions
as
a
by
there
and
goods
is
could
rival
are
duopoly.
products
their
firm
firms.
only
We
share
the
two
assume
the
same.
Oligopolists
acting
as
a
10
is
were
to
shown
what
change
the
in
Table
would
prices
be
of
10.1
the
where
possible
their
firms
profit
identical
F irm
A
and
&
B
both
high
are
if
they
products.
A’s
price
choices
$ 5.50
A
B
outcomes
$ 5.00
A
prices
low
price;
B
high
1
situation
contemplating
Oligopoly
price
s cim on o c e or ci M
The

$ 5.50
F irm
B’s
price
choices
B
low
A
get s
$ 6m
A
get s
$ 8m
B
get s
$ 6m
B
get s
$2m
price;
A
high
price
A
&
B
both
low
prices
$ 5.00
T
able
price
Let
of
10.1
The
us
start
$5.50
by
for
are
both
We
can
it
can
If
firm
A
is
B
from
$6
as
has
firm
is
get s
$2m
B
get s
$4m
A
and
to
B
strategies
both
logical,
They
it
to
its
$4
not
the
A
B
with
different
possible
lower
the
the
firms
then
Thus,
tables
firm
a
firm
also
can
it
A.
it
This
$6
its
The
not
means
to
options
strategy
two
the
B
they
choices:
to
then
the
to
is
its
$2
its
in
the
price
and
million.
profit
best
lower
and
is
worst
responds
lower
that
is
but
$5.00.
has
million
price,
outcomes,
profit
firm
does
from
A
price
of
it.
consider
where
If
fall
Firm
to
a
profits
colluding,
prices
lower
might
lowers
million.
not
their
choices.
it
choices,
possible
might
its
consider
firm
lower
is
A
’s
the
price
then
for
best
responds
and
million.
maximum
Firm
B
its
$6
price,
and
If
firm
firm
A
profit
in
If
would
option,
prices.
if
The
therefore
adopt
the
A
possible
the
firm
firm
to
B
A
will
and
way
policy
does
scenarios
that
not
lowers
make
lower
available
“maximin”
are
the
will
price
look
at
applies
also
to
cutting
up
the
and
$8
price.
is
its
is
best
lower
price
its
and
million.
The
known
“maximax”
strategy
as
a
strategies
of
been
better
They
would
have
benefitted
have
done
from
the
“maximin”
lowering
is
leaving
from
the
point
and
of
view
“maximax”
price.
making
exercise
have
situation
so
lower
strategy
end
would
so.
A
’s
or
would
make
logic
B
adopt
they
are
charging
making
price.
same
for
to
B
option
the
they
currently
both
outcome.
not
strategy.
its
are
are
lowering
strategy.
it
lower
firms
they
that
firm
where
will
best
make
so
minimum
worst
does
firm
to
turn
firm
firm
worst
choices,
If
does
both
each.
the
both
cautious,
profit
optimistic
again
trying
we
its
least
its
A.
or
“maximin”
“maximax”
If
A
unchanged
and
million
a
then
B
Once
of
$4m
assume
damaging
then
the
A
firm
price,
If
get s
and
following
maximizing
Firm
are
A
firms
that
considering
price
considers
is
us
price
most
its
following
of
$ 8m
considering
pessimistic,
does,
known
for
by
its
is
lowers
firm
let
scenarios
firm
If
Now
start
that
that
for
products
separately
way
one
assuming
their
leave
possible
fall
profits
get s
combinations
$6million.
it
predicted
B
the
prices,
lower
actually
their
of
$4
harmful
prices
ability
which
profits
to
seems
to
where
collude,
to
be
million
both
they
if
firms.
were.
they
could
129
10

The
Oligopoly
different
strategies
and
outcomes
Decisions
Firm
If
Firm
worst
s cim on o c e or ci M
Firm
lowers
B
Firm
A
lowers
Figure
B
Firm
price
the
best
10.3.
happens
A
maintains
price
Firm
price
in
for
If
Firm
price
shown
A
happens
A
maintains
lowers
the
are
Firm
price
lowers
B
maintains
Firm
price
A
price
B
maintains
price
1
Profit
$2M
Profit
$4M
Profit
$6M
Profit
Best
“worst
F igure
10. 3
Game
Game
theory
accurately,
However,
are
in
an
possible
theory
this
there
can
Theory
not
be
of
concept
Flood
men
The
more
easy
B
are
follow
to
it
able
any
do.
will
and
there
small
and
of
a
the
more
estimate
few
Testify
the
and
dilemma
by
and
dilemma”
formalised
so
the
uses
police.
separate
the
The
the
was
by
developed
Alber t
Tucker
example
police
men
of
in
and
two
offer
each
the
If
hard
front,
rider
conditions.
prosecution.
par tner
in
crime
to
confess
gets
you
10
one
do,
you
go
free
first
one
gets
years
the
in
prison.
while
the
Say
nothing
and
you
get
5
prisoner
saying
has
the
nothing
or
years
choice
of
in
the
of
trust,
cooperation,
and
first
rider
the
save
oneself
at
the
expense
other,
betrayal.
of
with
and
the
so
it
betrayer
one’s
own
well-being
for
Is
others?
the
other
it
human
have
the
Should
common
principle
of
the
prisoner’s
dilemma
can
world
get
situations,
away
from
such
the
as
cycling.
main
be
applied
Sometimes
g roup
of
peloton).
If
the
two
riders
riders
cooperate,
130
of
wind,
they
the
will
lead
finish
so
that
cooperate,
the
peloton
first
the
and
will
other
can
second.
each
catch
shelter
If
them
they
up.
dilemma
the
as
actions
par t
of
of
game
firms,
theory.
mainly
those
What
it
mean
to
say
that
firms
in
an
oligopoly
interdependent?
two
(known
taking
from
don’t
What
does
to
Examine
some
of
the
price
and
non-price
strateg ies
as
to
a
firm
in
an
oligopoly
to
improve
its
position
a
in
share
to
oligopoly.
open
the
it
good?
2
riders
apply
one
are
real
prisoner’s
nature
1
The
almost
wins.
raises
in
sacrifice
(just
leader).
Economists
to
sits
of
Only
adapted
issues
other
betrayer)
prison.
cooperating
betraying
the
all
the
offer.
Theorists
and
at
slipstream
always
Each
does
work
(the
is
(the
and
The
2
happens
rider
cooperator)
the
require
and
that
behind
the
the
sometimes
the
your
an
predicted.
“prisoner’s
following
for
there
the
game
in
options,
in
1
firms
all
So,
firms
possible
relatively
decisions.
outcomes.
only
number
to
predict,
of
Also,
be
also
are
to
set
dilemma
arrested
the
a
A
they
decisions
accurately
Dresher
evidence
them
if
will
difficult
when
only
prisoner’s
being
of
Firms
strateg y)
Knowledge
of
and
firms
that
more
useful
are
for
necessarily
the
prisoner’s
1992.
of
is
mostly
outcomes
by
for
combinations
industry,
The
useful
option”
(ma xima x
outcomes
outcomes
industry
is
The
is
“best
strateg y)
theory
the
Best
option”
(minima x
$8M
a
market.
the
3
Do
you
think
cooperate
it
with
is
better
the
for
others?
a
firm
in
an
oligopoly
to
10
way
of
American
the
attempting
is
the
kinked
economist
theory
has
been
to
explain
demand
called
called
Paul
into
the
situation
curve,
in
devised
Sweezy
in
a
non-collusive
the
1930s
(1910–2004).
question,
it
does
by
ecirP
oligopoly
an
MC
Although
provoke
some
a
MC2
P
interesting
thoughts
and
discussion
concerning
Oligopoly
)$(
One

non-collusive
b
oligopoly.
The
kinked
demand
curve
is
shown
in
Figure
10.4.
1
c
D=AR
start
by
making
the
assumption
that,
in
reality,
a
firm
only
knows
0
one
point
on
its
demand
curve,
the
one
that
it
holds
at
present.
This
s cim on o c e or ci M
We
Q
is
Quantity
MR
shown
firm
as
point
would
“a”
expect
in
Figure
from
its
10.4.
Now,
competitors
consider
if
it
were
what
to
reactions
change
its
the
price.
F igure
If
the
raise
This
“a”,
firm
since
the
the
first
is
as
in
1
Firms
to
are
a
then
it
is
Q
its
lost
competitors
to
the
elastic
lead
to
a
other
above
large
demand
curve
would
firms.
the
fall
kinked
point
in
and
concept
are
many
of
in
the
the
above
an
the
that
in
demanded.
curve
will
curve
that
will
why
are
current
so
price
be
be
has
twice
curve.
of
There
would
the
decrease
MR
curve
demand
and
a
quantity
MR
explanation
follow
implies
since
demand
possess
of
competitors
undercut
This
“a”,
the
oligopoly.
prices
not
also
part
an
sales.
point
that
that
would
increase
see
parts
likely
they
lost
the
will
offers
their
firms
that
will
may
curve
that
seen
MC
selling
firm
been
they
there
three
to
reasons.
market
will
tends
price,
lose
trade,
prices
harm
means
MC
2
P
.
still
Thus
would
they
be
the
if
firms
not
are
we
market
costs
MR
change
If
their
could
so
so
by
stable,
to
the
prices
that
as
or
the
profits
rise
profits
remains
and
were
and
assume
maximizing
costs
market
them,
involved.
equal
maximizing
price
current
marginal
still
10.4.
Marginal
the
significant
all
that
Figure
the
undercutting
would
then
at
would
P
.
,
in
below
follow,
by
high
as
producing
even
though
changes.
competition
firms
the
It
each
maximizers,
be
charging
have
we
is
profit.
on
and
the
“a”.
two
possible
can
it
that
any
below
lower
MR
profit
Q
Non-price
names,
is
then
noticeable
will
war
operating
and
Because
to
the
This
producing
there
of
a
raise
other
price
being
outputs.
at
that
be
relatively
would
likely
regain
curve
to
afraid
shape
firms,
the
probably
because
creating
is
since
firms
price,
1
would
price
non-collusive
afraid
other
and
to
bc,
as
in
are
MC
unlikely
be
price
it
to
point
demand
Firms
firm
in
expectations,
sloping
because
rise,
is
would
elastic
lead
the
rigidity
sales,
less
section
kinked
The
it
demand
its
point,
order
be
around
price
3
then
of
lower
the
these
vertical
be
2
lot
increase
to
to
firm
of
steeply
The
were
unlikely
kinked
price
a
demand
small
would
Because
the
that
More
demand
price
a
its
so
The
demanded.
firm
follow.
of
and
implies
quantity
If
raises
theirs
10.4
of
in
oligopoly
non-price
kinds
of
packaging,
personal
selling,
features,
such
as
tend
to
competition
non-price
special
publicity,
free
not
compete
becomes
competition,
features,
and
deals,
after-sales
terms
of
important.
such
advertising,
sponsorship
delivery
in
as
the
sales
and
use
There
of
brand
promotion,
special
service.
price,
distribution
Oligopoly
is
131
10

Oligopoly
characterized
as
firms
try
by
to
very
large
develop
advertising
brand
loyalty
and
and
marketing
make
expenditures
demand
for
their
Student
products
less
elastic.
Some
may
argue
that
this
represents
a
Be
of
scarce
resources,
but
it
could
also
be
argued
that
the
large
companies
results
in
greater
an
choice
for
By
referring
undertake
s cim on o c e or ci M
market
share.
all
This
kinds
serves
of
behaviour
to
increase
to
the
guard
and
barriers
to
extend
entry
to
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and
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idea
Find
1
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just
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few
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aisle
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might
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&
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ways
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200
Cadbury
oligopoly
different
names
1
1,
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countries,
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include
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oligopolies
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bet ween
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on
events
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132
view
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gover nment s
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celebrities
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trust
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limelight.
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oligopolies.
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the
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dominates
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firms
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EX AM I NATION
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multinational
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magazine,
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undercut
in
out
discriminate,
market
thus
demand
exporting
competitors
price
inelastic
inelastic
Trade
foreign
is
the
markets.
prices
and
firm
segment
demand
allow
in
in
This
have
foreign
at
a
firm
elastic
advantages
they
paying
to
This
are
are
sell
This
is
permitted
below
to
the
prices.
some
that
the
average
the
gained
elastic
the
market
sales.
economies
enable
If
may
discrimination
not
may
dumping,
also
product
be
offered,
they
producer
of
from
segment.
firm
markets
lower
domestic
There
of
firm:
the
lowering
more
may
known
and
and
upon
enable
gain
profits
the
the
set
the
amount
market.
more
in
to
may
by
competitive
in
price
segments.
discrimination
rules
segment,
a
eroded.
thus
market
competitors
trade,
citizen,
may
principle
prices
discrimination
enables
discrimination
it
market
the
elasticities
depends
given
everyone,
the
lower

price
discrimination
more
then
but
a
different
senior
advantages
product
of
adult
adults.
many
really
discrimination
benefit
the
charging
is.
consumer

In
by
discrimination.
degree,
clear
revenue
students.
maximized
segments,
different
it
375
are
discrimination,
are
price
and
325
student,
of
Whatever
bad
two
there
third-degree
a
profits
price
than
cinemas,
take
attracting
attracting
third-degree
into

and
MC=MR=$5,
a
may
would
to
allow
not
higher
the
some
have
price
consumer:
consumers
been
and
able
thus
to
if
to
purchase
other
“subsidizing”
a
consumers
the
poorer
136
consumers.
For
example,
in
many
countries,
lawyers
charge
high

11
prices
to
wealthy
lower-income
customers
clients
for
and
little
this
or
no
enables
fee.
them
Doctors
to
deal
often
do
Price
discrimination
with
the
same.

S

imilarly,
product
producer
a
discrimination
lower
had
example,
not
price
been
many
than
able
allows
they
to
some
would
secure
universities
people
have
higher
charge
to
had
prices
foreign
purchase
to
pay
from
students
if
a
the
others.
higher
1
For
price
at

P

rice
so

A

s
fees
than
for
discrimination
the
product
stated
scale,
above,
lower
market
is
domestic
usually
available
price
unit
more
and
thus
total
output
in
a
market
Be
and
may
lower
lead
prices
to
for
economies
consumers
of
in
Find
of
segments.
disadvantages
to
the
consumer
are
that:
the
Any
consumer
surplus
that
existed
before
the
price
different
different
be
prices
of
Some
been
The
The
on
charged
Twin
in
will
a
City
City
pay
single,
discrimination
and
explain
more
than
the
price
non-discriminated
is
a
75-minute
connecting
which
Slovakia.
that
would
Vienna
Bratislava
are
The
the
boat
Vienna
separate
to
the
(e.g.
keep
time,
card).
capital
makes
boat
cities
five
journey
16.30
€17
€19
18.30
€17
€19
and
of
daily
Austria
journeys
to
to
Bratislava
and
five
–
50 %
Vienna.
for
the
journeys
are
as
from
Bratislava
10.30
€17
€19
14.30
€28
€30
16.00
€28
€30
18.30
€17
€30
22.30
€17
€19
–
we
50 %
V ienna
( Main
tourist
Weekends
and
holidays
discount
have
an
excellent
might
People
example
want
who
to
want
make
a
to
of
price
day
make
of
it.
If
the
they
season )
are
Weekday
Weekends
season )
follows:
journey
from
tourist
Weekday
discrimination.
Depar ting
( Main
Time
Here
prices
discount
from
Children
Time
markets
identity
market.
Depar ting
The
the
have
Children
from
how
manages
Liner
Liner
Danube,
Bratislava
and
might
market
study
Twin
the
the
to
why
lost.
consumers
Case
charged
demand
of
details
Suggest
between
producer/seller

the
examples
Provide
g roups.
elasticities
different
segments,
will
real-world
discrimination.
the
be

three
price
all
the
The
inquisitive—investigate
following
consumers.
discrimination
costs,
11.1
students.
increases
to
workpoint
s cim on o c e or ci M
Student
tuition
and
holidays
like
in
to
8.30
8.30
€28
€30
9.00
€28
€30
12.30
€28
€19
Vienna
take
or
leaving
make
any
then
the
9.00
first
and
the
price
or
of
at
means
second
come
Bratislava
other
this
back
16.00
the
of
boat
in
or
round
combination
that
they
of
time
18.30.
trip
the
for
day
at
dinner,
This
€56.
journeys
would
will
Almost
will
be
less
137
11

Price
discrimination
expensive
than
City
company
Liner
most
desirable
this.
trip
It
would
feels
and
seem
that
are
this
that
will
pricing
to
the
be
will
Twin
of
people’s
different
occupy
but
elasticities
They
must
also
be
is
assuming
that
s cim on o c e or ci M
will
worth
want
to
make
the
round
trip
from
from
Vienna
rather
than
from
combinations
starting
from
Vienna
noting
had
the
have
two
of
same
from
day
cost
more
that
Saturdays,
they
are
Sundays,
differing
elasticities
the
days
only
their
can
demand
“take
higher
than
that
charging
and
of
be
less
advantage”
of
higher
holidays
demand.
certain
will
a
people
by
also
These
elastic.
this
is
price
can
The
due
may
also
to
travel,
an
thus
that
an
to
1
1,
children
example
E xplain
pr ice
Paper
1
par t
the
to
and
three
and
at
two
ran
(a)
of
essay
E xplain
b
Evaluate
the
from
have
situation
an
economist.
are
offered
price
a
have
increase
example
run
a
lower
may
average
the
of
in
led
the
the
a
and
cost
for
to
took
extra
a
Clearly
a
service.
supply.
in
the
of
the
a
scale
abnormal
discriminating
The
there
has
extra
the
and
by
(capital)
factor
to
of
profits
allowed
The
a
the
was
of
new
short
production.
earned
firm
to
by
increase
price
discrimination.
capital
and
therefore
increase
itsoutput?
They
necessar y
for
a
seller
of
a
good
to
be
able
to
[10
mark s]
[10
mark s]
[15
mark s]
question
concept
the
ef fec t s
of
of
pr ice
pr ice
discr imination.
discr imination
on
producer s
and
consumer s.
t
alis
journ
advice :
using
examples
announces
plans
to
ra i s e
t u it i o n
fees
remember
examples
for
in
in
your
to
include
written
explaining
answers.
the
For
concept
of
st u d e n t s
c o n c e pt :
Price
Different
discrimination,
e l a st i c it i e s
of
demand
for
d o m e st i c
st u d e n t s
and
do
g ive
so
e xp l a i n
why
the
government
m i g ht
wa n t
to
do
this
why
the
demand
for
u n i v e r s it i e s
from
f o r ei g n
st u d e n t s
the
to
t ha n
the
be
demand
from
d o m e st i c
st u d e n t s .
effectively
situations
effects,
consider
able
takes
you
if
you
where
place.
need
To
to
the
effects
on
be
the
m i g ht
stakeholders
e l a st i c
will
and
able
consider
more
of
discrimination
evaluate
to
much
examples
price
st u d e n t s
Tr y
you
d i s c r i m i n at i o n
to
D ia g ra m :
138
has
the
QU ESTIONS
Government
Economics
less
the
decision
boats
fixed
higher
price
be
a
Now
price
increase,
company
example,
Hint:
the
from
price
supply
change
at
the
Always
H ea d l i n e :
f o r ei g n
Bratislava.
increased
Assessment
be
the
question
conditions
a
f o r ei g n
ago
journeys
discr iminate.
1,
ou
Y
years
three
Furthermore,
this
demand
increase
Perhaps
EX AM I NATION
Paper
of
production,
company
charging
an
firm
be
price.
fact
also
and
boats
Look
strong
demand
on
its
is
is
price.
their
price
The
the
Bratislava.
1
fact
of
and
been
The
up
boat
journeys.
perspective
equivalent
that
one
Vienna
increased.
returning
“product”
50%
Bratislava
number
as
the
pay
journey
they
starting
so
only
more
day
people
seat,
of
company
demand.
a
they
take
It
advantage
still
identical
the
in
different
examples.



