Inelastic products are products that don’t have a perfect alternative and the consumers have no alternative in purchasing the goods and services in case the price increases thereby the quantity demanded remains constant. An example of an inelastic product is oil manufactured by OPEC. The demand and supply of oil are relatively inelastic. This means that changes in price have a very minimal impact on either quantity supplied and demanded. OPEC as exporters of oil cannot maintain high prices of oil in the market because it will affect its revenues. This is because in the short run the demand for oil is inelastic meaning that a rise in price will only cause a small fall in the demand. The demand is price inelastic since customers require oil-based products such as Petrol and diesel to run their engines. However, in the long run, a higher oil price will make the consumers shift their consumption such as they can begin to buy hydrogen-powered cars, being to conserve and also shifting to less energy intensive options. Therefore, it is imperative that in the long run making a demand to be more price elastic. This will make OPEC lose some revenues due to a shift in the demand for oil (Gabaix, 2009).
Long-term and short-term demand elasticity
An effective price ceiling is known as the binding price ceiling. The binding price ceiling is depicted in a supply and demand diagram like;
Since the price for the non-binding is less than price set by the government, then price ceiling is binding.
Binding Price Floor
This occurs when the government sets a given price on goods or good at a price that is above the equilibrium. Therefore, since the government needs the prices not to drop below the price then binds the market. For example, a minimum wage law in California. Consider a minimum wage of about $10 hourly. If an organization wants to pay an individual $12 there will be no problem since the price is above the floor. On the other hand, if a company wants to pay someone $4 there will be a problem because the price is below the price floor. The later will then be a binding price floor.
|Quantity of soap sold per hour||Total cost ($)||Fixed cost ($)||Variable cost ($)||Average fixed cost($)||Average variable cost ($)||Average total cost ($)||Marginal cost ($)|
Inflation takes place when an economy expands because of increased spending. During this period, Prices goes up and the currency within the economy becomes worthless compared to before. Monetary policy is one of the methods used to control inflation. Monetary policy is a policy laid by a central bank which involves the management of money supply and interest rates in order to solve some financial problems.
- The demand curve illustrates the quantity of money demanded. The curve slopes downwards meaning that people want to hold less of their wealth in form of money the higher the interest’s rates and financial bonds will be. The supply curve is vertical since it does not depend on interest rates but the decision of central bank.
- An increase in the amount of money in the economy encourages private consumptions while at the same time reduces interest rates encouraging lending and investments. Therefore, an increase in the consumption results to a higher aggregate demand (Gabaix, 2009).
The GDP is an indicator that is used to gauge the health of a nation’s economy. It shows the total dollar value of all goods and services through a given time period. The four components are investment, personal consumption expenditure, Government expenditure, and the Net Export. The net export is described as the export minus import value. The exports bring to the GDP while an import removes from GDP.
Labor force is a group that comprise of all the people who work together in a given area or a country. The Unemployment rate is describes as the percentage of unemployed people in the entire labor force. Labor force participation rate is described as a part of working population between the age group 16-64 within the economy employed currently or seeking for employment.
Labor force = 11.67 million
Unemployment rate= No of unemployed people/labor force= 0.7/11.67
Labor force participation rate= Labor force/Adult population
= 11.67/18.94= 0.62
DAILY, J. E., KIEFF, F. S., & WILMARTH JR, A. E. (2014). Introduction. In Perspectives on Financing Innovation (pp. 13-16). Routledge.
Gabaix, X. (2009). Power laws in economics and finance. Annu. Rev. Econ., 1(1), 255-294.