Inflation and Unemployment

About This Chapter

Unemployment is an unfortunate reality for many people these days, and there are a lot of different ways to solve that problem. In addition to hearing about unemployment, you've probably also heard some talk about inflation. But how deeply do you understand these two hot topics on a conceptual level? By watching these Education Portal video lessons on inflation and unemployment, taught by economics and finance instructor Jon Nash, you can gain some insight into what causes widespread unemployment. Read more

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The Phillips Curve Model: Inflation And Unemployment

Can we have low unemployment and low inflation at the same time? Some economists think the answer is no. In this lesson, we'll explore the relationship between inflation and unemployment in the short-run, what economists call the Phillips Curve.

Factors That Shift The Phillips Curve

Inflation and unemployment are directly related. In this lesson, discover the factors that lead to a shift in the Phillips Curve by looking at a fictitious economy as an example.

The Phillips Curve In The Short Run: Economic Behavior

Economists have ways to describe the changes in the economy. In this lesson, discover the short-term relationship between inflation and unemployment - what economists refer to as the Phillips Curve.

The Phillips Curve In The Long Run: Inflation Rate

How do unemployment and inflation effect each other? In this lesson, you'll discover why the Phillips curve is vertical in the long-run with the help of some real world examples.

Demand and Law of demand

What is demand?

Demand is defined as want or willingness of consumers to buy goods and services. In economics willingness to buy goods and services should be accompanied by the ability to buy (purchasing power) and is referred to as effective demand.

Types of demand

Composite demand: It is when a good is demanded for two or more uses. For example oil may be used to run a car or as a fuel in a factory.

Joint demand: It is when two goods are bought together. Mouse is bought with a mouse pad.

Derived demand: It is when demand for one good occurs as a result of demand for another. Example, If more goods are made, more labour is needed. Hence demand for labour is derived demand.

Law of demand

It states that when price increases, the amount demanded will fall and when prices fall, the amount demanded will rise.
This phenomenon when plotted on a graph is known as Demand Curve.

Law of Demand

The law of demand states that other factors being constant (cetris peribus), price and quantity demand of any good and service are inversely related to each other.

Definition: The law of demand states that other factors being constant (cetris peribus), price and quantity demand of any good and service are inversely related to each other. When the price of a product increases, the demand for the same product will fall.

Description: Law of demand explains consumer choice behavior when the price changes. In the market, assuming other factors affecting demand being constant, when the price of a good rises, it leads to a fall in the demand of that good. This is the natural consumer choice behavior. This happens because a consumer hesitates to spend more for the good with the fear of going out of cash.

The above diagram shows the demand curve which is downward sloping. Clearly when the price of the commodity increases from price p3 to p2, then its quantity demand comes down from Q3 to Q2 and then to Q3 and vice versa.

Supply

What is Supply?

Supply refers to the amount of goods and services firms or producers are willing and able to sell in the market at a possible price.

Law of Supply

It states that when the price of a commodity rises, the supply for it also increases.
The higher the price for the good or service the more it will be supplied in the market. The reason behind it is that more and more suppliers will be interested in supplying those good or service whose prices are rising.

What is demand?

Demand is defined as want or willingness of consumers to buy goods and services. In economics willingness to buy goods and services should be accompanied by the ability to buy (purchasing power) and is referred to as effective demand.

Types of demand

Composite demand: It is when a good is demanded for two or more uses. For example oil may be used to run a car or as a fuel in a factory.

Joint demand: It is when two goods are bought together. Mouse is bought with a mouse pad.

Derived demand: It is when demand for one good occurs as a result of demand for another. Example, If more goods are made, more labour is needed. Hence demand for labour is derived demand.

Law of demand

It states that when price increases, the amount demanded will fall and when prices fall, the amount demanded will rise.
This phenomenon when plotted on a graph is known as Demand Curve.

Law of Demand

The law of demand states that other factors being constant (cetris peribus), price and quantity demand of any good and service are inversely related to each other.

Definition: The law of demand states that other factors being constant (cetris peribus), price and quantity demand of any good and service are inversely related to each other. When the price of a product increases, the demand for the same product will fall.

Description: Law of demand explains consumer choice behavior when the price changes. In the market, assuming other factors affecting demand being constant, when the price of a good rises, it leads to a fall in the demand of that good. This is the natural consumer choice behavior. This happens because a consumer hesitates to spend more for the good with the fear of going out of cash.

The above diagram shows the demand curve which is downward sloping. Clearly when the price of the commodity increases from price p3 to p2, then its quantity demand comes down from Q3 to Q2 and then to Q3 and vice versa.

Define price elasticity of demand and suggest why different goods have different price elasticity? [5marks]
                                Price elasticity of demand can be defined as a responsiveness of quantity demand due to change in price of the product. There are various reasons why different goods have different price elasticity of demand.
Firstly, some goods are necessities like gas, food, clothing etc where people do not have any choice for consumption. This means change in price will not have much effect on quantity demand. These goods are inelastic goods.
Secondly, some goods are luxuries such as cars where there is availability of many substitutes in the market. This means change in price will have a significant effect on quantity demand. These goods are elastic goods.

Price Elasticity of demand

The responsiveness of quantity demanded, or how much quantity demanded changes, given a change in the price of goods or service is known as the price elasticity of demand.

Price Elasticity of demand (PED)=	% change in quantity demanded
	% Change in price

Negative sign

The mathematical value which is derived from the calculation is negative. A negative value indicates an inverse relationship between price and the quantity demanded. However, the negative sign is ignored.

Range of PED

The value of PED might range from 0 to ?

Lets take a look at various types of PED.

Perfectly Inelastic demand

In this case the PED =0 That means, any change in price will not have any effect on the demand of the product. Or in other words, the percentage change in demand will be equal to zero. It is hypothetical situation and does not exist in real world.

Perfectly elastic demand In this case the PED =?

The demand changes infinitely at a particular price. Any change in price will lead to fall of demand to zero. It is hypothetical situation and does not exist in real world.

However Normal goods have value of PED between 0 and ?. These can be classified as Inelastic demand When a product has a PED less than 1 and greater than 0, it is said to be have an inelastic demand. The percentage change in demand is less than the percentage change in price of the product.

Demand for a product is said to be ELASTIC if the percentage change is demand is more than the percentage change in price.

The value of PED is more than 1.

When there is a smaller percentage change in quantity demanded as compared to the percentage change in its price, the product is said to price INELASTIC.

The value of PED is less than 1.

Unitary Elastic Demand

When the percentage change in demand is equal to the percentage change in price, the product is said to have Unitary Elastic demand. In short, PED=1

Types of Price Elasticity

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Taxation and distribution of income

Discuss how a government might use taxation to affect the distribution of income. [6]
           Redistribution of income is a very important aim of the government. They use taxation to reduce inequalities in the distribution of income between people. Firstly, the possible system is that government can use the progressive tax system where the higher income groups have to pay more percentage of their income as tax compared with the lower income groups. This method is very fair to distribute the income equally between all the people. Secondly indirect taxes are imposed for spending on goods and services. Some of the goods and services are very popular among the people especially rich people. So, taking higher tax from them could be a reasonable way to redistribute the income.

Firms growth

How do some firms become large? [4]

Some firms become large by various ways. One of the important methods is by merger or integration of two or more firms. This can be in the form of horizontal merger where two similar firms join together or lateral merger where two different firms merge. This can also be possible in different stages of production. Secondly Advertising is also one possible way to grow since it generates higher demand and sales which result a need of higher capacity. Moreover issuing shares also increases the company’s capital and size.