12




Market
By
the
end
of

define

explain,
negative

define

explain,

explain
land
to
should
examples
of,
to
deal
and
in
with
access
illustrate,
fuels
between,
diag rams,
common
and
illustrate
in
be
merit
able










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to:
goods,
using
illustrate,
of
the
g ive
the
and
production
different
demerit
to
and
of
and
examples
threat
g ive
goods,
examples
and
positive
methods
of
externalities
sustainability
of
common
sustainability
countries
of
consumption
government
existence
resources
developed
developing
evaluate,

you
externalities
using
intervention
fossil

failure
g ive
distinguish
evaluate,


goods
define,
and
and

failure
chapter,
market
public

this

1

s cim on o c e or ci M

and
access
posed
resources
by
over-exploitation
the
of
use
of
ag ricultural
countries
diag rams,
possible
government
responses
to
threats
sustainability
HL
explain,
using
examples,
asymmetric
HL
explain,
using
examples,
the
abuse
information
of
as
monopoly
a
market
power
as
a
failure
market
failure.
In
the
“real
allocatively
of
things
from
then
that
failure.
intervene
We
in
towards
need
to
order
the
look
options
Types
of
of
Public
market.
public
public
goods
Examples
barriers.
and
goods
in
as
is
perfect.
7,
page
from
an
not
attempt
to
perfect
and
they
and,
If
is
say
eliminate
market
why
the
not
number
the
that
are
of
a
therefore,
this
we
are
are
governments
allocation
reasons
is,
There
manner.
maximized
fail,
That
108).
being
optimal
governments
often
case,
this
is
a
expected
failure
and
resources.
markets
have
to
might
try
to
fail
and
correct
the
that
failure.
failure
goods
a
is
not.
such
are
in
not
goods
are
free
public
could,
extent,
they
of
is
the
they
There
what
at
are
Since
in
markets
to
market
goods
markets
optimal
that
are
Chapter
surplus
When
possible
Lack
(see
resources
community
move
markets
prevent
allocating
market
to
world”
efficient
goods
theory,
sometimes
that
is
be
of
not
are
be
known
as
provided
benefit
what
goods
or
to
national
over
supplied
lighting
be
of
considered
would
debate
number
street
would
market
much
A
that
goods
is
often
by
the
be
a
at
and
a
considered
public
a
to
lack
of
failure.
flood
be
to
free
the
public
market
and,
in
market
defence
free
all
society,
actually
lighthouses
quasi
to
good
public
some
because
of
this,
goods.
139

12
The
Market
failure
reason
market
is
that
that
excludable
and
individuals
both
of
these
completely
defence
s cim on o c e or ci M
A
good
will
a
said
flood
not
the
goods
to
barriers,
be
once
then
and
that
barrier
to
benefit,
it
it
has
protect
even
makes
is
not
a
If
it
a
at
is
called
if
been
a
it
is
they
If
as
other
paid
If
private
not
a
have
good
is
national
public
a
free
for
does
good.
impossible
the
a
pointless
pure
have
in
non-
good
such
provided.
house,
though
a
all
are
public
non-rivalrous,
then
it
provided
themselves.
non-excludable
it
be
characteristics—they
characteristics,
flood
the
will
two
non-rivalrous—and
provide
consuming
gain
goods
have
non-excludable
and
is
people
erects
to
public
they
to
good.
stop
private
people
in
nothing.
other
individual
the
area
This
is
1
known
flood
not
A
as
be
is
not
person
ice
said
barrier,
it
as
small
relative
who
the
a
flood

number
They
case

may
with
other
from
one
is
people
from
by
it
no
one
it.
person
is
from
a
person
consuming
person
although
protected
may
try
provide
such
to
to
pay
The
for
a
good
will
the
be
it
as
a
huge
to
and
If
be
all
that
of
the
very
the
probably
private
a
flood
at
would
benefit
a
by
protected
barrier
for
well.
it
consume
protected
social
would
consuming
cannot
being
flood
incentive
reduce
street
who
may
the
things
fund
people
They
if
when
another
benefit
there
will
do
greater
individual
to
this
market
failure
by
intervening
in
ways.
pavements,
of
person
then
cost,
one
will
barrier.
of
money
the
Thus
Governments
a
stop
no
else
market.
However,
were
Logically,
someone
non-rivalrous
private
to
cost.
free
cream,
not
The
the
that
another
ice
does
problem.
hope
be
well.
time.
people
by
to
an
same
erect
the
prevent
eats
cream
than
free-rider
in
provided
good
does
the
barrier,
public
as
lighting,
the
good
national
and
provision
would
subsidise
not
be
private
themselves.
defence,
lighthouses.
spreads
the
prepared
firms,
to
This
flood
The
cost
pay
covering
is
usually
barriers,
use
over
a
of
the
roads,
taxpayers’
large
number
individually.
all
costs,
to
provide
thegood.
Under-supply
Merit
goods
and,because
merit
goods,
government
use
them
goods
merit
care,
will
of
important
and
merit
well
point
they
are
this
does
not
a
of
to
shared
for
therefore
greater
degree.
goods
the
they
merit
as
provide
mean
and
How
available
among
They
benefits
merit
are
market
call
goods
both
they
All
the
(We
are
the
think
public
them
that
the
people
that
that
such
goods
education,
at
that
no
they
taxpayers.
supply,
do
good
education
them
140
simply
services.)
increase
the
such
by
are
health
opera.
goods.
goods,
may
course,
to
the
think
government
where
whole,
attempt
they
merit
a
underprovided
under-consumed.
positive
examples
facilities,
important
as
be
be
usually
consumed
Some
consumption,
are
will
will
provide
society
be
goods
that
they
they
thinks
Governments
how
this,
but
should
goods.
merit
goods
of
and
sports
of
are
this
is.
and
directly
direct
have
In
will
the
cost
thus
of
care,
subsidize
to
the
depend
case
health
or
no
and
the
actual
upon
extremely
the
them
to
consumer.
cost.
The
the
Of
cost
is

12
As
merit
then
goods
they
will
considered
to
become
be
less
important
subsidized,
have
positive
but
to
a
benefits
in
the
lesser
for
eyes
of
extent.
people
the
so
facilities
may
well
are
Theory
of
from
the
government.
The
opera
may
be
the
same,
Knowledge
gain
Consider
subsidies
failure
government,
Sports
and
Market
the
following
but
statements
since
the
benefits
may
be
considered
to
be
smaller,
the
subsidy
given

to
the
opera
may
well
be
All
public
goods
are
merit
smaller.
Over-supply
of
demerit

goods
Spor ts
facilities
are
a
s cim on o c e or ci M
1
goods.
merit
good.
Demerit
and,
the
goods
because
are
of
government
and
for
society
goods
this,
thinks
as
a
that
they
will
will
are
be
bad
whole,
be
both
and
over-provided
over-consumed.
for
people
therefore
by
the
They
who
market
are
goods
consume
government
would
that

like
them
demerit
consumed
goods
are
to
a
lesser
cigarettes,
degree,
alcohol,
or
not
hard
at
all.
drugs,
Examples
and
a
spor ts
public
facilities
good.
to
Is
see
Therefore,
are
them
of
or
the
conclusion
why
log ical?
Why
not?
child
pornography.
Governments
for
demerit
may
goods.
harmful
they
harmful
demerit
the
because
chance
As
An
to
they
that
we
talk
must
reflect
about
add
We
a
to
cost
production
to
also
will
completely.
disappear,
attracted
existing
demand.
goods,
less
the
eyes
of
such
harmful
how
pornography,
them
appear,
in
demand
extremely
completely
harmful
slightly
of
child
ban
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12.1
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142
meet
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allowed
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It’s
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meet
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Maathai,
Peace
Prize
2004
laureate
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them.
production/external
production
Kyoto
way.
Nobel
GHG
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s cim on o c e or ci M

of
with
losses
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good
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143
external
benefits
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are
good
for
third
parties.
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us
suppose
that
12
Market
large
failure
printing
printing
firm
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firms.
firm,
s cim on o c e or ci M
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do
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level
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output,
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and
1
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Q*
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,
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12.4
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utility
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individuals,
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in
by
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and
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Figure
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M SB
cigarettes
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an
example.
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144
simple
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commonly
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their
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Figure
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If
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of
154
indicator”
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e xplain
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view
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air plane
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13.1
Product
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microeconomics—the
13
a
allocation
in
Employment
Table
GDP
nominal
income
steady
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significance
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of
inflation
payment s
distribution
of
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income
objectives
economy
as
a
whole,
a
significant
concern
is
the
level
155
of
the
economy’s
total
output.
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will
see
later
in
this
chapter
that
13

this
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is
level
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overall
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shown
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and
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for
Figure
receive
produced
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basis
to
factors
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13.1.
income
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circular
(2).
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using
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production
nation’s
provided
Table
sectors.
goods
production.
factors
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two
and
output
income
13.2.
fac tor
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production
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income
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of
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factors
production
to
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of
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economy’s
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13.2
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factors
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buy
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1.
of
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in
very
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use
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shown
model
Chapter
people
for
households
goods
at
in
owners
payment
received
income
again
introduced
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services
look
of
of
income
provide
buy
the
the
the
goods
income
throughout
two-sector
factors
the
and
received
of
model
production
services
(4),
and
(3)
in
this
economy.
Households
Expenditure
Wages,
on
Goods
goods
and
Factors
interest,
services
services
(3)
production
(4)
156
13.1
Two-sector
circular
flow
of
income
model
and
(1)
profits
Firms
F igure
rent,
of
and
(2)
13
and
two-sector
the
economy.
not
behave
the
money
Households
means
the
financial
as
goods
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as
firms
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income
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expenditure
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unsold
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finance
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to
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money
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of
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circulating
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directly
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sectors.
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name
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spending
deliberately
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the
households
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hospitals,
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introduce
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goods
f l o w.
and
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earned
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range
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use
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fact
households
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order
economic
imbalances.
income
circular
do
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money
their
output.
investment
coming
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wide
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simplified
suggested
production
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in
also
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income.
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to
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much
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and
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will
have
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overall
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though
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in
received
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capital
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shows
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current
income
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save
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level
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later
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in
and
157
13

The
level
injections
of
in
overall
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economic
economy
activity
and
thereby
affect
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level
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income
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point
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transfer
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payments
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payments
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payments
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allowance
exchange
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income,
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rather
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than
represent
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Figure
13.2
shows
the
sectors—households,
s cim on o c e or ca M
sector—taking
into
circular
firms,
flow
the
account
the
of
income
foreign
sector,
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model
and
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the
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government
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2
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Expenditure
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Taxes
spending
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13.2
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the
Four-sector
four-sector
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economy
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rise,
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illustrated
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leakages
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illustrate
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158
but
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later
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159
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economic
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3
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to
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experienced
1
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2
Explain
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the
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In
rate
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the
of
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figure
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100
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GDP
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the
2
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100
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169
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14
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and
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bicycles
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period
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objectives.
171

14
Agg regate
expor ts
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kind
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up
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are
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much,”
buy
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don’t
where
impossible
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off.”
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Thursday
from
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26,
The
a
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fancy
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Source:
rates
her
chiropractor.
debt
accumulated
business
short
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finances.
in
of
credit
loans
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already
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student
while
to
higher
and
physiotherapist
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if
recovery
jobs.
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household
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but
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consumer
recovery
vulnerable
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their
interest
of
cornerstone
consumers
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soon
the
borrow
well
large
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recession.
their
and
economy
or
Canada
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higher
essential
to
their
services.
reduce
spending—a
week,
economy]”,
for
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rates
country’s
rates,
and
combination
could
leave
may
rates
re-pay
plus
will
and
threatens
now
disposable
of
next
–
this
cards
interest
to
continue
goods
interest
than
and
emptying
a
on
if
more
(easy
households
borrowed
and
borrow
credit
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spend
to
money
that
their
simply
debt
able
likely
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paid
to
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and
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of
it
to
debt
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levels
interest
rate
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rise.
might
to
to
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easy
Canadian
has
$1
as
cover
Organization
174
is
original
run
consumers
Canadians
high
cautioned
are
will
Canada’s
dollar
raise
indebtedness
the
to
economy
taking
is
expect
to
Economists
have
payments.
“The
people
confidence
loans
will
money
their
themselves
pockets
(the
as
1989
every
to
it
freely.
record
With
expected
perhaps
a
are
household
rebound
from
for
income.
find
of
paying
at
booming
about
confidence
likely
likely
services
will
less
If
getting
and
dampen
Household
stands
a
“consumer
household
spending
doubled
or
is
to
information
that
households
short
with
levels
threaten
the
index”
rates
debt
Rising
Bloated
put
households
the
consumers
if
are
future.
spending
mortgages
In
ultimately
the
and
by
goods
then
and
interest).
they
consumption.
interest
on
rise,
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for
due
confident
consumer
indicates
which
more
spending
then
to
and
future
more
indebtedness
affects
on
index
consumer
extent
money
high
confidence
the
Household
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save
the
feel
then
confidence
“consumer
increase
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in
will
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worsen
order
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they
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promotion
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today
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sales
up
demand
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2010
and

14
Student
Read
Use
workpoint
14.3
thinker
the
the
shor t
data
text
from
below
the
text
Mexico’s
Consumer
Mexicans
highest
global
level
in
theNational
suppor t
the
questions
your
answers.
to
prior
crisis
Statistics
to
in
the
its
June
point.
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badly
consumer
points
said
the
its
lowest
October
The
in
level
survey
in
and
purchase
one
durable
year
to
June
c
June
2009
to
October
d
2008
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a
2010
think
goods.
explain
the
at
domestic
its
was
virus,
and
weakest
also
of
the
which
caused
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restaurants,
public
its
venues
first
of
recently
in
first
rising
overall
it
2008,
above
late
2009
quarter
of
levels.
the
in
remains
when
it
the
below
started
in
the
in
consumer
confidence
in
is
that
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the
Mexican
explain
how
of
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survey
asks
durable
change
a
separate
goods
in
in
your
for
makes
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workpoint
of
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the
informal
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to
on
give
and
consumer
this
labour
improvement
market
some
from:
consumer
question
about
consumers’
willingness
to
buy
answer.
confidence
from
2009
to
2010
the
change
in
consumer
confidence
from
2009
to
might
be
expected
to
2010.
14.4
“The
Consider
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selling
2009
definition
workpoint
percentage
many
the
2010
up
most
of
the
agg regate
demand
in
the
national
agg regate
find
that
demand
this
distribution
income
of
is
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rather
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for
data
workpoint
comes
typical
the
in
of
country
from
the
13.1
and
consumption
developed
that
you
entire
the
world
economy
consumer;
if
he
rests
ever
most
stops
Canada.
in
returning.
Mexico
on
the
pre-crisis
crisis
2010
inquirer
countries.
labour
has
AD.
reasons
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year
tends
With
formal
Lozano
formal
security
less
optimism
as
which
job
to
work
such
confidence.
the
the
100.
difference
less
therefore
past
the
sought
street,
them
has
last
the
Javier
the
almost
economy,
this
confidence
over
that
During
people
4.3%.
gain
Minister
said
recovered
in
and
year-on-year
consumer
an
of
recovery
quarter
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Rise
(approximately).
Use
diag ram,
Mexican
Suggest
an
you
June
text,
2009
to
to
the
June
do
2010
from
in
the
market
months,
levels
to
goods.
May
Student
Be
eight
ability
at
outbreak
close
other
its
While
question
consumers’
to
(2010),
shown
and
the
began
growth
overall
gross
10%
tourists
second
year
which
by
was
cities.
showed
situation,
Mexico
on
2008-2009
influenza
off
GDP
in
the
present
hurt
and
some
five
b
affect
4
the
the
numbers
durable
3
about
of
a
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clubs
at
reached
points
consists
financial
concerning
2
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was
follow.
economy
authorities
May,
the
concerning
economy
Using
77
in
in
The
scared
87.5
index
2009.
of
two
household
future
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June
at
points
2009
the
dipped
A/H1N1
put
2009.
questions:
1
84.6
institute.
points
survey
confidence
versus
81
two
(2010)
of
product
saidMonday.
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June
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recession,
the
2008,
that
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In
among
June
since
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to
answer
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confidence
rose
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2
a
demand
s cim on o c e or ca M
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Agg regate
in
countries.
chose
in
spending
money
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doesn’t
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on
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he
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need—we’redone
Bill
for.”
B onner
13.2.
175

14
Agg regate
causes
changes
in
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What
demand
investment?
etar
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rates
order
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are
tseretnI
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firms
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affected
by
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profits”
the
money.
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interest
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sources.
can
rate.
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borrow
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firms
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money.
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to
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of
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borrowed,
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then
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the
interest
cost
rates
of
borrowing
are
high,
may
then
lead
firms
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in
prefer
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their
retained
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the
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to
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rises.
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In
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and
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likely
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income
14.4
income
leads
pressure
in
1
to
of
investment
effect.
national
firms
say
I
7%
cost
that
national
rises
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be
from
the
borrowing
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investment.
rate,
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level
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and
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interest
income
there
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rates
14.4.
and
the
the
national
invest.
investment
have
asdiscussed
rapidly
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increase
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in
to
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very
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little
confident
to
consumer
productivity.
businesses
they
and
should
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consumer
demand
in
the
rise
and
point
in
demand
about
the
then
they
demand
by
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publish
data
in
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factories
and
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14
Student
Be
a
workpoint

