Income Elasticity of Demand

Our final lesson on elasticities will examine the responsiveness of consumers of a good to a change in their own incomes. The lesson introduces the formula for YED, gives an example of how to calculate YED for both a normal good and an inferior good and explains the different possible values of the YED coefficient.

Calculating the area of Deadweight Loss welfare loss in a Linear Demand and Supply model

Once you’ve learned how to calculate the areas of consumer and producer surplus on a graph when the market is in equilibrium, the next question is how so we determine the loss of total welfare when a market is out of equilibrium. This lesson shows how to find the changes in CS and PS when the price is not at the free market equilibrium and thereby determine how much welfare loss arises from a disequilibrium.

Consumer Surplus and Producer Surplus

The additional benefits enjoyed by consumers pay less than they are willing to pay and by producers who sell for a price higher than they are willing to sell for are known as consumer and producer surplus. Together they make up the “total welfare” of a market. This lesson introduces and explains these concepts, important for understanding what makes the market system effective at meeting society’s wants and needs.

 

Why does Supply slope upwards? (The law of increasing opportunity cost and supply)

In a previous lesson we introduced the law of supply and the determinants of supply, but we never clearly explained WHY there is a direct relationship between price and quantity supplied. In this lesson we will connect the law of supply to a law introduced in an earlier lesson on the PPC and the Law of Increasing Opportunity Costs.

The concept of increasing marginal costs of production will be explained and the link between firms’ marginal costs and supply will be established in this lesson.

The Law of Demand (NEW 2016)

Our study of market economies requires us to examine both the demand-side and the supply-side of product and resources markets. Buyers and sellers interact with one another to engage in mutually beneficial exchanges in a market economy, and prices are set based on the demand and supply for a particular good, service or resource. This video lesson presents the law of demand, and explains how the demand curve can illustrate this fundamental economic concept.

The Law of Increasing Opportunity Cost and the PPC Model

In a previous lesson we introduced the basic economic concepts of scarcity, opportunity cost, and the production possibilities curve (PPC). In that lesson, we examined the tradeoffs an individual faces in the use of her time between “work” and “play”. We showed that the opportunity cost of one hour of work is always the one hour of play that the individual could have enjoyed instead.

The constant opportunitiy cost between work and play is illustrated in the PPC model as a straight line production possibilities curve. In this lesson, we will expand our understanding of the PPC and opportunity costs by examining the tradeoff a nation faces between the production of two goods using its scarce resources. Cars and pizzas require very different resources to produce, and therefore, as the production of one good increases, the opportunity cost of its production in terms of the other good increases.

The result is a PPC that is bowed outwards from the origin. When choosing between the production of two goods, the more similar the resources needed to produce each good, the straighter the PPC will be. The less similar the resources needed to produce each good, the further the PPC will be bowed out from the origin.

The Circular Flow Model of a Market Economy

By this point in your course you may have learned the definition of a market: A place where buyers and sellers meet to engage in mutually beneficial exchanges. But what is a market economy? Two basic types of markets exist in any market economy: resource markets and product markets. The exchanges that take place in these markets benefit both the households and the firms that engage in exchanges.

This lesson will introduce the circular flow of money, resources and goods and services in a market economy. We will examine how resources flow from households to firms, and goods and services from firms to households. We will also seek to explain why individuals are willing to engage in the exchanges that characterize the market system.

To order practice activities on this and other lessons from the Econ Classroom, click here.

For student revision guides and teacher PowerPoints, click here.

Scarcity, Opportunity Cost and the Production Possibilities Curve

The basic economic problem is one rooted in both the natural world and in human greed. We live in a world of limited resources, but we seem to have unlimited wants. This results in scarcity, which gives rise to the very field of Economics, which deals with how to allocate scarce resources between the competing wants and needs of society.

This lesson will introduce these basic economic concepts, along with the first (and perhaps the most useful) graph an Economics student will learn, the Production Possibilities Curve.