Summary Internationale Volkswirtschaftslehre - Supply and Demand, PED and XPED, Cost- and Profitfunctions
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Course
Volkswirtschaftslehre
Institution
Gymnasium
Summary for the subject of international economics and business administration:
demand curve, supply curve, market equilibrium, price elasticity, cost function, fixed and variable cost functions, profit maximization
international business administration and economics
Written for
Secondary school
Gymnasium
Volkswirtschaftslehre
1
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I know...
… the factors influencing demand.
- income: depending on one's income, he/she may buy more or less of the product.
- price: depending on the price of the product people may be differently interested in buying it
o lower income people will not buy luxury goods.
o sudden price drops may lead to people buying the product more.
- future expectations: depending on the future expectations people may be buying more durable goods
or will spend their money differently.
… the law of demand and the demand curve / slope of the demand curve
- Law of demand: The higher the price of a good, the fewer people will buy it.
- (individual) demand curve:
… the difference between substitute goods (substitutes), complementary goods (and indifferent goods)
- substitute goods: substitute goods can replace each other,
- a good that serves the same purpose as another good for consumers.
o price of good 1 ↑ demand of good 2 ↑ (coffee and tea // apple - and orange juice)
o → demand curve good 2 shift to right
- complementary goods:
- a good that adds value to another good when they are consumed together.
o price of good 1 ↑ demand of good 2 ↓ (car and petrol) → demand curve good 2 shift to left
- indifferent goods:
- do not affect each other.
- price of good 1 ↑ demand of good 2 stays the same
… know the dependence of a household’s demand on income regarding superior, inferior, saturation goods.
- superior goods (non-saturation goods): goods that are demanded more often if the income increases.
o champagne, caviar, luxury goods
o
- inferior goods: inferior goods are substituted with superior goods when income increases
o cheap fast food
o
- saturation goods: does not depend on the income, income does not affect the demand of the good
o toilet paper, salt
o
, … know what the market demand is.
If the quantities demanded by the individuals for a good are combined
(added together at various prices), this gives us the market demand for that good.
Market demand is influenced by factors such as income and wealth distribution in the economy or the number
of households that demand a good. Population and advertising to raise awareness for a product can also lead
to a change in the market demand for a good.
→ left shift of curve: lower demand at every price → advertising ban for alcohol-free lemonade
→ demand will be lower than before, independent on the price
→ right shift of curve: higher demand at every price → healthy eating campaign to eat more fruits
→ overall demand of fruit increases independent of the price
… can calculate the PED / XPED.
… know differences between elastic / inelastic demand.
… know that each demand curve has different elasticity areas.
… understand the meaning of a positive / negative / … PED / XPED.
Definition: Price elasticity of demand (PED) measures the responsiveness of demand after a change in price.
PED > 1 = Price Elastic
When PED for a good is greater than 1 it is said to be price elastic. In other words, a change in price causes an
even greater change in quantity demanded.
PED > 1: change in price < change in quantity demanded
PED < 1 = Price Inelastic
When PED for a good is less than 1, it is price inelastic. A change in price causes a proportionally smaller
change in quantity demanded. Put simply, a change in price doesn't have much of an effect on demand.
PED < 1: change in price > change in quantity demanded
PED = 1 = Unitary Price Elastic
If PED is equal to 1 then demand is unit elastic, demand changes exactly in proportion with price.
For example: a 10% increase in price would lead to a 10% contraction in demand.
PED = 1: change in price = change in quantity demanded
PED = 0 = Perfectly Inelastic
A good with a PED of 0 is said to be perfectly inelastic, a change in price has no effect on demand. In this case
the demand curve is vertical, this is because demand does not change at all when the price changes.
PED = 0: change in price = no change in quantity
PED = Infinity = Perfectly Elastic
If PED is infinite only one price can be charged, the demand curve in this case is perfectly horizontal. If a firm
increased its price by 1% all its demand would be lost. --> comparison carrots on market
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