Agg regate
demand
14.5
thinker
Read
the
following
ar ticle
German
adapted
from
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The
Financial
Times
and
sentiment
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monthly
German
reported
coming
half
general
renewed
questions
that
three-year
follow:
high
7,000
for
German
business
Ifo
(2000 =100)
were
in
also
June,
concern
climate
more
110
contrary
about
economic
index
the
a
105
slowdown.
manufacturing,
“the
business
100
2
In
year
than
of
the
executives
expectations
optimistic
to
at
survey
business
answer
has
brightened
strongly”,
s cim on o c e or ca M
outlook
95
A
remarkable
economic
upturn
sentiment
in
said
German
Professor
capacity
was
Sinn,
utilisation
with
of
improved
plant
and
90
confirmed
business
on
Friday
confidence,
by
a
surge
machinery,
in
and
opportunities
which
export
seen
to
be
as
85
reached
the
years
July,
in
highest
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level
for
positive
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as
in
June.
employment
employers
plans
“Firms’
are
more
80
Jan
reported
a
steady
recovery
in
favourable
order
and
point
2009
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towards
2008
books
and
cuts
short-time
The
in
by
rose
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in
increase
slight
on
to
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recorded
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domestic
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sharpest
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gradually
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of
seems
into
with
construction
the
2010
levels.”
also
economy
reflecting
German
staff
recovery
economy
spreading
Ifo
level
in
export-led
German
index
Munich-based
106.2,
June,
increases
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climate
the
institute
101.8
numbers
working.
business
produced
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the
to
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on.”
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is
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3
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the
causes
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to
deal
education
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or
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to
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causes
with
factories
holiday
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going
breaks
demand.
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the
the
are
Andreas
extent
recession
of
in
fantastic
the
23,
from
2010
The
Financial
(author
Quentin
Peel)
numbers,”
Scheuerle
increase
late
July
of
Deka
in
2008-early
business
2009.
improvement.
the
change
of
government
government
goals
of
subsidies
to
the
in
financially
will
rise.
then
policy
We
said
state
how
in
failure,
health
German
summer
is
were
in
business
expectations
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spending
“These
said
of
the
show
nature
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market
or
for
changes
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g raph,
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what
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Times,
institute.
worst
that
climate.
German
mood,”
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reasons
commitment
correct
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government
to
the
agg regate
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at
“The
party
of
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influence
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of
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unification
incredible
said
in
at
spending
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Chapter
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support
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require
depends
For
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example,
vast
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government
industry,
obliged
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government
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spending?
will
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affect
AD
on
shortly.
expor ts?
Expor ts
Exports
are
goods
or
services
that
are
bought
by
foreigners.
If
foreign
177
incomes
rise
then
their
consumption
of
imported
goods
and
services

14
Agg regate
will
rise.
people
from
For
are
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affect
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then
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competitive
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China
partners,
demand,
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rise.
relatively
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demand
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also
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expands.
exchange
law
services
economy
Thus,
trading
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exports
the
China
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and
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capital.
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rises,
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countries’
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exports.
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rise
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able
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country’s
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value
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changes
cause
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German
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liberalized
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imports
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markets,
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and
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export
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Canada
and
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exports
US
goods
so
affect
partners.
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American
ceteris
other
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among
US
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tariffs
to
adopts
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it
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export
more
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it
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countries.
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relatively
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to
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Canadian
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paribus
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national
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income
capital
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components.
imports.
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services
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it
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national
consumption.
necessarily
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national
income
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increase
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national
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an
Part
of
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spending
spending
on
imports.
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same
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would
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we
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on
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goods
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rate
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would
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import
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thus
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level
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import
imported
see
exchange
depending
on
expenditure.
goods
178
expensive
to
to
expenditure.
more

14
The
type
import
trade
of
trade
policy
by,
expenditure
expenditure
the
Thus,
also
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policies
trade
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import
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then
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imports,
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exchange
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much
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revenues
more
in
time
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above.
and
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(affecting
changes
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notably
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income
incomes
rates,
rates
vary
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national
national
exchange
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spending
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be
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paribus
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tariffs
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chapters.
2
in
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workpoint
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eurozone
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14.6
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sought-
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179
14
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180
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14
supply
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15
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15
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In
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194
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output
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there
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output
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with
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price
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16.10
The
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Keynesian
an
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increase
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AD
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capacity
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3
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16.11,
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and
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will
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the
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This
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in
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beyond
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egarevA
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16.1
1
The
impact
economy
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Keynesian
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perspective
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Figure
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at
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195
16
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Macroeconomic
Demand-side
The
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introduced
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Figure
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demand
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14.
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2
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Be
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workpoint
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creates
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John
in
family
was
intelligent,
of
academics,
the
civil
but
political
connection
Group
in
as
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the
London,
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service
and
did
he
the
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by
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to
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expect—but
as
he
and
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evidently
knew
more
about
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of
War
resigned
it.
very
to
as
wrote
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the
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One.
from
the
Economic
Peace.
for
His
argument
Germany
predicted
damag ing
and
that
he
to
pay
the
was
the
that
it
amounts
consequences
turned
out
to
be
right.
and,
views
for
which
Keynes
is
most
well-known
economics
explained
published
economics
than
in
1936
in
The
General
Theory
of
later,
Employment,
“I
payments
of
in
expected
impossible
demanded
the
examinations
in
result,
would
joined
enter
reparations
a
conference
was
countries
Consequences
his
intellectuals
Woolf.
order
entrance
for
the
massive
Allied
Treasury
pursuits
Bloomsbury
many
In
highly
of
Germany
make
the
were
exam
level
using
which
to
British
on
literary
literary
was
intellectual
Although
Virg inia
1906.
He
The
ironically,
a
happen
conclusions
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income
taxes,
60%
and
of
to
in
spent
re-spent.
services.
providers
range
be
services.
people
repairs,
way,
re-spent
rounds
and
million
spent
goes
and
(MPC)
goes
is
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to
average
represents
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it
some
rest
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the
goods
consume
million,
engineers,
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to
The
goods
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pay
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stays
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of
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economy
$100
$10
illustrates
additional
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imports
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example.
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propensity
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buy
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economy.
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and
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The
initial
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including
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249.99
effect
national
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by
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all
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the
i.e.
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2.5
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this
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the
example,
the
16
multiplier
circular
to
is
national
Rather
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than
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by
mpw
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value
marginal
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complicated
formulas
calculated
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(mpw).
(mps)
to
economy
complete
can
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withdraw
this
2.5
into
times
Macroeconomic
equilibrium
the
its
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income.
multiplier,
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rate
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find
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propensity
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value
value
marginal
marginal
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table
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mpc
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0.4
Example
Q
a
Calculate
marginal
Q
b
By
how
there
is
the
multiplier
propensity
much
an
will
to
for
an
national
investment
economy
consume
of
is
where
the
0.75.
income
increase
in
total
if
$50,000?
1
________
Ans.
a
The
multiplier
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1
0.75
1
____

0.25

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b
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in
Any
change
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in
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increases,
marginal
investment
national
for
propensity
multiplier.
If
government
a
it
must
estimate
output.
the
so
demand
that
the
The
one
gap.
of
gap
Second,
multiplier
the
aggregate
is
have
as
the
the
is
to
idea
must
limitations
demand
in
to
of
have
necessary
to
to
in
of
result
value
falls,
from
of
then
intervene
two
inject
into
estimating
try
output
the
fiscal
the
will
to
of
an
a
full
the
policy
will
rate
fall.
If
increase
the
in
deflationary
try
to
employment
value
increase
these
flow
will
must
economy
of
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taxation
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and
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If
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estimate
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$50,000).
multiplier
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in

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multiplier.
government
the
will
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equilibrium
able
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import
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be
of
withdrawals
between
it
$50,000
economy’s
then
some
to
of
income
example,
the
gap,
of
in
4
in
of
in
the
aggregate
order
values
aimed
to
fill
illustrate
at
managing
economy.
201
16

Macroeconomic
Student
Be
a
your
An
workings
economy
a
marg inal
b
its
multiplier
c
the
In
16.3
a
country,
taxation
the
rise
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value
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the
of
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by
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s cim on o c e or ca M
1,
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to
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to
consume
of
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Calculate:
withdraw
that
would
propensity
marginal
multiplier
(a)
the
propensity
be
needed
if
national
income
million.
marginal
marginal
of
injections
and
rate
EX AM I NATION
Paper
each
marginal
$10
the
0.3,
a
propensity
amount
to
for
has
its
is
2
workpoint
thinker
Show
1
equilibrium
of
to
save
propensity
change
taxation
if
the
drops
is
to
0.1,
the
import
government
to
is
marginal
0.1.
lowers
rate
How
of
will
taxes,
such
0.2?
QU ESTIONS
questions
2
1
W ith
of
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help
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W ith
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HL
W ith
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Creating
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Paper
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1,
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Evaluate
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employment
diagram,
diagram
the
the
income
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demand
numer ic al
will
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the
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bet ween
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equilibr ium
level
out put .
ef fec t s
and
e xample,
multiplier
dif ference
level
e xplain
national
ag gregate
essay
an
diagram,
full
countr y ’s
a
for
202
help
in
of
of
supply
increase
value
a
the
help
ag gregate
3
of
and
the
an
pr ice
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of
increase
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t wo
per spec tive,
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the
fac tor s
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Friday.
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the
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means
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article
be
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lowest
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the
hourly
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wage
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year
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in
the
US.
said
last
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2002
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employment
anunemployment
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Canada
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April
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average
was
up
2005.
past
C BC
News,
May
5,
2006
provinces
jobless
rates
manufacturing
rose.
Stats
Can
jobs
said
follows.
what
of
the
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jobs
Canadian
level
growth
were
leaves
country.
For
job
straight
the
essentially
in
have
the
Those
jobs
manufacturers
Statistics
to
and
6.4%
still
fewer
relentless
Source:
first
That
the
strong
relatively
for
165000
by
the
Alberta
was
factory
inApril.
current
Quebec
April
Columbia
last
service
significant
was
creation
British
jobs
in
to
country’s
past
manufacturing.
province’s
last
has
adult
added
the
up
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added
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growth
Employment
about
than
economists
as
edges
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positions
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rate
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mostly
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22000
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15000
is
rate
economy.
women.
a
from
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jobs—all
added
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issues
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losses
Statistics
an
tenth
Canada
rose
point
job
lows.
new
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unemployment
Statistics
The
percentage
but
of
unemployment
theory.
slightly
said
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Unemployment
falling
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useful
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Canada’s
and/or
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government.
s cim on o c e or ca M
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tenth
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203
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17
Low
The
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in
unemployment
the
The

unemployment
number
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manufacturing
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While
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people
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will
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men
or
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be
different
industries
different
for
(e.g.
different
women).
publicize
the
vary
may
a
in
national
different
unemployment
regions
will
rate
differ
from
average.
things
costs
created
services)
6.4%),
national
Many
or
country
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
rate
economy.
will
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affect
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economic
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The

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What
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s cim on o c e or ca M
According
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how
Labour
“people
work,
effect
on
is
it
wage
measured?
Organization
of
and
working
actively
rates.
(ILO),
age
who
seeking
are
employment”
(www.ilo.org).
By
definition,
the
unemployment
rate
is
the
number
of
people
who
2
are
unemployed
(not
the
work
whole
force,
Although
which
age
not
part
is
parents
of
part
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is
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labour
force
retired
not
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be
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these
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Similarly,
force.
quite
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at
considered
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age
stay-at-home
jobs,
noting
possible
data
two
true
is
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of
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work.
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people
system
unemployed.
worth
may
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Information
population,
insurance
that
there
is
along
records
may
inconsistency
the
differences
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based
Austria
as
likely
of
in
be
the
benefits.
register
people
people
who
may
be
unemployed.
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as
are
Belgium.
there
people
in
the
Switzerland.
of
and
unemployed
to
on
or
number
Britain
approaches,
register
not
in
in
number
unemployment
benefits
are
national
surveys
as
countries.
benefits,
to
for
considered
actually
are
specified
choosing
the
known
attending
have
force
Anybody
students,
the
own
a
unemployment
is
there
of
labour
population”.
is
retire.
not
not
and
that
calculated
the
incentive
availability
entitled
and
is
and
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to
Because
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unemployed,
within
problems
on
people
example
unemployment
However,
204
data
it
has
are
do
part
force
Unemployment
it
they
censuses
different
registered
Alternatively,
of
are
who
not
there
looking
children,
that
labour
records
gives
measurement.
are
active
children
who
unemployed.
information.
such
not
after
others
country
national
in
look
and
total
otherwise
Students
are
People
realize
the
force.
include
they
to
work
the
force,
country,
they
though
be
Each
security
definitions
who
of
administrative
social
inaccuracies
The
to
number
from
to
and
Even
to
start
as
force.
labour
of
“economically
work
would
surprising
unemployed.
to
home
employment,
measure
are
the
people,
considered
seeking
It
at
percentage
The
the
force,
labour
parents,
are
of
a
country
eligible
work
stay
the
from
part
the
who
of
essentially
not
of
as
population).
varies
people
this
be
it
expressed
is
likely
person
to
who
For
depend
is
unemployed.
not
17
Hidden
One
the
that
existence
of
includes
of
those
of
are
longer
they
of
are
time
no
people
have
time.
Since
job,
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given
for
up
work
are
like,
to
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the
but
or
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stay
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in
the
no
be
part
and
Yet
first
like
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time
to
they
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as
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much
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they
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Another
are
find
group
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Since
working
are
like
group
for
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unemployed.
part-time
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for
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really
They
need,
search
is
unemployment
The
unemployed
the
hidden
working
Hidden
presumably
to
unemployment
people.
been
up
work,
of
of
better
people
hidden
from
in
official
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for
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which
like
income,
job
unemployment
to
but
at
an
You
must
stay
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that
in
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utilizes
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workpoint
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lower-skilled
job
are
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pays
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people
higher
better
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17.1
inquirer
have
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Student
Be
they
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s cim on o c e or ca M
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than
have
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considered
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Low
unemployment
problem
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
gathered
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data
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out
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exactly
unemployment
how
the
rate
in
your
government
rate.
Y
What
does
the
Organization
The
International
specialized
justice
and
was
major
creation
League
specialized
I LO
founded
of
Labour
Organization
which
internationally
It
The
Labour
agency
rights.
the
International
do?
of
the
in
of
formulates
1920
into
the
of
and
the
is
in
it
UN
of
human
the
Versailles
being;
UN
is
promotion
recognized
T
reaty
Nations
agency
seeks
and
only
which
became

labour
administration

labour
law

working

management

cooperatives

social
social
of
standards
association,
abolition
of
the
right
forced
treatment,
and
across
entire
the
provides
and
of
labour
brought
the
to
other
standards
of
assistance
rights:
collective
equality
spectrum
technical
labour
organize,
labour,
in
vocational
training

employment
and
policy
development
of
regulating
primarily
in
of
bargaining,
and
conditions
issues.
the
labour
vocational
statistics
and
occupational
safety
and
health.
setting
freedom
oppor tunity
work-related
security
the
It
fields
of:
It
promotes
employers’
training
Within
the
structure,
equal
the
and
and
development
workers’
advisory
UN
with
par tners
governing

conditions
first
standards
Recommendations
basic
relations
1946.
international
Conventions
minimum
industrial
surviving

form
and
labour
system,
with
independent
organizations
services
workers
of
the
and
to
I LO
those
has
a
in
provides
unique
employers
governments
and
organizations.
tripar tite
par ticipating
the
work
of
as
its
organs.
rehabilitation
Source:
www.ilo.org
205
17

Low
unemployment
Student
Be
1
Read
you
2
workpoint
through
know?
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at
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207
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F igure
17.1
Inflows
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Figure
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208
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17.2
Equilibrium
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17
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Number
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209
preventing
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F igure
17. 3
Real-wage
unemployment
17

Low
unemployment
Solutions
The
are
real-wage
solutions
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wage
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obvious
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Figure
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in
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AD
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Assume
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17.4
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210
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unemployed
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furniture
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resulting
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213
unemployment
among
Italian
furniture
makers.
17
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Low
unemployment
Changes

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215
17
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Low
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17
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Low
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Crowding
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Investment
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-
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countries
fears
tha t
could
be
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Canada
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the
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spending
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usua l,
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s o me
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e as e
m ay
s uch
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jobless
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for
suggest.
he l p
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people
throughout
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although
time
growth
signs
are
headlines
Recovery
was
unemployment
under-employment
the
Spain,
Unfortunately,
story.
stopped
and
to
and
OEC D
Factblog,
July
17
,
2010
under
public
219
17
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EX AM I NATION
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importance
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as
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word
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221
the
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rate
18.1
223
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2005.
18
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224
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said
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facing
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government
demand
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have
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costs
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urged
to
and
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from
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said.
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industrialized
which
economy
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production
1990s
economic
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increasingly
asset
financial
suffering
deflation,
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the
boost
jobs
potential
such
as
domestic
through
high-growth
health
care
and
low
and
worsens
green
as
technology,
echoing
the
ageing
consumers
prone
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very
put
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difficult
purchases
future
price
strategy
in
Kan.
falls.
of
Prime
However,
Minister
this
will
Naoto
only
Japan’s
economy
worsen
has
Japan’s
mountain
of
public
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gradually
warned
of
future
While
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off
careful
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government
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Japan’s
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for
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global
report
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Falling
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Office
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estimate.
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2010
also
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Table
is
important
are
given
shown
change
basket
larger
CPI
list
The
the
consumed
UK
a
household.
categories.
of
that
country
creates
a
the
and
inflation
up
average
for
In
goods
calculate
price
take
of
average
price
services
they
the
the
different
consumer
categories
are
by
month
categories
importance
different
economic
of
change
the
consumer
measure
consumers.
of
each
because
the
a
consumed
goods
others,
items
by
number
called
of
Thus,
their
Theweights
a
of
devise
compilation
measured
measure
basket
to
bought
services
are
income.
of
services
grouped
that
consumers’
impossible
and
the
the
out
to
of
“representative
be
items
of
in
a
charge
moreimportant
index
inflation
increases
goods
these
reflected
of
price
would
goods
agency
the
the
basket
meant
includes
rate
risen.
services”?
the
stable
with
some
18.1.
2
C ategor y
Food
oils
CPI
and
and
chocolate,
waters,
other
glassware
Health
and
and
Transport
and
repairs;
gas,
and
visual
and
outdoor
and
Education
226
goods
and
and
cereals;
sugar,
cocoa;
jam,
meat;
10.8
honey,
mineral
cigaret tes
men’s,
and
shoes
(rent s;
and
children’s
and
4.0
cigars)
clothing;
5.6
boots)
maintenance;
12.9
water
fuels)
goods
and
and
by
(furniture
tex tiles;
ser vices
and
culture
and
furnishings;
household
for
carpets
6.4
appliances;
household
equipment;
maintenance)
2.2
out- patient
and
telephone
and
bic ycles;
maintenance
spare
16.4
and
air)
and
telefax
equipment;
2.5
subscriptions)
plant s,
fees,
major
and
media;
durables
equipment
and
cultural
equipment
recording
hobbies;
package
school
vehicle
road,
produc t s;
and
stationer y;
motorc ycles
(audio -visual
and
gardens,
(private
railway,
equipment;
related
toys,
c ars;
lubric ant s;
ser vices;
internet
recreational
and
tea,
beer;
clothing;
appliances,
(postal
and
recreation;
magazines,
wine;
second-hand
processing
games,
ser vices;
goods
fuels
charges;
equipment
culture;
cof fee,
household
transpor t
and
data
of
other
produc t s,
passenger
produc t s;
(breads
vegetables;
ser vices)
(new
Recreation
and
tableware;
accessories;
phone
fruit;
(women’s,
repair
household
Communication
mobile
and
coverings;
hospital
(spirit s;
household
and
floor
sugar;
footwear
cleaning
beverages
eggs;
juices)
tobacco
(medic al
ser vices;
par t s
and
elec tricit y,
Furniture
and
confec tionar y
and
accessories;
Housing
cheese,
drink ,
and
Clothing
and
milk ,
and
sof t
Alcohol
supply;
non-alcoholic
fat s;
weight
flowers;
ser vices;
for
pet s,
book s,
for
15.0
related
repair
of
audio -
recreation
spor t
and
related
produc t s,
newspapers,
holidays)
evening
classes,
universit y
tuition
fees)
1.5
(%)
18
charges;
and
Miscellaneous
social
protection;
Source:
and
18.1
From
UK
the
alcoholic
beverage
some
is
the
The
Currently,
to
are
The
the
take
UK
by
a
the
spending
of
the
in
be
of
charges)
The
to
the
2010
the
a
Basket
and
UK
of
the
of
Goods
the
the
of
(see
from
price
price
we
country’s
and
10.8%
of
habits
Table
The
is
the
and
price
of
will
for
the
outlets
determined.
This
are
in
the
18.2
shopping
index
rate.
that
“typical”
food
spending
“basket”).
inflation
non-
the
weighting
habits
prices
one
of
and
of
weight
average
the
food
prices
consumer
and
on
household
“headline”
state
9.7
watches;
spending
given
national
used
and
Index:
collecting
180 000
used
every
consumer
are
by
Price
and
is
changes
the
most
rate
of
familiar
economy.
categories
account
in
and
Price
and
and
their
item,
To
price
are
has
covering
650
services
around
changing
households.
Consumer
separate
goods
collected
Index
month
150
for
areas
weightings,
revised
Index
one
year
has
risen
been
there
spending
increasing
and
to
on
of
on
the
and
examples
the
so
the
last
the
20
for
sof t
Added
drink s,
and
Juices
to
of
this
reflect
this
have
include
playgroup
Table
basket
component
which
subscriptions,
the
consumers
household
18.2
in
gives
2010.
–
Comment
cereal
bars
Introduced
not
waters,
for
of
Items
nannies.
changesto
at trac ting
Mineral
weight
years.
category
internet
fees
tendency
category
(continued)
Change
cereals
in
added
charges,
example,
an
expenditure
in
along
each
been
tospendmore
consumption
give
Sub - C ategor y
Bread
inflation
12.6
deliver y;
funeral
consumption
national
representative
into
patterns
CPI
and
the
overall
around
prices
UK.
The
in
changes
commonly
representative
with
will
surveys
Consumer
quotations
the
of
study
UK
which
rate
Statistics
components
regularly
the
that
changes
The
by
country
judging
food
stable
weights
10.8%
basket
fees;
Prices
National
their
changes
represent
most
Case
the
of
Retail
for
up
Thus,
recent
measure
index
for
to
of
the
and
clocks,
self-storage
conclude
determined
the
inflation
with
in
measured
and
makes
index.
according
throughout
in
the
examples
is
can
and
Office
categories
we
deliver y;
Index
household.
of
take -aways,
services ( jeweller y,
flower
Prices
products
are
basket
This
CP I:
data
calculation
change
and
Gooding,
beverages
oraverage
basket
goods
Philip
(restaurant s,
and
c anteens)
insurance;
Consumer
Services,
Table
hotels
c atering;
low
2
bar
A
s cim on o c e or ca M
Restaurants

Added
bot tle
–
still
mineral
water,
small
to
previously
New
item.
bot tle
added
drink s
of
to
The
basket
water
and
t ype
in
the
already
water.
represent
a
increasing
covered
mineral
market
bot tled
represent
gradually
The
water
reflec t s
overall
over
in
of
snack
is
and
basket.
includes
new
the
item
“on
increased
a
which
expenditure
period
a
larger
has
the
been
go”
spending
of
on
years.
227
18

A
low
CPI
and
stable
rate
of
inflation
Sub - C ategor y
Appliances
and
Change
produc t s
for
personal
c are
Added
Comment
–
elec tric al
hair
straighteners/
New
tongs
item.
share
of
hairdr yer
Appliances
and
Photographic ,
produc t s
for
personal
cinematographic ,
and
c are
Added
optic al
–
liquid
Removed
–
soap
disposable
c amera
due
Appliances
and
produc t s
for
personal
c are
Removed
–
lipstick
to
compac t
photography
Replaced
by
they
hairc are
represent
market
a
greater
than
the
replace.
individual
Removed
digital
as
elec tric al
they
Replaces
equipment
Introduced
the
bars
of
decreasing
c ameras
become
lip
toilet
and
soap.
expenditure
mobile
increasingly
gloss
reflec ting
a
as
phone
popular.
trend
towards
gloss.
Medic al
ser vices
and
paramedic al
ser vices
Removed
–
eyesight
test
charge
Removed
s cim on o c e or ca M
which
is
decrease
in
Table
18.2
Changes
to
the
CP I
basket
of
goods
in
the
UK
in
some
as
it
was
in
a
par t
over-represented
in
expenditure
of
and
as
the
basket
there
eyesight
has
been
test s
are
a
free
areas.
2010
2
Source:
Philip
Consumer
Gooding,
Th e o r y
In
of
carrying
have
to
range
Prices
Office
Index
and
National
Retail
Prices
Index:
The
2010
Basket
of
Goods
and
Services,
Statistics
Knowledge
out
research
deliberately
of
for
data,
and
or
investigations,
choose
their
to
include
choices
physical
or
and
analyse
inevitably
affect
social
cer tain
the
scientists
data
from
outcomes.
a
wide
For
Student
example,
replaced
data
when
with
reliability
the
CP I
different
Issues
the
applicable
clearly
with
a
regional
figures
are
measure
area.
If
the
the
of
you
CP I
will
think
the
truly
basket
they
necessarily
that
inflation
reflect
this
could
rate
the
on
will
be
use
some
affect
which
spending
used
a
For
very
with
the
may
national
any
the
Be
example,
a
national
be
average
an
is
changes
the
There
figure
accurate
as
then
this
of
of
may
is
of
of
an
basis
these
not
be
a
for
might
be
people
couple
variations
more
main
family
elderly
Although
the
one
the
will
reflection
the
has
different
“basket”
that
country.
used
but
habits
from
children.
index
represents
household,
purchasing
within
not
pension
an
in
regional
widely-used
for
a
particular
wage
not
18.4
accurately
inquirer
Research
to
the
If
could
the
CPI
you
cultural
wage
patterns
inflation
price
country
different
no
inflation
this
in
The
of
consumer
“typical”
greatly.
be
the
workpoint
be
most
basket
were
change
the
basket
measurement
published,
or
this
using
of
will
person
negotiations
228
the
there
item
people?
people.
vary
and
do
generate
will
basket
all
rates
to
how
habits
children
single
in
but
representative
UK.
used
in
The
to
extent
one
item
spending,
what
inflation
purchasing
or
of
involved
limitation.
will
is
based,
g roups
Measuring
that
statistic?
basket
are
T
o
propose
representative
household
involved.
of
increases

another
concerning
judgment
If
economists
the
changes
goods
in
the
researching
in
the
changes
over
recent
of
to
years
UK,
the
tell
what
CPI
you?
18
reflect
the
harmful

price
if
the
the
national
are
less
There
accuracy
of
impossible
in
outlets.

a
all
The
results,
this
As
but
Table
18.2
changes
in
the
cost
group.
of
for
This
living
those
of
of
all
will
than
whose
cities
sampling
are
are
the
and
stable
rate
of
inflation
be
suggested
spending
or
by
sample
to
by
costs
by
to
take
sample
selected
to
some
degree
will
be
of
the
costly.
t ak e
be
all
to
accurate
very
to
the
utterly
of
lead
m a ki ng
a dde d
be
bought
more
try
limit
necessary
a
and
s ta ti stici ans
r e mo ve d
is
likely
sample,
ha bits
it
that
would
and
time-consuming
consump ti o n
it
data
items
locations,
the
of
Because
prices
selected
larger
is
collection
results.
the
show s ,
Items
particular
low
i nt o
a cc o un t
c h an g e s
m o re
to
the
re pr e se n t a t ive
of
the
deal
of
then
that
hou s e ho l d ’s
time.
this
from
a
typical
limits
one
the
Mor e o v e r,
time
the
computer
of
memory,
price
the
the
of
rate
of
the
typ ical
inf l a ti o n,
a
ri se
to
b a s ke t
to
t im e.
the
F or
to
the
th e n
pr od uc t
a
g ood
ch a ng e d,
c om p a ri so n s
by
th e
e xa mple ,
in c l u de
pr od uc t
re fle ct
the
t ak es
are
c om pli c a t e d
com pu t e r
of
th is
m a ke
is
over
ba ske t,
y et
the
Thi s
q ua li ty
ma y
in
a na l ys t s
cha ng es
the
H oweve r,
items
upg r ad es
the n
isin
of
the
a nothe r.
goods
comp ute r
computer
ahigher
to
comp a ny
built-in
if
a b i l ity
pe r i o d
quality
de ma nd.
s cim on o c e or ca M
2
basket.
in
of
layers
inaccuracy.
a
higher
beneficial
possible
sample
The
and
final
collect
in
a
A
average.
errors
the
to
households
items
the
be
for
has
average
than
may
changes
group

m or e
i m pr ove s .
impr ovem e nt .
this
i sn ’t
fa c t
wh en
w i ll
fe ed
r e al ly
Th e
If
into
the
s ame
product.

Countries
include
make

oil
may
prices
be
may

effects
and
energy
The
CPI
very
are
to
price
through
material
and
indices.
large
number
or
divided
a
indicators
the
make
a
of
an
different
it
that
prices
in
some
“core”
price
ways
and
problematic
are
of
rate
the
of
not
food
to
sustained.
and
inflation
effort
index
which
to
volatile
rate
reduce
inflation
but
and
such
that
excludes
(e.g.
signals
tin,
wool).
of
the
uses
food
a
such
copper)
of
predict
that
a
a
the
of
changes
basket
of
track
in
in
is
a
a
commodities
may
of
doing
commodity
non-food
and
a
there
factors
tracks
which
movements
pressures
the
Others
food
is
reason
way
weighted
as
and
this
of
which
types
and
However,
judging
One
commodities.
Upward
which
index,
in
in
For
prices
firms.
commodities,
cost-push
(indicators
country.
in
prices
health.
important
a
changes
commodity,
(e.g.
consumer
different
traded
industrial
metals
price
are
measures
of
of
economy’s
There
different
or
are
changes
the
in
economy’s
prospects
by
category
into
are
in
make
reasons
in
changes
of
commodity
One
coffee)
commodities
prices
of
consumer
measure
prices.
price
sugar
can
movements
identifying
changes
health
also
particular
unusual
measures
needed
is
variety
variations
indicator
production
raw
a
the
economists
this
inflation
This
Statisticians
by
of
RPI)
important
other
of
prices.
(or
economic
for
lead
information
rate
comparisons.
seasonal
misleading.
distorting
the
change
example,
can
their
components.
international
Prices
For
measure
different
(e.g.
further
agricultural
commodity
be
change
a
will
leading
occur
in
229
the
future)
of
inflation.
18

A
low
and
Another
price
of
stable
index
goods
wholesalers,
Causes
We
can
of
divide
or
s cim on o c e or ca M
The
the
causes
in
the
price
index,
factories
(stores)
add
and
their
which
before
profit
tracks
the
distributors,
margins.
of
inflation
cost-push
into
three
inflation,
main
and
types:
inflation
due
to
growth.
inflation
suggests,
The
the
reasons
changes
retailers
aggregate
18.2.
up”
producer
demand-pull
demand
increase
average
for
any
the
of
in
the
inflation
level
in
P
1
aggregate
of
This
demand
from
components
occurs
economy.
aggregate
price
increase
the
in
to
P
as
a
can
from
result
be
AD
to
1
of
seen
in
AD
2
egarevA
“pulls
a
leave
ecirp
Figure
is
level
increasing
inflation
they
inflation,
Demand-pull
name
used
as
excessmonetary
the
of
inflation
demand-pull
As
rate
2
demand
aggregate
could
be
demand.
due
SR AS
P
2
P
to
For
AD2
example,
causing
2
level
of
there
could
consumers
demand
be
to
for
a
a
high
increase
level
of
consumer
consumption.
country’s
exports
due
confidence,
There
to
could
rising
be
AD
a
high
foreign
0
Y
Y
2
incomes.
The
increase
might
be
due
to
an
increase
in
government
Real
output
spending.
F igure
Cost-push
Cost-push
inflation
inflation
production.
short-run
increase
output.
The
the
of
in
ofdomestic
capital,
the
raw
price
to
as
that
to
a
imported
in
in
or
will
the
the
level
SR AS2
ecirp
SR AS
egarevA
P2
P
AD
Y2
Y
Real
output
(Y)
230
F igure
18. 3
Cost-push
is
costs
inflation
to
a
are
to
in
discussed
increases
Increases
a
and
in
the
also
a
raw
in
firms’
in
2
.
of
Chapter
the
costs
in
of
in
in
an
real
15.
of
the
labour
costs
costs
of
production,
costs
of
imported
costs
It
currency
is
the
of
worth
can
exchange
materials
to
costs
fall
18.3
increase
lower
a
results
level
inflation.
production
the
in
This
the
Changes
country’s
because
of
in
Figure
inflation.
in
results
SRAS
fall
increase
of
increase
costs
import-push
value
This
1
materials
components,
increasing
0
due
raw
and
an
in
illustrated
costs
causing
inflation.
capital,
is
level
of
SRAS
level
pressures.
firms,
result
increase
wage-push
materials
fall
a
from
price
inflation
cost-push
import-push
thereby
supply
components,
production
noting
as
an
increases
referred
creating
occurs
know,
average
Cost-push
Increases
be
you
aggregate
in
causes
may
As
more
cause
rate
makes
expensive,
country’s
firms.
18.2
Demand-pull
inflation
(Y)
18
Student
Be
a
workpoint
the
question
that
following
and
stable
rate
of
inflation
18.5

data
from
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AD2
Using
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231
18
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232
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Economics
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output
demand,
it
in
in
central
might
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It
is
not
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trade-off
want
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the
interest
this
they
a
goods”
speaking,
to
fight
demand,
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money
face
few
and/or
aggregate
inflation
money
will
possible
unemployment.
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economy.
may
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growing
spending
how
rate
real
is
too
changes
in
The
3%.
economy
governments
decrease
of
by
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the
Practically
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money
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policy
about
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influence
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much
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IB
same
is,
is
solution
should
ration
can
the
different
unemployment
growth)
of
bringing
result
than
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actual
problem
their
to
very
the
scope
That
monetary
actually
between
might
rise
is
the
the
supply
more
inflation
then
by
output.
banks
control
the
increase
by
that
supply,
“there
through
is
to
believe
money
central
economy
banks
the
increases
although
rates,
only
national
then
situation
and
who
money
should
increase
by
the
and
try
2
monetarists
growth
low
but
to
s cim on o c e or ca M
For
A
this
fight
economic
create
inflationary
pressure.
It
is
generally
longterm
felt
irresponsible
in
the
of
elected
the
decisions
responsibility
with
that
interests
for
monetary
policy
Student
to
maintain
managing
automatic
carried
workpoint
at
of
out
an
not
and
demand
fiscal
by
may
heart
popularity.
aggregate
stabilizers
Australia
governments
economy
policy
might
the
independent
Raises
Rates
in
for
the
year.
still
this
States,
increases
remains
and
month
suggested
withdrawal
This
comes
evidence
that
economy
speed.
rate,
to
is
The
by
a
3.5%,
of
as
in
a
a
rate
row
for
on
result
the
the
Tuesday
measures.
of
increase
mounting
picking
in
those
to
signal
of
the
its
quarter-percentage
Australia
the
and
cash
point
only
has
freedom
normal
two
Europe,
the
in
begun
some
they
its
centr a l
rate
consecutive
more
r e tur n
l e v e ls .
r a te
the
whose
p o i nts ,
the
R e s e r ve
d ur ing
recovery
country’s
measures,
labour
location
of
to ta l li ng
Ba nk
the
near
of
materials
has
the
Asia,
demand
been
improvements
market,
to
has
official
and
by
notably
for
its
fast-growing
China,
Australia’s
supported
the
raw
overall
economy.
re bo und
b a nk
gradua l l y
interest
crisis
slump.
rapid
the
series
crisis.
economies
introduced
financial
by
stimulus
in
a
(RBA)
Australia’s
aided
less
from
Australia
by
Month
cuts ,
percentage
financial
more
have
exit
more
of
of
rate
announced
the
far
some
aggressive
recovery
and
economic
to
in
extraordinary
with
given
rate
policymakers
measures
global
a
the
too,
gradual
other
cope
as
fragile
Australia’s
up
key
to
a
reverse
have
and
remain
But
Straight
4.25
Japan,
countries,
stimulus
Australian
rapidly
makes
its
gradual
stimulus
a
raised
to
successive
including
prospect
pronounced.
second
left
changes
Second
world
increases
distant
interest
best
centralbank.
two
rate
benchmark
be
careful
implemented
United
bank
fiscally
18.8
Elsewhere,
central
the
make
Therefore,
and
country
Australia’s
have
might
to
The
i ncr ea s es
The
RBA
borrowing
pressures
growth
that
said
costs
it
raised
as
inflationary
increased
accelerated.
growth
is
now
after
It
is
economic
estimated
nearly
at
the
235
18

A
low
and
long-run
that,
stable
rate
trend
rate
without
economy,
Policy
are
inflation
adjustments
might
be
within
the
Australia
to
target
“Economic
and
monetary
needed
keep
the
is
of
the
the
policy
stronger
Prospects
trading
is
than
noticeably
has
having
Reserve
to
for
the
now
is
modest
to
has
better.
very
Growth
strong,
significant
were
in
put
and
confidence
s cim on o c e or ca M
1
Using
a
seems
2
Using
2
Using
a
from
the
Calculating
We
alrea dy
used
to
impact
(or
price
Let
us
The
on
which
price
possible
down
explain
of
the
and
a
tha t
the
why
the r e
reason
earlier
the
A
a re
s uch
than
Reserve
dif f e re nt
as
business
why
the
Bank
might
ar e
up on
be
for
consumer
shows
a
bought
two
the
pr ic e
then
gi ven
r el a t ive
a
price
index
hypothetical,
by
typical
to
consumers
for
year
X
Index
for
pr ic e
Australian
economy
action
was
Source:
Adapted
a
t ha t
120
125
Clothing
120
1
10
Enter t ainment
125
130
index
190/5
Unweighted
18.3
categories.
price
consumer
The
average
indices
for
dividing
how
basket
of
a nd
“ ba s ke t ”
we ig h t
pe op le
this
of
works.
goods
economy
118
index
605/5
information
expenditure
price
each
by

the
level
category
number
for
has
for
of
of
year

X
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each
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and
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1)
121
and
year
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year
is
expenditure,
categories.
(X
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1)
five
shown
by
totalling
We
see
that
that
in
be
Australia
sensible
degree
measures
when
to
of
that
the
bleaker.
November
economy
has
in d ic e s
in di c e s
t a ke s
an
year
Travel
then
the
di ffe re n t
in
105
and
of
explain
105
price
taken
pr ic e
simplified
Foodstuf fs
the
the
Europe.
a m o u nt s
130
table
has
in d ex
120
In
cycle
place
outlook
and
years:
Index
18. 3
region
Australian
or
t yp es
Housing
Table
the
US
c omm o dit y
we ig hte d
p r o ducts
ba s e d
simple
below
indices
Average
the
rate.
i nfl a ti o n,
C ategor y
236
phase
in
stimulus
in
markets.”
them.
use
table
a
slow
ind i ce s .
importance),
spend
explain
interest
know
ofproducts
which
economies
commodity
would
the
said
serious
from
the
on
inflation
measure
consumer
explain
the
diag ram,
increasing
on
said
also
of
which
in.
diag ram,
emerged
3
be
other
of
recovered,”
diag ram,
to
a
measures
have
it
lessen
monetary
to
bank
risk
contraction
passed,
Times,
expected
the
gradually
financial
appear
central
that
economic
in
the
Australia’s
partners
been
a
of
be
due
The
Bank
expansion
legacy
Asian
China
the
countries,
crisis.
be
in
of
“The
expected
major
continuing
further
range.
been
governor
Australia.
generally
rates
inflation
conditions
have
fear
of
occur.
interest
normal
in
the
cooling
will
said
below
inflation
and
some
makers
still
of
taking
them,
over
2,
2009
New
York
18
the
two
means
years
that
following
the
we
average
can
work
index
out
increases
the
from
inflation
rate
118
by
to
121.
using

A
low
and
stable
rate
of
inflation
This
the
equation:
Index
for
(X

1)
Index
for
X
__________________________


Index
121
for
118
3
__________
In
our
case,
this
____
gives

100


118
However,
gives
all
clothing
of
an
this
of
has
housing.
much
This
is
an
in
more
why
consumer
is
the
on
of
than
on
table
indices
each
fall
per
are
not
in
to
would

2.54%
price
of
than
A
set
is
of
the
a
fall
it
a
is
do
price
as
on
based
it
price
the
likely
impact
of
price
that
on
spend
clothing.
In
upon
weighted
in
people
indices.
goods.
since
the
highly
greater
clothing,
of
in
increase
since
they
category
weighting
category.
to
measure
so
have
calculate
each
the
effect
month
used
of
inaccurate
weighting,
accurate,
housing
the
importance
and
equal
opposite
obviously
housing
price
an
100
118
simplistic
and
cost
weights
expenditure
in
very
equal
incomes
therelative
below
a
categories
This
increase
people’s
is
the
100
X
They
the
the
2
rate
s cim on o c e or ca M
Inflation
stress
case
of
relative
figures
are
shown
18.4.
C ategor y
Index
for
year
Weight
Index
X
for
times
year
X
Index
weight
(X
for

year
Weight
1)
Index
for
year
times
Housing
120
0.4
48
130
0.4
52
Foodstuf fs
105
0.2
1
1
105
0.2
1
1
Travel
120
0.2
24
125
0. 2
25
C lot hing
120
0.1
12
1
10
0.1
1
1
Enter t ainment
125
0.1
12.5
130
0.1
13
1.0
107.5
1.0
1
12
Tot als
Table
In
18.4
table
Weighted
18.4
we
earlierexample,
expenditure.
so
of
it
is
given
their
the
in
weight
The
index
category
giving
with
We
as
a
of
for
can
the
on
of
year
X
is
spend
and
the
so
calculated
then
for
index
40%
In
of
the
(X
and
The
year
figures
to
they
is
of
is
our
relative
on
housing
only
only
all
multiplying
1)
in
spend
(importance)
index
the
as
+1)
represent
way,
total
(X
income
weight
price
by
X
their
same
adding
year
year
weights
consumer
and
for
price
are
expenditure.
index
of
work
same
there
clothing
weight
The
information
0.4.
weighted
outcome
then
now
housing
its
107.5.
an
have
but
weight
the
by
index
Consumers
income
clothing
price
a
the
the
calculated
weights
for
totals,
in
the
and
10%
of
quarter
index
individual
(X  1)
weight
of
is
1.0.
each
thus
same
way,
112.
out
the
inflation
rate
by
using
the
same
equation
earlier:
Index
for
(X

1)
Index
for
X
__________________________
Inflation
rate


Index
112
for
107.5
4.5
____________
This
now
gives
us
______

107.5
100
X
100


107.5
100

4.19%
237
18
As

A
low
we
the
and
can
stable
see,
the
unweighted
increase
given
price
in
its
of
the
The
price
price
in
index
the
Paper
figures
rate
opposed
the
and
is
most
not
is
to
significantly
2.54%.
This
important
cancelled
out
larger
is
than
because
the
expenditure,
is
by
the
the
fall
in
expenditures.
g ives
HL
inflation
as
housing,
workpoint
see
shown
of
importance
following
might
inflation
weighted
important
Student
The
of
rate–4.19%
proper
less
rate
18.9
type
of
questions
you
3.
for
country
X
for
two
years
are
The
below:
expenditure
country
are
average
Categor y
2015
Housing
household
s cim on o c e or ca M
1
10
120
106
1
10
120
25%
15%
enter tainment,
on
Explain,
is
population
discovered
35%
of
its
of
the
that
the
on
with
transpor t,
the
of
15%
and
help
of
on
income
on
10%
the
on
foodstuffs,
clothing.
figures
above,
the
weighting.
120
4
Assuming
not
Enter tainment
the
it
spends
housing,
importance
Foodstuf fs
of
and
2016
3
Transpor t
patterns
surveyed
1
10
100
105
105
a
that
change
table
consumer
over
showing
the
the
expenditure
period
patterns
2015/2016,
weighted
indices
for
do
construct
2015
2
Clothing
Base
1
year

and
2010
Calculate
the
average
index
for
each
year.
5
Calculate
6
Explain
that
2
Calculate
the
unweighted
inflation
rate
2016.
the
the
you
weighted
differences
have
inflation
between
calculated
in
2
rate
the
and
for
2015/2016.
inflation
rates
5
for
2015/2016.
The
inflation–unemployment
Having
looked
consider
of
at
unemployment
relationship
unemployment
The
Phillips
1958,
at
the
the
previous
two
chapter,
we
macroeconomic
now
problems
inflation.
curve
Alban
working
and
in
between
debate
the
Williams
London
Phillips
School
(the
of
New
Zealand-born
Economics
who
economist
created
the
segaw
In
the
trade-off
fo
work
in
which
mentioned
he
presented
not
adjusted
ofunemployment
based
on
his
as
study
his
between
of
for
UK
argument
the
rate
inflation)
shown
on
data
13)
of
in
Figure
from
published
that
there
change
the
to
His
significant
was
an
money
economy
18.7.
1861
of
a
and
wages
the
observation
etaR
wages
Chapter
fo
inverserelationship
(i.e.
in
egnahc
Moniacmachine
rate
was
1913.
Unemployment
The
explanation
unemployment,
for
this
firms
was
would
that,
if
have
there
to
pay
was
a
low
higher
level
wages
to
attract
F igure
labour.
be
If
unemployment
competing
offered
could
more
output
more
quickly
and
lower
could
with
be
is
each
demanded
levels
they
of
unemployment
to
low.
and
would
demand.
become
high
other
relatively
than
actually
was
obtain
During
more
if
rate
i.e.
workers
rather
than
remain
available
an
of
unemployed.
be
so
needed,
of
could
that
wages
to
at
when
wages
in
money
fall
willing
would
expansion,
contraction
change
wages
would
a
are
workers
jobs,
economic
was
238
wages
unemployed
workers
there
The
negative,
because
then
rate
of
rise
activity
wages
high
accept
levels
the
of
lower
18.7
The
orig inal
Phillips
curve
18
economists
refer
between
and
to
the
This
is
data
to
as
the
adapted
from
the
Phillips
inflation
rate
unemployment
due
to
the
the
other
fact
relationship
countries
curve.
This
(rather
rate
that,
of
established
establish
shows
than
an
since
to
the
as
make
in
a
in
large
and
that
we
relationship
money
shown
up
Phillips
pattern
inverse
change
economy
wages
the
by
the
noitalfnI
now
it
wages)
Figure
18.8.
proportion
low
and
stable
rate
of
inflation
etar
applied
A
)%(
Other

B
6
of
A
2
firms’
changes
in
wages
feed
directly
through
to
changes
in
the
level.
3
5
Unemployment
Another
way
“trade-off”
to
express
between
this
relationship
inflation
and
is
to
say
that
unemployment.
there
For
is
example,
in
Figure
18.8,
an
unemployment
rate
of
5%
might
to
the
3%,
other
of
increase.
The
If
the
of
it
inflation.
can
The
be
trade-off
If
unemployment
6%.
implication
of
this
main
objective
this
can
Similarly,
lowered
demand/aggregate
2%.
to
unemployment
rate
then
clear.
of
rise
can
supply
by
be
if
of
be
but
inflation
the
is
as
at
were
variable
for
the
is
to
in
to
be
of
a
too
rate
to
aggregate
Figure
is
to
reduce
expense
perceived
using
it
decreases,
unemployment
shown
as
government
government
explained
analysis,
one
trade-off
a
done,
allowing
also
As
egarevA
high
is
rate
would
curve
SR AS
ecirp
higher
inflation
Phillips
level
rate
an
inflation
increases.
objectives
the
by
then
The
drawn
2
fall
18.8
be
usually
accompanied
(%)
as
F igure
shown
rate
a
s cim on o c e or ca M
price
costs,
P2
P
18.9.
AD2
The
economy
Ifthe
is
initially
government
feels
in
equilibrium
there
is
too
at
Y
much
1
,
at
a
price
level
unemployment
of
at
P
1
.
this
AD
point,
then
techniques
it
might
to
bring
use
Keynesian
about
an
demand
increase
in
management
AD,
from
AD
1
to
AD
2
.
This
Y
will
result
in
an
increase
in
output,
which
is
produced
by
Y2
hiring
Real
more
is
workers,
also
a
so
higher
unemployment
price
level,
that
is
is,
assumed
higher
to
fall.
inflation.
However,
In
the
Phillips
curve,
a
decrease
in
unemployment
occurs
at
18.9
of
toB
This
was
higher
in
existence
of
about
inflation
combination
known
as
problems
would
be
like
the
movement
up
inflation
shown
and
of
trade-off
data
should
between
to
the
and
by
the
Phillips
and
According
worsen
From
unemployment
inflation
not
inflation
1970s.
unemployment
high
stagflation.
from
curve
rose
high
to
the
in
and
this
began
was
many
levels
of
Phillips
simultaneously
unemployment
time
to
no
on,
however,
suggest
longer
that
valid,
economies.
The
unemployment
curve,
and
so
the
the
as
is
two
model
came
etar
was
the
the
Phillips
curve
monetarist
biggest
critics
of
economists
the
original
led
by
Phillips
Milton
curve.
Friedman
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E
10
noitalfnI
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)%(
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AD/AS
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supported
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the
inflation.
Figure
Phillips
a
through
cost
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F igure
with
output
there
C
6
their
B
analysis
This
is
there
is
no
consistent
trade-off
with
the
between
inflation
explanation
of
the
and
new
unemployment.
classical
long-run
A
2
aggregate
supply
provided
in
Chapter
15.
Recall
that
according
to
SR PC3
the
SR PC2
0
new
classical
economists,
the
economy
will
automatically
tend
towards
3
6
SR PC
its
long-run
equilibrium
at
the
full
employment
level
of
output.
Unemployment
Figure
curve
18.10
model.
can
be
used
to
explain
this
adaptation
of
the
rate
(%)
Phillips
F igure
18.10
The
long-run
Phillips
curve
239

18
A
low
Assume
SRPC
1
.
and
stable
that
The
the
any
pay
would
rate
is
that
if
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for
example
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demand
same
case
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time,
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the
who
s cim on o c e or ca M
are
for
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2
the
at
at
rate
.
of
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an
C
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natural
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to
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the
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Aggregate
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on
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real
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natural
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prices
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to
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only
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at
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natural
move
to
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short-run
its
natural
a
that
continue
demand
this
and
Now
to
to
result
short-run
3
rate
of
policies,
will
Phillips
At
inflation
is
rate
the
unemployment
As
long
will
However,
vertical
any
between
natural
the
if
not
as
rate
that
governments
accelerate
expansionary
at
is
do
the
policies
are
accelerate.
curve
(NRU).
is
inflation.
of
given
inflation
to
at
the
point
and
natural
in
time,
rate
by
using
unemployment
economy
is
at
full
of
may
unemployment,
unemployment
this
rate
there
is
at
the
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demand
the
be
but
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the
rate.
management
unemployment
employment
and
the
labour
equilibrium.
this
is
not
reduced
demand
to
at
say
all!
that
The
management
the
key
point
policies,
natural
rate
of
unemployment.
natural
rate
of
unemployment
long-run
are
here
the
unemployment
is
that
solution
Supply-side
policies
policies,
reducing
will
LR PC
rate
supply-side
for
LR PC2
noitalfnI
be
have
wages
workers
levels
etar
cannot
to
below
to
higher
as
wage
)%(
course
are
existing
6%.
unemployment.
when
in
at
suffered
returned
reduce
is
unemployment
diagram.
increase
return
occurs
the
expect
cannot
market
think
unemployment
trade-off
in
jobs
their
of
return
will
stable
inflation
The
fall
wages
that
always
policies.
a
unemployment
will
not
at
that
2%
expenditure.
would
have
Governments
Of
be
expansionary
take
on
attempt
expansionary
rate
B
diagram,
SRPC
with
be
real
equivalent
inflation
long-run
that
to
rate.
decided
increase
to
rate
not
people
an
to
and
realize
does
unemployment
short
an
they
unemployment
natural
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expected
an
so
unemployment
inflation
increase
would
inflation
curve,
consistent
used,
an
workers
jobs
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inhigher
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be
Unemployment
reduce
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so
what
from
the
6%,
point
2
by
workers
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at
in
prepared
wages
that
economy
SRPC
this
equilibrium
equilibrium
government
this,
there
moves
leave
running
be
the
in
expect
on
would
attracted
say
now
and
is
adopted
and
been
nominal
would
The
long-run
government
so
and
run
not
economy
but
and
there
short
now
then
based
the
labour
in
also
6%.
had
When
exists
is
is
People
increasing
increase
inflation
market
2%.
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happen
of
economy
labour
unemployment
inflation
rate
reduce
the
the
0
and
shift
the
long-run
Phillips
curve
to
Unemployment
the
left
from
LRPC1
the
equivalent
of
a
to
LRPC2
rightward
as
shown
shift
in
in
the
Figure
18.11.
long-run
This
aggregate
would
supply
240
curve
or
an
outwards
shift
in
a
country’s
production
possibilities
rate
(%)
be
curve.
F igure
reduce
18.1
1
the
Supply-side
NRU
policies
can
18
This
confirms
Chapter
cyclical
17.
natural
seasonal,
be
itself
admits
estimated
NRU
are
time
and
made.
may
unemployment
be
appropriate
unemployment,
structural
including
the
practices
What
but
not
unemployment
for
at
for
the
end
and
stable
rate
of
inflation
of
reducing
reducing
that
low
make
the
up
the
by
evident
countries
of
firms.
of
natural
is
rate
of
unemployment
Nonetheless,
that
it
varies
estimates
considerably
of
“can
the
over
of
labour
due
market
Countries
labour
are
to
a
number
unemployment
with
markets
regulations,
more
tend
to
and
benefits
have
of
benefits,
a
and
higher
things
trade
union
wage-setting
considerable
NRU.
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organizations
market
to
like
reforms
measures
the
to
that
reduce
will
EX AM I NATION
Paper
1
1,
W ith
par t
the
(a)
help
demand - pull
2
W ith
the
3
W ith
the
of
a
recommend
that
unemployment,
reduce
the
natural
countries
they
are
of
a
e xplanation
of
of
a
labour
referring
rate.
QU ESTIONS
questions
diagram,
e xplain
the
concept
of
diagram,
e xplain
the
concept
diagram,
e xplain
the
monet ar is t
[10
marks]
[10
marks]
[10
marks]
of
inflation.
help
make
usually
inflation.
help
cos t- push
OECD
inflation.
4
E xplain
three
consequences
of
inflation.
[10
marks]
5
E xplain
three
consequences
of
deflation.
[10
marks]
6
E xplain
three
problems
[10
marks]
[10
mark s]
[10
mark s]
[10
marks]
[15
marks]
[10
marks]
[15
marks]
[10
marks]
[15
marks]
of
7
a
an
in
the
measurement
E xplain
Paper
bet ween
diagram,
e xplain
unemployment
why
and
there
might
inflation
in
be
the
run.
natural
1
appropr iate
trade - of f
shor t
8
involved
inflation.
Using
1,
t wo
rate
policies
of
a
E xplain
b
Evaluate
that
might
be
used
to
reduce
the
unemploy ment .
essay
the
questions
main
the
consequences
methods
that
of
might
inflation.
be
used
to
reduce
inflation.
2
a
E xplain
b
Evaluate
the
ef fec tive
3
a
E xplain
b
Evaluate
that
an
main
the
in
the
c auses
e x tent
to
reducing
concept
the
wishes
s cim on o c e or ca M
2
regulation
is
availability
extent
the
uncertainty”.
countries.
between
the
that
with
between
Differences
power,
about
A
unemployment.
OECD
only
and
drawn
policies
demand-deficient
frictional,
The
conclusions
Demand-side

economy.
inflation.
which
demand - side
policies
are
inflation.
of
methods
to
of
reduce
the
natural
available
the
level
to
of
rate
a
of
unemployment .
gover nment
unemploy ment
in
241

18
A
low
and
Assessment
When
there
you
the
are
You
the
use
level
may
end
where
the
without
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bit
is
that
last
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there
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you
writing
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use
possibilities.
AD/AS
is
inflation
diagram
more
an
“appropriate”
In
the
or
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first
short
short-run
sophisticated
and
diagram,
response
Phillips
may
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question
curve
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given
diagram.
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a
exam.
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but
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unemployment
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question
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rate
trade-off
natural
extra
essay
chapter.
explanation
sophisticated
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higher
rate
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question
at
could
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The
these
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extended
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and
can
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are
are
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result
at
theory.
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inflation
policies
question
concepts
the
the
long-run
demand-side
unemployment.
use
and
unemployment
reasons
the
here
have
a
The
curve
more
not
likely
answered
in
a
more
approach.
to
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information
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s cim on o c e or ca M
p
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e
2
Japan
Consumer
price
(%
from
change
previous
of
labour
price
(%
from
change
labour
United
price
(%
from
change
242
0.9
0.3
0.0
4.7
5.0
5.4
0.3
5.3
4.7
4.4
2000
2001
2002
2003
2004
2005
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2005
3.4
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5.1
index
rate
index
year)
Unemployment
of
labour
0.8
force)
Consumer
(%
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2005
rate
St ates*
previous
2004
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Mexico
previous
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
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In
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ways
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243

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244
A
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with
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the
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employment
of
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245
factors
of
production.
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19
Economic
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Summary:
Deflationary
economic
may
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economic
growth
248
supply
gaps,
growth
using
policies.
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demand
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shown
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
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Consider
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GDP
( millions
data
of
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GDP
for
in
Year
Canada:
$,
Year
Grow th
ye ar
rate
20 0 2 )
2006
1 283 033
2007
1 31
1 260
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1 260
s cim on o c e or ca M
2
ba s e
100
1
1 283 033)

100
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1 283 033
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2008
1 31
1 260)
1 318 054

100

0.51%

100

2.46 %
1 31
1 260
(1 285 604
2009
1 318 054)
1 285 604
1 318 054
Source:
Statistics
Canada,
EX AM I NATION
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251
20
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the
distribution
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the
data:
Countr y
Sur vey
year
Lowest
20 %
Bolivia
2007
2nd
3rd
4th
Highest
20 %
20 %
20 %
20 %
2.7
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1
1.0
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Gini
index
( 20 02–2007)
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2007
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6.9
1
1.8
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2005
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13.3
17.3
22.7
37.9
29.0
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2005
6.2
9.6
17.7
53.5
47.2
Sources:
Table
World
20.1
Income
of
if
20%
Croatia,
the
receive
of
the
where
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to
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only
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3.0%
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2009
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in
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r
y-axis
divided
shows
the
up
in
the
cumulative
quintiles
shown
percentage
of
in
total
Table
20.1.
(b)
total
income
The
20
Cumulative
earned
quintiles.
distribution
earns
10%
The
of
of
line
of
income
the
absolute
where,
income,
equality
for
and
indicates
example,
90%
of
the
10%
of
a
perfectly
the
population
=
area
equal
population
earns
income.
Each
country
has
its
own
Lorenz
curve
based
90%
on
data.
absolute
Inour
of
example,
Croatia.
less
An
We
equally
derived
of
the
the
can
that
and
from
equality
line
farther
on
curve
and
equality
neatly
a
in
Brazil
(b).
is
and
Lorenz
The
it
the
a
in
ratio
the
from
farther
(a)
the
of
(a)
+
(b)
distribution
of
income.
Gini
index
reduction
in
income
inequality
total
20.1
line
area
of
development,
one
must
be
that
than
presented
The
Gini
as
a
basis
for
than
low-income
evaluating
high-income
between
its
Gini
the
level
index.
development,
Gini
index
countries
a
countries,
of
There
such
(40.8)
tend
area
between
to
the
total
area
index,
are
the
given
be
an
careful
country’s
to
there
is
development
are
as
and
countries
the
US
of
no
a
a
rank
with
a
hard
and
high
13),
low
the
unequal
in
Table
as
Ethiopia
(HDI
rank
171),
with
252
1
Source:
Human
Development
Repor t
2009
a
curves
for
Brazil
Student
Be
workpoint
in
using
levels
fast
level
level
of
creative
is
g raph
Table
of
and
for
Bolivia
draw
the
data
Lorenz
and
Gini
Remember
that
the
index
are
drawn
by
adding
up
progress.
cumulative
values
of
total
inequality
by
its
HDI
and
human
a
relatively
human
lower
paper
20.1,
share
of
income
and
share
of
population.
the
total
correlation
have
of
20.2
important
measured
that
much
equality
20.1.
high
development,
1
such
of
is
theline
under
more
development
higher
country
with
(HDI
countries
have
line
in
index
the
While
Lorenz
is
points
numbers
and
that
income
the
may
very
under
Lorenz
Madagascar.
objective
equality
of
curves
a
of
Croatia
from
Although
line
the
of
values
between
=
Using
the
100
population
Croatia.
index.
Gini
80
total
income.
away
diagram
information
Gini
curve
higher
is
the
is
is
distribution
Brazil
the
is
curve
the
from
than
curve
curve
is
for
summarizes
country’s
+
country’s
observe
Lorenz
Lorenz
(a)
a
unequal
drawn
quickly
the
the
away
more
distributed
indicator
thetable
of
The
equality,
of
of
and
income
60
curve
F igure
the
40
percentage
by
(a)
the
o
C
20
0
population
a
i
a
evitalumuC
2
richest
100
egatnecrep
richest
look
Human
fo
households
ranked
income
we
UN
latot
s cim on o c e or ca M
example,
&
distribution
are
total
Data
emocni
Households
share
Bank
13.1
Gini
value
(29.8)
the
shape
the
relationship
country’s
Gini
of
the
curves
curve
does
confirm
between
Lorenz
index?
How
a
and
its
20
Moreover,
have
poorest
in
it
more
would
20%
Brazil.
pattern
If
of
the
even
proportion
of
in
the
be
to
their
the
and
of
the
it
the
the
poorest
remains
that
is
necessary
standards.
3.0%
rises
then
share
larger
assume
living
earns
income
same,
to
raise
population
the
if
a
correct
order
national
remains
amount,
not
equality
Assume
national
income
will
same.
Equity
in
the
distribution
of
income
to
that
the
income
as
distribution
receive
They

a
get
larger
the
same
amount!
Taxation
used
array
to
of
reduce
externalities.
reduce
the
lowered
Inthis
used
Direct
Direct
firms’
to
are
taxes
for
imported
the
are
the
are
profits.
of
a
of
range
level
of
looking
goods
only
create
(tariffs)
goods.
at
national)
reasons.
that
aggregate
of
of
goods
imported
distribution
taxes
The
ownership
that
while
full
Indirect
Indirect
imposed
income
employment
the
based
on
manage
may
Taxes
the
way
in
Taxes
be
in
impose
may
be
negative
imposed
may
demand
be
the
which
to
raised
or
economy.
taxation
is
income.
are
income
to
interest
Some
charged
usually
because
people’s
income
households
and
shares.
is
on
from
income
of
some
people
unavoidable,
their
taxes
provincial,
taxes
employers,
form
Taxes
we
(municipal,
consumption
consumption
change
suchas
from
levels
different
the
section,
to
all
2
ahuge
at
s cim on o c e or ca M
Governments
of
obliged
to
households
governments
on
the
based
comes
savings
income
on
fill
or
the
out.
and
is
are
pay
taxes
on
directly
“tax
obliged
it
on
forms
dividends
taxed
by
return”
Theoretically,
firms
and
various
annual
and
and
wealth,
in
such
to
taxes
declare
accordingly.
taxes
taxes
taxes,
are
and
also
known
have
as
different
expenditure
names
in
taxes,
different
or
consumption-
countries.
Canada
Student
and
Australia
have
a
“goods
and
services
tax
(GST)”,
the
UK
has
Be
“value-added
tax
(V
AT)”
and
so
does
Austria
( Mehrwertsteuer).
workpoint
In
an
inquirer
this
Researching
case,
consumers
who
buy
the
goods
pay
the
tax
to
the
seller,
who
then
pays
the
tax
to
the
government.
In
a
the
to
whether
sense
previous
are
avoidable,
as
consumers
have
choice
as
to
good
or
not,
and
in
what
quantities.
Governments
vary
the
the
tax
rate
that
charged
and
they
a
valued
charge
lower
tax
goods,
on
different
rate
such
than
as
food
goods
and
at
supermarket,
luxuries,
the
services,
such
as
food
in
is
the
ta x
two
are
three
different
have
in
types
terms
Progressive
Many
proportion
income
no
taxes,
changing
use
higher
tax
of
at
a
and
into
these
people’s
progressive
income
means
this
that
taxes
of
categories
which
differ
in
we
of
the
country?
What
are
ta xes
and
the
different
rates
of
being
what
are
the
restaurants.
can
the
the
place
effect
these
that
they
they
are
categories
charged?
on
which
Give
examples.
incomes.
taxes
from
progressive
pay
of
countries
income
of
different
name
in
with
different
There
as
find
of
2
necessity
to
following.
What
indirect
indirect
country
try
buy
1
the
same
chapters,
these
out
taxes
the
or
in
producer,
20.3
a
is
that,
income
as
in
However,
as
to
incomes
taxes.
non-taxed,
all,
tax
earners
so
a
the
low
rise,
Usually,
person
when
the
main
way
income
people
there
earning
income
pay
is
a
to
redistribute
earners,
a
a
as
certain
low
moves
a
higher
amount
income
beyond
might
this
253
minimum,
then
a
certain
percentage
of
the
income
will
have
to
be

20
Equity
paid
tax
to
in
the
would
the
distribution
of
government.
take
larger
income
Then,
as
income
percentages
at
rises
higher
further,
incomes.
a
progressive
Consider
a
Student
simple
hypothetical
example
where
there
are
four
tax
“brackets”
Be
shown
in
Table
workpoint
20.4
as
a
thinker—calculate
the
20.2.
following
Using
“ Taxable”
income
($)
%
to
be
paid
as
Table
0 –10 000
10 001–25 000
30 %
25 001–50 000
40 %
50 001
50 %
a
and
higher
a
first
s cim on o c e or ca M
$1,500
A
T
ax
person
the
the
40%
rates
in
the
represents
earn
and
double
000,
on
this
30%
average
the
g iven
the
in
total
of
they
next
$5,000
an
the
average
earning
your
ta x
ta x
each
paid
of
for
the
incomes.
answers
in
the
form
of
table.
(hypothetical)
then
average
income,
on
$5,000
tax
levels
000,
represents
remaining
an
income
$15
30%
This
earning
$10
different
to
000
taxes.
first
on
for
were
$10
person
on
structure
calculate
the
following
a
20.2
and
person
Put
If
ta x
20.2,
0
paid
Table
the
t ax
$30
next
so
tax
a
approximately
no
taxes
would
on
1
$7
,000
3
2
$14,000
4
$28,000
$56,000
pay
10%.
would
000
for
pay
they
of
000,
$15
($2,000)
would
pay
($4,500)
total
22%.
of
As
nothing
and
then
$6,500.
we
can
This
see,
the
2
average
It
is
tax
important
represents
tax
rises
a
as
to
observe
vastly
structures
income
are
rises,
that
simplified
infinitely
making
the
tax
it
a
example
given
structure.
more
progressive
In
in
Table
reality
complicated.
The
tax.
20.2
most
countries’
Student
Be
complication
comes
in
the
form
of
“tax
deductions”
and
an
of
“taxable”
income.
Tax
deductions
allow
people
four
examples
their
“taxable
income”
as
a
result
of
spending
on
and
For
this
person
costs
to
reducing
this
example,
$1,000
deduct
the
because
if
this
amount
it
feels
a
a
worker
month,
spending
of
tax
that
must
the
she
will
a
long
government
from
that
this
travel
her
pays.
The
encourage
distance
might
taxable
work,
the
find
unemployment.
different
A
from
progressive
and
can
will
be
lead
an
HL
rate
paper
of
Here
is
ta x
might
do
and
a
What
to
means
is
considered
that
higher
redistribution
of
to
be
a
tax
deduction
is
country.
of
income
income
progressive
taxes
people
to
the
later
pay
less
in
higher
well-off.
this
taxes,
There
chapter.
Advice
3,
and
an
tax
to
evaluation
Assessment
In
country
you
the
may
be
average
example
of
the
asked
rate
kind
to
of
of
calculate,
from
a
set
of
data,
the
marg inal
ta x.
question
that
you
may
face
and
suggested
responses.
The
table
earnings
below
for
Income
0
5
254
5,
001
20
001
40
001
20
40

shows
workers
($)
000
000
000
in
the
an
income
ta x
economy.
%
0
20
40
50
rates
that
apply
to
different
such
research
work
ranges
of
the
ta x
households
country
investigating.
Suggest
(If
a
ta x
you
that
can
home
reason(s)
you
are
cannot
information,
your
governments
be
lower
in
access
thus
government
to
to
allow
income,
people
that
certain
make
things.
of
to
deductions
reduce
20.5
inquirer
the
Find
calculation
workpoint
biggest
then
country.)
why
might
deduction.
allow
each
to
20

Individual
A
(low

Individual
B
(middle

Individual
C
(high
1
Calculate
the
percentage
income)
income)
income)
amount
of
earns
of
income,
$15
earns
earns
income
i.e.
their
Total
000
$38
$90
ta x
000
000
paid
average
ta x
per
by
Equity
in
the
distribution
of
income
year.
per
per
ta x

year.
year.
individuals
A,
B,
and
C
as
a
rate.
paid
__________
The
average
tax
rate


100
Income
Individual
A
pays
($5000

0%)

($10
000

20%)

0

$2,000

$2,000
40%)

B
0
Therefore
$36

C
If
direct
($5,000
$3,000

average
pays
($50

direct

rate
$7
,200
($5,000
000
ta x
0%)


ta x

$10
000
$10
($15


000
20%)


100

($18
13.33%
000

200
is

0
$2,000/$15
($15
rate
0%)
50%)
is

200/$38
000
$3,000


000
20%)
$8,000



100
($20
$25

26.84%
000
000


000
Therefore
2

the
Individual
40%)
average
pays
2
the
Individual
s cim on o c e or ca M
Therefore
the
individual
what
will
B
be
average
direct
receives
an
the
ta x
rate
increase
marg inal
ta x
is
in
$36
000/$90
earnings
from
000
$38

100
000
to

40.00%
$48
000,
rate?
Change
in
total
ta x
paid
_________________
The
marg inal
tax
rate


Change
Individual
($20
B
000
$4,000

means
$10
200).
Therefore,
asked
to
his
that
tax
is
petrol
taxes.
can
For
2%
Regressive
of
of
worsen
tax
is
a
constant
the
idea
or
of
a
that


($15
0

000

$3,000
20%)


$8,000

and
paying
by
be
$10
$4,800
000
$4,800/$10
direct
and
marg inal
average
ta x
ta x
000
000
indirect
direct
and
more
($38

$48
100
ta xes,
rates,
marg inal
($15
to
total

48%
then
the
000
000).
you
could
average
ta x
be
and
rates.
tax)
For
a
their
may
tax
falls
an
end
earning
person
be
a
the
good
$1.00
per
is
source
of
consumption
tax
$50
per
on
the
paid
taxes
a
per
litre
tax
in
will
the
take
tax
a
in
are
of
month
because
will
higher
ofincome.
government
of
income
month,
regressive
levels
of
Indirect
month,
$2500
tax
lower
a
rises.
spending
$500
The
at
proportion
of
up
earning
income.
paid
the
income
example
people
is
if
as
demerit
revenue
goods,
but
and
they
inequality.
taxes
all
income
tax
of
tax
reasons
this.
is
if
the
levels.
proportional
percentage
for
will
the
person
proportional
of
now
paying
Consider
income
for
0%)
50%)
risen
regressive
discourage
Propor tional
A
a
income
taxes
might
is
rate
is
average
rate
assume
proportion
tax
rates,
as
income.
represent
they
ta x
B
have
person
the
taxes.
and
of


taxes
petrol
10%
a
average
regressive
individual
marginal
known
(the
($5,000
($8,000
earnings
if
indirect
Regressive
tax
that
His
pay

100
income
000
calculate
marg inal
now
40%)
$15
This
Remember
A
will

in
paid
direct
at
all
proportion
Many
taxes,
levels
of
countries
or
of
flat
income
are
taxes,
income.
paid
now
whereby
There
in
tax
is
promoting
are
the
same
several
255

20
The
at
Equity
first
the
in
the
distribution
relates
tax
to
guide
the
for
of
income
huge
most
complexity
countries
will
of
most
tax
confirm
systems.
that
A
taxation
glance
is
an
“In
incredibly
complicated
process,
with
ample
room
for
error
said
manipulation.
This
may
result
in
governments
earning
this
world,
nothing
less
to
be
certain,
except
death
revenue
taxes.”
than
expected
as
people
find
ways
to
avoid
paying
taxes.
The
second
Benjamin
relates
to
Itmight
be
working
they
the
to
be
be
policyto
labour
argued
harder,
will
were
possible
that
high
moving
reluctant
constant,
encourage
rates
into
to
lose
then
of
of
taxes
higher
their
this
greater
effects
paid
own
could
be
incentives
taxes
working.
discourage
jobs
gains
and
to
viewed
to
on
work
people
taking
higher
as
a
and
from
risks,
taxes.
as
If
taxes
supply-side
therefore
raise
supply.
Transfer
payments
Governments
s cim on o c e or ca M
provide
their
payments.
national
the
can
different
improve
for
disincentive
use
living
While
income
tax
types
of
revenues
standards.
transfer
of
a
to
These
payments
accounting,
production
to
assistance
or
a
groups
are
are
because
good
redistribute
in
known
not
they
service,
income
the
as
do
not
they
and
economy
as
income
represent
are
to
transfer
included
in
payment
payments
made
to
2
increase
the
Examples
pensions,
subsidies
income
of
of
transfer
particular
payments
unemployment
to
groups
include
benefits,
within
child
the
economy.
support
payments
to
assistance,
disabled
people,
and
producers.
Government
expenditure
to
provide
essential
goods
and
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256
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258
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World
Trade
Organization
(W TO).
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gains
from
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trade
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are
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exchange
number
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gains
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and
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services
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from
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international
international
1
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trade
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and
and
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main
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producers
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able
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the
for
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access
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section.
consumers
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and
prices
next
and
trade.
advantage,
have
to
not
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products
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order
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country
or
well-being.
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trade
or
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to
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earn
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for
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capital
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import
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able
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259
21

Why
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countries
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l an o i t a n r et n I
International
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larger
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run.
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interference,
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in
and
industrial
important
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abroad,
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260
convertible
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currencies
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s c i m o n o cE
Litres
both
of
of
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by
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to
early
prove
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nineteenth
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used
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to
to
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century,
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as
David
trade
countries
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litre
advantage
a
in
lower
considered
explain
Table
has
21.2
and
produce
of
A
to
K ilos
the
give
than
the
production
shows
and
of
up
does
the
Poland,
wine
cost
in
opportunity
question
France
Oppor tunit y
1
at
country
example.
of
are
cost
than
fewer
units
country
B.
production
using
the
cheese.
cheese
Oppor tunit y
wine
of
1
kilo
of
cost
cheese
3
4
France
but
advantage
mathematically
producing
countries,
wine
seems
reciprocal
advantage.
have
two
in
of
production
produce
shown
where
Countr y
to
produce
In
In
economist
comparative
if
advantage
situation
advantage
country.
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a
beneficial
another
other
absolute
example?
first
opportunity
of
of
not
above
the
absolute
concept
A
if
in
Ricardo
advantage
concept
kilos
3
of
cheese
4
3
l an o i t a n r et n I
litre
of
wine
litre
of
wine
4
1
Poland
1
3
kilos
of
cheese
3
3
Table
21.2
Comparative
advantage
3
This
of
shows
both
that
goods.
France
has
However,
an
in
absolute
terms
of
advantage
comparative
in
the
production
advantage,
has
a
comparative
advantage
in
the
production
of
wine
has
a
comparative
advantage
in
the
production
of
cheese.
and
France
Poland
4
This
is
because
France
only
has
to
give
up
kilos
of
cheese
to
3
produce
a
litre
of
wine,
whereas
Poland
has
to
give
up
3
kilos,
but
1
Poland
only
has
to
give
up
litre
of
wine
to
produce
a
kilo
of
cheese,
3
3
whereas
France
has
to
give
up
litre
of
wine.
4
The
theory
specialize
in
comparative
the
production
they
wish
and
way,
extra
cheese
production
of
cheese.
use
Poland
to
any
will
of
wine
France
extra
consume
exchange
will
wine
for
to
the
tells
and
us
that
Poland
then
France
should
consume
exchange
cheese
for
that
it
should
specialize
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wine
cheese.
wants
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that
In
the
and
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same
advantage
)sertil(
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of
(a)
The
situation
can
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diagram
as
in
Figure
21.1,
4
3
2
F
r
a
n
c
e
using
simplified
production
possibilities
curves.
1
Figure
even
21.1
shows
without
the
the
same
information
information
in
Table
as
Table
21.2,
it
is
21.2.
However,
possible
to
use
1
0
Figure
21.1
to
show
comparative
2
3
advantage.
4
(b)
Cheese
In
simple
terms,
producing
both
when
goods,
a
country
as
France
has
has
an
absolute
here,
and
advantage
the
scale
of
(kilos)
in
the
axes
is
F igure
21.1
Production
possibilities
262
the
same,
the
comparative
advantage
for
the
better
producer
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in
curves
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21
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producing
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producing
cheese.
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a
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using
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justification,
diagrams
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lines,
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since
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r
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o
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comparative
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2
0
countries
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the
two
countries
face
the
same
4
6
opportunity
Cheese
costs
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taking
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by
parallel
This
Litres
of
PPCs),
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wine
is
then
shown
Oppor tunit y
of
1
litre
of
there
in
cost
would
Table
K ilos
be
21.3
of
no
and
cheese
point
Figure
in
of
1
kilo
F igure
21.2.
Oppor tunit y
wine
of
(kilos)
trade
21.2
Identical
oppor tunity
costs
cost
cheese
1
3
2
kilos
of
cheese
6
litre
of
wine
litre
of
wine
3
France
l an o i t a n r et n I
2
1
Poland
1
2
kilos
of
cheese
2
2
As
21. 3
we
Identical
can
see
possibilities
country
oppor tunity
in
Figure
curves
will
be
are
costs
21.2,
the
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if
the
same,
and
slopes
then
there
of
the
two
opportunity
will
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no
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costs
gains
s c i m o n o cE
Table
to
for
be
each
made
by
trading.
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Be
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answer
Using
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workpoint
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cloth,
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that
quantities
China
and
21.2
of
information
below
and
follow.
resources,
Pakistan
have
the
to
produce
rice
1
Calculate
2
Draw
oppor tunity
costs
for
the
table.
a
diag ram
to
illustrate
the
information
in
outcomes:
the
3
Countr y
the
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K ilos
of
Oppor tunit y
Metres
table.
Should
trade
Pakistan?
rice
cost
kilo
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of
1
of
take
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cloth
cost
rice
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metre
Why?
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of
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4
In
which
product
should
each
country
specialize?
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China
5
4
Pakistan
3
3
What
To
a
g ives
large
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amount
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arable
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a
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comparative
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land
products.
country
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country
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with
is
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advantage
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labour
263
can
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in
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21
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labour-intensive,
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low-skilled,
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manufactured
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country
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advantage
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in
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output
of
financial
services.
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country
with
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beaches
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climate
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an
in
the
output
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out
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actually
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factor
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production!
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particular
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the
price
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abundance
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of
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or
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in
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father
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imports
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Jewish
27
,
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family
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wheat
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of
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economy.
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first
to
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on
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stockbroker
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Ricardo’s
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theory
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study
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output
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axation,
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in
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better
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showed
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to
theory
food
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and
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able
to
would
benefit
they
would
be
Throughout
his
to
political,
the
with
and
advocate
made
economic
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rents.
need
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to
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free
another
of
thought,
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studying
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feed
productive
show
from
able
to
career,
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important
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age
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it
trade.
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increasing
areas
would
population
extract
Ricardo
Mill,
names
philosophical
51.
“professional”
to
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high
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rent.
influenced
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by
thought.
he
Ricardo
short
career
made
died
of
several
his
and
nineteenth-century
relatively
economist,
that
are
in
real
the
of
assumptions,
life.
producers
aware
transport
existence
the
advantage
number
of
and
where
the
purchased.
there
The
He
time,
theory
assumed
knowledge
be
Thomas
economic,
in
14
1823,
years
as
lasting
Political
the
upon
the
benefit
who
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additions
of
and
publication,
was
friendships
and
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might
returns.
capital,
comparative
is
application
competition,
have
expensive
reality,
theory
advantage
in
students,
cloth
of
at
Principles
published
and
presented
diminish.
work
Portugal
contributions
contributions
Economy
wine
and
a
Ricardo’s
of
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Influence
Stock,
conclusion,
of
case
economics
1814.
diminishing
between
amounts
eventually
on
of
to
and
business
Essay
Profits
the
relationship
ag riculture
known,
total
of
wine
would
freely.
Ricardo
In
of
of
notes.
Gloucestershire
retirement
Although
both
populations
moved
theory
famous
widely
production
Portugal.
production
purchased
the
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His
exchange
loan
as
the
the
bank
stock
and
conclusions
presented
explanation
made
the
today
advantage.
the
impor tant
Ricardo
costs
producers,
of
traded
inflation
Britain.
he
the
thought
at
known
countries
views
into
different
producing
inflation
Corn
restrict
years
and
contributed
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this
him
looked
before
in
famous
encouraged
was
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comparative
arrived
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examining
between
contact.
Adam
were
study,
to
advantage
product.
protectionist
Laws
comparative
work,
country
opportunity
that
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production
the
(1772–1823)
1772.
the
using
of
g ive
countries.
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April,
services
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the
of
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lower
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expor t
countries.
abundant
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main
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21.3
inquirer
comparative
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advantage
workpoint
beautiful
of
costs.
transport
However,
costs
may
economic
theory
that
we
study
today.
21
erode
a
country’s
international
comparative
trading
advantage
worthwhile,
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it
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may
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Why
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countries
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eliminate
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producing
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still
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assume
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may
be
possible
use
of
4
It
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usually
to
scale
of
scale.
all
probability,
relative
5
It
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costs
usually
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as
goods
such
prove
the
as
costs
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no
the
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goods
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The
products
and
advantages
it
lie.
multi-country/
conduct.
change
and
economies
of
that
or
the
returns
diseconomies
scale
would,
advantage,
in
as
more.
being
traded
However,
A
problem.
more
comparative
bananas.
television
and
economies
even
durables.
Phillips
has
the
or
consumer
Japan
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fell
economies
such
made
to
do
of
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not
comparative
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country’s
that
is
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cotton,
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the
easier
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production
assumed
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i.e.
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barley,
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countries
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constant,
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simulations
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assumed
are
to
discern
computer
there
However,
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goods.
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will
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producing
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country.
the
goods,
that
developed
may
7
It
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countries,
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LDCs
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assumed
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the
WTO
WTO
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largely
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WTO
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is
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and
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gains
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global
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trade.
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factors
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In
factors
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countries,
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21
Why
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do
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countries
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international
forum
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trade
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Student
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The
functions
of
the
WTO
are
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to:
administer
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trade
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be
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handle
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forum
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cooperate
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and
training
tariffs,
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later
international
through
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system
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negotiations
legislation
for
developing
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round
and
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negotiations,
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meeting
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round,
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21.5
ahead
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21.4
inquirer
situation
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
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tariffs,
trade.
trade
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anti-dumping,
subsidies,
competition
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in
government
procurement,
and
intellectual
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273
22
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Quota
of
their
in
the
,
income
3
to
Q
3
w
and
Q
and
to
supply
the
of
of
in
Q4
Q2
(000s
tons)
of
falls
wheat
from
theory,
it
begins
F igure
22.4
A
quota
on
wheat
impor ts
more
wheat.
above
now
wheat
changes
Qe
wheat
producers
right,
demand
tons
4
price
a cdfij.
tons
but,
so
price
to
of
happened,
demanded
Q
Q3
importers
domestic
higher
Q
income
has
allowed
where
a
1
P
shifted
and
the
Quantity
this
wheat
Q
and
w
price
not
from
quota
fall
by
1
P
quota,
of
0Q
rises
the
effect,
at
supply
of
once
are
their
has,
Thus
a
3
attracted
their
.
Q
filled
revenue
price
However,
settles
now
a
importers
total
usually
in
are
tons
of
now
is
P
.
of
curve
supply
of
3
at
1
equals
to
Q
at
4
a
Foreign
and
also
b cde
does
to
not
be.
amount
loss
Their
price
again,
welfare
the
0Q
Q
have
price
producers
.
1
market,
the
and
Q
rises,
they
supply
Eventually,
again
of
demand
price
because
supply

quota
excess
domestic
supply
(World)
assume
0
Domestic
(Domestic)
PQuota
ecirP
the
(Domestic)
+Quota
fo
Before
S
S
taehw
has
on
a
on
3
quotas
into
limit
$(
imported
physical
l an o i t a n r et n I
a
rep
be
is
s c i m o n o cE
quota
)not
A
e
of
tariffs,
caused
wheat
that
they
consumer
purchased.
loss
of
there
are
two
areas
by
the
imposition
are
not
now
would
surplus
This
consumer
is
a
have
of
of
dead-weight
the
demanded.
spent
equivalent
on
to
dead-weight
k,
Consumers
the
wheat,
because
loss
of
loss
of
quota.
but
the
welfare,
keep
the
there
wheat
is
because
is
a
not
of
surplus.
275
22


Free
trade
After
the
and
quota,
inefficient
farmers.
The
the
more
than
Be
a
your
example.
one
world’s
own
win
loser.
or
Be
letters
in
the
s c i m o n o cE
HL
paper
Below
is
a
3,
an
is
of
to
a
and
j
produced
more
this
used
the
for
loss
a
need
inefficiency
since
produce
dead-weight
foreign
producers
efficiency,
to
relatively
quantity
domestic
world
by
efficient
represents
of
being
another
explain
quota
two
each
to
the
loss
are
to
produce
Thus
a
of
the
diag ram,
columns,
column,
imposition
consider
now
of
the
wheat
welfare.
22.5
the
case
diag ram
would
whereas
and
with
In
is
opposed
c dj.
This
the
each
why
of
the
possible
following
with
one
make
the
a
list
quota
stakeholder
identify
of
and
international
specifically
textiles
headed
is
in
Europe
“Winners”
the
a
either
costs
the
stakeholders
g ive
brief
a
winner
implications.
the
as
and
and
Use
or
the
benefits.
advice
you
tariff,
by
wheat
as
resources
table
“Losers”.
Assessment
imposing
a
lose
sure
in
copy
Make
explanation
In
of
producers
workpoint
headed
who
cd,
thinker—illustrate
Draw
of
farmers
of
necessary.
Student
tons
4
farmers,
revenue
the
are
Q
foreign
domestic
of
3
revenue
minimum
of
Q
domestic
minimum
a
protectionism
may
be
quota,
example
of
asked
or
the
a
to
calculate,
subsidy
kind
of
on
from
different
question
that
diag rams,
the
effects
of
stakeholders.
you
may
face
and
suggested
l an o i t a n r et n I
responses.
This
g raph
shows
the
market
for
cooking
oil
in
a
country.
)$(
3
ertil
S
Domestic
rep
2
lio
gnikooc
fo
ecirP
1
D
0
1
Quantity
1
Indicate
2
Cooking
supply
3
oil
domestic
may
curve
Explain
how
the
how
much
to
be
the
much
will
be
of
cooking
equilibrium
impor ted.
2
The
price
oil
(millions
and
world
of
quantity
price
is
$1
litres)
on
the
per
g raph.
litre.
Add
the
world
g raph.
cooking
supplied
oil
by
will
be
foreign
supplied
by
producers
domestic
when
free
suppliers
trade
and
takes
place.
4
The
the
5
Calculate
of
276
government
imposes
a
tariff
of
30¢
per
litre.
Show
the
effect
of
this
on
g raph.
the
the
tariff.
change
in
consumer
spending
before
and
after
the
imposition
22
6
7
Calculate
Explain
the
cooking
The
the
oil
required
government
impact
of
tax
the
revenue
tariff
on
after
any
the
two
tariff
of
the
is
put
in

Free
trade
and
protectionism
place.
stakeholders
in
the
market.
diag ram
is
shown
below.
)$(
ertil
Efficiency
loss
S
Domestic
rep
Dead-weight
loss
of
surplus
consumer
2
lio
gnikooc
1.50
S
+
T
ariff
W
1.30
fo
ecirP
1
S
W
D
0
0.5
Quantity
The
equilibrium
cooking
at
3
quantity
world
Before
The
i.e.
supply
curve
has
been
free
free
by
effect
S
W
trade,
trade,
domestic
the
foreign
of
the
tariff
is
is
expenditure
after
The
7
The
tax
revenue
will
stakeholders
consumers,
effect
on
the
any
D omestic
It
is
a
litres)
$1.50
perfectly
supplied
falls
million
by
revenue
and,
paying
loss,
The
to
will
in
the
get
to
to
1
0.5
litres
and
1
million
inelastic
million
million
(1.5
upward
by
The
are
light
will
litres
of
supply
curve
litres
litres
million
shift
of
S
of
and
0.5
from
W
cooking
the
oil.
quantity
million).
$1
to
$1.30,
domestic
allocation
the
allocation
oil
sell
less
of
the
some
also
case
from
is
by
to
a
a

million.
$1.56
million.
thus
also
increase
economy.
reducing
also
a
of
tariff,
from
that
a
there
imposing
the
their
lower
there.
higher
price,
consumer
and
a
which
in
this
surplus,
dead-weight
and
may
decrease
is
always
of
producers
inefficient
triangle
then
be
in
the
danger
of
tariff.
production
foreign
loss
at
the
diagram.
the
blue
price,
will
damage
loss
of
follows.
They
will
producers,
explanation
government,
However,
means
as
thus
This
the
from
dark
$1.5
foreign
An
higher
causing
the
in
welfare

$1.30
domestic
price,
benefit
for
a
product,
efficient
the
at
the
suffer
triangle
economy.
This
for
are
profit.
profit.
also
countries
shown
effects
same
their

$1
producers,
more,
good
income
this
million

allocation.
economies,
may
shifts
producers.
occurs,
in
The
million
$120,000.
domestic
the
They
gain
in
cooking
at
blue
government
1.2

probability,
be
producers,
other
of
to
all
less,
total.
retaliation
litres
able
in
foreign
in
was
1.5
resource
cer tainly,
unemployment
Resource
are
and
should
sell
the
from
tariff
was
400,000
consume
more
tariff
sufficient.
and,
the
government
spent.
be
almost
domestic
shown

market
which
producers
Consumers
some
the
revenue
employment
case
in
the
the
30¢
producers
employment,
Foreign
be
government,
two
increasing

1
shown
Consumer
6

as
of
tariff.
before

added.
supply
producers
expenditure

(millions
shown
producers
domestic
Consumer

are
oil
oil.
supplied
5
cooking
2
$1.
After
4
1.5
3
The
and
1.2
l an o i t a n r et n I
2
price
of
1
s c i m o n o cE
1
0.8
in
the
0.3
to
million
less-efficient
resource
diag ram.
277
22

Free
trade
and
protectionism
Administrative
We
will
look
at
governments
1
“Red
goods
processes
can
their
entry
a
into
are
of
sold
the
s c i m o n o cE
imports
and
administrative
requires
down
of
the
undertaken,
are
to
a
will
barriers
to
delays
more
and
may
certain
be
that
and
that
their
countries
by
or
legal
raise
more
cost
get
then
to
it
if
will
the
ports
of
This
costs.
of
standards
the
types
the
methods
These
regulations
As
to
can
addition,
expensive.
on
able
In
certain
entry.
be
they
work,
the
as
then
making
before
on
preventing
known
example,
designate
raise
be
complicated
imports.
of
also
administrative
environmental
placed
goods.
population
and
and
market,
restrict
For
down
may
again
standards
may
and
paperwork
amount
reach
usually
which
lengthy
slow
large
even
are
imports.
countries
domestic
may
there
complicated
difficult
isimportant
of
be
country
safety
manufacture
safety
a
restrictions
in
imported,
restriction
border
and
Various
to
Sometimes,
that
Health
it
types
processes
through
process
maycause
be
have
paperwork
the
being
these
as
go
goods
importer.
2
If
act
importers
slow
different
impose.
are
that
tape”.
they
the
may
tape”
When
“red
barriers
three
goods
will
mentioned
guarantee
the
import
that
used
in
apply
earlier,
the
of
can
the
to
while
health
and
unhealthy
or
Student
unsafe
goods,
it
is
extremely
important
that
governments
l an o i t a n r et n I
Be
legitimately
their
own
keeping
country’s
out
imports
rather
than
simply
an
Find
inquirer
workers.
an
a
example
of
a
country,
or
set
3
countries,
has
situation
of
imposed
Embargoes
economic
In
effect,
an
embargo
is
an
extreme
quota.
It
is
a
complete
onimports
and
is
usually
put
in
place
as
a
form
of
For
example,
the
USA
has
a
trade
embargo
on
from
commonly,
against
one
or
an
a
Cuba.
offending
few
punishment,
Nationalistic
key
or
to
domestic
jobs.
more
Such
Australia,
where
the
creation
of
country.
sometimes
demand
campaigns
and
embargoes
place
set
These
and
a
a
are
limit
also
desired
of
are
rare.
economic
the
used
a
or
form
imports
of
the
goods
for
This
government
marketing
instead
domestic
have
US.
run
links
unemployment.
be
in
campaigns
and
ones
of
political
consumption
of
as
such
“moral
imported
encourage
order
preserve
countries
described
to
in
to
domestic
as
the
UK,
suasion”,
goods
the
whether
objective.
foreign
goods
happened
may
of
were
on
another
countries
involved
sanctions
imposed.
sanctions
exports
as
political
More
campaigns
people
generate
in
achieve
will
buy
put
products
Governments
to
Complete
countries
the
and
explain
all
why
products
Note
political
that
punishment.
sanctions
ban
country.
278
22.6
protecting
where
3
workpoint
are
to
the
Also
the
countries
try
were
to
achieved
objectives.
conclude
imposing
country/
their
22
EN D
1
OF
Using
on
2
the
Using
the
3
CHAPTER
a
diagram,
bic ycle
a
Evaluate
Assessment
your
found
chapter
the
the
2,
(tariffs,
markets
in
e xplain
argument s
the
the
quotas,
for
is
ef fec t s
of
a
t ar if f
the
likely
ef fec t s
of
a
quot a
used
by
government s
on
response
subsidies)
individual
the
paper
Below
likely
questions
data
to
on
impor ted
on
justif y
international
paper.
are
products.
microeconomic
EX AM I NATION
HL
QU ESTIONS
the
bic ycles
impor ted
shoes
on
protec tionist
policies.
advice
paper
these
protectionism
economics
However,
the
microeconomic
Therefore,
section
of
you
paper
models,
could
will
models
be
as
primarily
covered
they
asked
a
be
in
deal
this
with
question
1.
QU ESTIONS
3
the
market
for
cook ing
oil
in
a
countr y.
ertil
3
)$ (
S
Domestic
rep
l an o i t a n r et n I
on
and
market .
examination,
in
trade
2
lio
gnikooc
fo
s c i m o n o cE
In
Free
market .
diagram,
shoe
R EVI EW
e xplain

ecirP
1
D
0
1
Quantity
1
Indic ate
2
C alculate
3
Cook ing
supply
4
E xplain
of
5
The
7
oil
be
the
domes tic
of
the
this
pr ice
spending
impor ted.
oil
(millions
and
before
T he
world
of
litres)
quantit y
impor t s
pr ice
is
on
are
$1
the
in
per
graph.
the
litre.
market .
Add
the
world
af ter
the
entr y
graph.
producer s
gover nment
ef fec t
supplier s
to
gives
on
the
will
domes tic
the
reduce
their
produc tion
market .
producer s
a
subsidy
of
40 ¢
per
litre.
Show
graph.
change
in
consumer
the
change
in
the
the
cos t
spending
before
and
af ter
the
giving
of
subsidy.
C alculate
is
to
cooking
equilibr ium
consumer
may
why
C alculate
the
domes tic
tot al
cur ve
foreign
the
6
the
of
2
revenue
of
foreign
producer s
when
the
subsidy
given.
8
C alculate
9
E xplain
the
cook ing
oil
to
impac t
the
of
gover nment
the
subsidy
on
af ter
any
the
t wo
subsidy
of
the
is
given.
s t akeholder s
in
the
market .
279
22

Free
trade
and
protectionism
e
Tyre
taris
parts
President
and
Obama
provoke
chicken
to
US
products
are scheduled to meet in Pittsburgh
are
for
on
China
car
tyres
was
not
“provocative”
complained
passenger-
meant
even
to
Organization
the
as
to
the
permitted
More
Trade
under
reluctantly
joined
China
World
about
it
be
the
provision
accepted
WTO
than
a
in
when
2001.
5,000
the
vows
workers
in
to
politics
tyres,
trade policy. Obama needs labour
the
United
Chinese
announcement
into
of
whether
an
US
000
production
companies were dumping chicken
Last
year,
and
USA
auto
auto
parts.
an
escalating
trade
conflict
China
tyres
jobs
remain.
shipped
and
to
treads
the
worth
acutely
their
in
leaders,
push
for
meanwhile,
sensitive
job-rich
his
driving
31
its
support
are
both
the
to
China
in
since 2004 amid a flood of imported
according
and
amid
volumes.
health care legislation in Congress.
to
the
export
are
needs
of
industries.
$2 billion, more than triple 2004’s
China’s August exports were 23%
$593
below
at
million.
US
tyremakers,
however,
say
year-ago
T h e r e ’s
figures.
little
sign
that
s c i m o n o cE
the tariffs will raise prices and create
competing
“In the short run, this could fairly
unemployment elsewhere. Roy
reconciled. “I suspect that we will
easily
Littlefield, Executive Vice President
make
of
coordinate the adjustment process
spiral
l an o i t a n r et n I
of
a
out
are
corner,”
the
of
control...
somewhat
said
a
former
International
Fund’s
China
Obama
Both
backed
head
Monetary
unit.
imposed
a
35%
tariff
the
Tyre
Industry
Association,
countries
such
as Brazil or India rather than return
Michael
lost
University’s
jobs
to
the
USA.
3
an International Trade Commission
come little more than a week before
(ITC)
world
Chinese
tyres
in
June
that
a
surge
leaders,
including
Assessment
Chinese
President
Hu
Jintao,
advice
g reat
so
temptation
that
strateg y.
Not
answering
example,
and
you
can
only
the
when
do
in
data
prove
you
question
you
draw
a
response
how
waste
as
much
valuable
clearly
tariff
questions
you
as
time,
you
diag ram,
have
but
need
you
to
are
write
learned!
you
more
This
run
than
is
the
not
risk
to.
able
to
explain
the
280
consequences
on
a
lot
of
stakeholders—including
domestic
consumers,
Adapted
from
Obama
14
of inexpensive Chinese-made tyres
is
a
of
not
of
Guanghua
gotten
Peking
School
Management.
Source:
ruling
Pettis
have
to
much worse for everybody,” wrote
low-cost
things
effort
only
other
after
be
to
The intensifying trade tensions
imported
concerted
can
says tyremakers will shift production
after
on
a
interests
the
a time of global economic fragility.
into
For
trade
union
after
countries
actually
global
the original ITC complaint. About
for
good
featured
day
The possible retaliation left some
a
summit.
protectionism
domestic
USA
20
have
Steelworkers union, which lodged
analysts worrying about prospects
is
resist
shrinking
But
of
meetings
for talks with the USA – came one
investigation
necessary,
Group
Previous
US tyre plants have lost their jobs
move.
China’s complaint – and demand
There
auto
had damaged US makers. The tariffs
Chinese
on
threat
Monday that imposing stiff tariffs
imported
insisted
China
September
2009
USA
T
oday,
of
22
producers,
response
issues
question
supposed
to
consumers,
any
trade
in
a
key
domestic
g iven
(tariff,
Keep
provide
bands
in
in
essay
enhance
your
must
mark
allows
be
can
a
find
you
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
281

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


23

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Exchange
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of
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of
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282
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20
information
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changed
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explain
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consider
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by:
rates
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services
lower
than
relatively
EU
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l an o i t a n r et n I
rates.
goods
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285
23

Exchange
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0.80
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Student
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23.4
Demand
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Be
1
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imports
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increase,
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286
financial
wish
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23.5
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demand
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23
the
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future,
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Student
Be
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the
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23.6
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thinker
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2
workpoint
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explain
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reality,
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bank,
to
will
changes
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governments
Because
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government.
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values
rate
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it
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times
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not
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allowed
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exchange
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to
most
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from
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come
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businesses,
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currency
extreme
feel
in
no
s c i m o n o cE
In
l an o i t a n r et n I
3
Managed
the
in
rate
need
governments
Subsequently,
will
to
have
look
at
intervene
we
look
marked
these
to
at
economic
now
to
influence
how
the
value
governments
intervene.
287
23

Let
Exchange
us
high
look
and
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low.
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rate
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currencies,
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imports,
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to
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costs
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international
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workers
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point),
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country.
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producers
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services
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currency
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in
means
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value
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costs
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efficient
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exchange
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finished
prices
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efficiency:
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of
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industries.
3

Damage
to
domestic
purchased,
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a
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further
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and
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lead
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imported
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final
imported
and
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economy.
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exchange
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domestically
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than
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industries:
expensive.
and
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imports
competition
services.
exchange
expensive
of
increased
and
unemployment
the
of
less
industries.
domestic
inflation.
the
competitive.
of
levels
relatively
industries:
imported
firms
to
of
consumers
value
leading
that
from
export
in
greater
now
goods
low
imports,
more
by
a
more
services,
needed
possibly
288
of
find
export
disadvantages
components
are
the
are
their
level
of
in
domestic
instead
Inflation:
goods
the
more
imports
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23
Impor tant
A
high
create
may
value
good
inflationary
a
for
currency
may
be
problems,
solving
good
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whereas
unemployment
fight
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inflation,
low
value
problems,
of
but
but
a
may
currency
may
create
Student
Be
1
pressure.
a
workpoint
the
explain
a
help
why
a
currency
of
measures
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the
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the
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lower
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of
exchange
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the
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fixed
rate
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to
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help
of
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a
country.
diag ram,
the
may
value
intervene
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in
currency.
of
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why
a
currency
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low
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value
create
pressure
in
a
a
current
goods
is
which
greater
services
in
is
to
improve
where
than
(see
rate
order
the
Chapter
spending
revenue
on
received
24).
3
and
employment
inflation
exchange
stability
deficit,
services
goods
increase
fight
floating
rate
account
and
to
to
rate
a
exchange
improve
order
order
exchange
confidence
exported
in
in
fluctuations
business
from
in
value
worsen
country.
exchange
large
why
to:
exchange
imported
diag ram,
market
explain
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23.6
foreign
2
are
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high
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rates
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With
of
exchange
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summary
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of
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reserves.
wishes
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and
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abroad,
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country,
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interest
rates
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value
rates
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their
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rates
financial
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into
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then
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way,
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than
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of
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currencies
to
exchange
currency
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so
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relatively
manipulate
reserves
currencies,
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value
to
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foreign
way,
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intervention,
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market,
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this
of
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the
In
exchange
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attempt
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for
methods.
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then
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reason
l an o i t a n r et n I
how
the
s c i m o n o cE
Whatever
own
of
in
the
lower
abroad
will
have
currency
exchange
market.
289
This
should
lower
its
exchange
rate.
23

Exchange
The
advantages
floating
bound
these
in
exchange
to
be
A
fixed
agents
in
trading
If
of
ofthis,
that
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sensible
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fixed
chooses
disadvantages
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at
has
as
low
on
the
not
fixed,
the
as
not
speculative
is
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fixed
in
markets.
policies
of
been
be
able
and
to
prices
inflation
for
forced
foreign
always
costs
then
possible,
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uncertainty
will
for
all
plan
for
economic
ahead
in
the
international
change.
demand
existence
in
todestabilize
s c i m o n o cE
Student
Businesses
will
are
on
rate
reduce
predicted
government
theory,
l an o i t a n r et n I
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and
should
government
speculation
a
regime
exchange
rate
their
rates
competitive
Be
fixed
country.
effect
inflation
this
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the
exchange
In
rate
agreements
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3
of
rates
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knowledge
2
disadvantages
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Advantages
1
and
exchange
Whichever
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on
to
Thus
have
and
measures
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keep
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very
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to
Because
ensure
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exchange
rates
ensure
inflation.
fixed
the
take
order
exchange
exchange
case
exchange
may
exports
rate
rate
markets.
and
there
systems
are
in
should
reduce
(However,
often
order
in
reality,
attempts
to
make
gains.)
workpoint
23.7
thinker
the
ar ticle
below
and
answer
the
questions
that
follow.
3
China
China
has
rejects
rejected
accusation
that
undervalued,
stronger
USA
’s
will
the
G20
to
came
address
summit
weekend.
in
Ahead
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brings
rich
and
latest
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293
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account
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294
goods
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24
trade
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3
24.1
Canadian
football
Be
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295
24
3
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World
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24
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297
24

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exports
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24
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workpoint
24.3
thinker
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the
price
rate,
following
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was
exchange
exports
decrease
and
application
exports
the
the
effect
currency
for
boxes
(as
shown
in
Chapter
4)
c
to
the
following:
of
on
expor ts
a
depreciation
expor t
is
or
revenues
devaluation
when
the
of
effect
the
effect
s c i m o n o cE
currency
for
l an o i t a n r et n I
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know
time
on
expor ts
that
period
more
of
d
demand
for
impor ts
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over
expor t
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under
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revenues
when
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of
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effect
2
demand
longer
of
elasticity
Remember
period
of
time.
that
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of
currency
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a
on
for
which
account
determinants
or
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expenditure
is
when
of
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the
inelastic
depreciation
impor t
impor ts
or
devaluation
expenditure
is
when
of
the
elastic.
a
elastic
consideration.
a
devaluation
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impor t
a
demand
inelastic
a
a
on
demand
b
of
currency
of
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demand
applies
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conditions
improve,
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become
will
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current
smaller?
the
becomes
the
elasticity
3
of
demand
for
exports
and
imports.
1
A
study
and
a
of
trade
long-run
number
of
elasticities
price
elasticities
countries.
Countr y
in
These
2000
of
are
shown
Shor t-run
PED
produced
demand
for
in
estimates
exports
Table
Shor t-run
PED
expor t s
short-run
imports
for
24.2.
Tot al
impor t s
of
and
shor t-run
Long-run
Long-run
PED
PED
PED
expor t s
impor t s
Tot al
long-run
PED
C anada
0.5
0.1
0.6
0.9
0.9
1.8
France
0.1
0.1
0.2
0.2
0.4
0.6
Germany
0.1
0.2
0.3
0.3
0.6
0.9
Italy
0.3
0.0
0.3
0.9
0.4
1.3
Japan
0.5
0.1
0.6
1.0
0.3
1.3
UK
0.2
0.0
0.2
1.6
0.6
2.2
US
0.5
0.6
1.1
1.5
0.3
1.8
Table
24.2
Shor t-run
and
long-run
P ED
values
in
the
G-7
countries
1
Trade
elasticities
for
the
G-7
countries,
Hooper,
Johnson
304
in
International
Economics,
No.87
,
August
2000
&
Marquez,
Princeton
Studies

24
The
1
figures
In
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the
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values
Only
US
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cases
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If
all
long-run
from
2
show
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Balance
Chapter
over
meet
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countries,
the
elasticity
exactly
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what
4,
values
we
which
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would
tells
us
lower
than
expect
that
to
find
price
time.
Marshall-Lerner
other
than
condition
France
and
in
the
Germany,
meet
run.
J-curve
government
is
facing
a
current
account
deficit,
it
may
reduce
the
Current
account
exchange
rate
of
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PED
then
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1
Z
improvement
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0
However
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short
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Time
current
X
account
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worse
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known
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toacurrent
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depreciated.
deficit
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exchange
rate
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is
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Figure
24.1.
F igure
us
the
government
The
it
assume
price
will
of
take
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24
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Balance
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25
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Economic
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shown
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Country
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to
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25.1
A
free
trade
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D
good
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Mexico.
a
January
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country
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final
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share
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today.
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Canada,
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trade
A
Country
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region
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imports.
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trades
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country
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freely
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trade
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number
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NAFTA
on
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reduction
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of
way
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now
agreement,
country
tariffs
relationships
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foreign
trade
free
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trade
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this
countries
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and
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3
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s
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