Economics – Grade 9

Unit 1 - Foundation of Economics

Learning Objectives:
Students should be able to:
 Understand Scarcity
 Identify Wants and Needs: Differentiate between wants and needs and understand how
they contribute to the concept of scarcity.
 Explain Opportunity Cost: Define opportunity cost and provide examples of how
making choices involves giving up alternative options.
 Explore Resource Allocation: Understand how societies allocate limited resources
among competing uses and the impact of these decisions.
Learning Outcomes:
students should be able to:
 Define and Explain Scarcity: Define scarcity and explain why it necessitates making
choices.
 Differentiate Wants and Needs: Differentiate between wants (desires) and needs
(necessities) and explain how they contribute to the economic problem of scarcity.
 Identify Opportunity Cost: Recognize opportunity cost as the value of the next best
alternative forgone when a choice is made.
 Discuss Resource Allocation: Discuss how societies allocate resources, considering
factors such as efficiency, equity, and sustainability
 Critical Thinking: Engage in critical thinking by evaluating the impact of different
choices on individuals, society, and the environment, considering short-term and long-
term consequences.
 Effective Communication: Communicate economic concepts, trade-offs, and decision-
making processes clearly and effectively in both written and verbal forms.
Economics:
Economics is the social science that studies how individuals, businesses, governments, and
societies make choices about how to allocate limited resources to fulfil their unlimited wants
and needs. It involves the analysis of production, distribution, and consumption of goods and
services, as well as the factors that influence these processes. Economics explores various
aspects of human behaviour, including decision-making, trade-offs, and the interactions
between supply and demand, all of which shape the way resources are used and distributed
within an economy.
In economics, "needs" and "wants" are fundamental concepts that help explain consumer
behaviour and the allocation of resources in society. These terms refer to different levels of
human desires and requirements:
Needs: Needs are essential requirements for human survival and well-being. They are the basic
necessities that individuals must have to live a healthy and fulfilling life. These needs are often
categorized into different types, including:
Basic Physical Needs: These include necessities such as food, water, shelter, clothing, and
healthcare. Without these, an individual's survival and health would be at risk.
Safety and Security Needs: These encompass the need for personal safety, protection from
harm, and a stable environment. This includes things like physical safety, job security, and
access to social services.
Wants: Wants are desires that go beyond basic needs and are shaped by personal preferences,
cultural influences, and individual aspirations. They are the things people desire to enhance
their quality of life and achieve higher levels of satisfaction. Wants can vary greatly from
person to person and over time, influenced by factors such as income, societal trends, and
advertising.
Luxuries: Luxuries are goods or services that are not necessary for survival or well-being but
provide comfort, pleasure, or status. Examples include high-end cars, designer clothing, and
exotic vacations.
Desired Services and Experiences: People often desire experiences such as entertainment,
travel, and leisure activities that go beyond basic needs.
Technological and Innovation-Based Wants: As technology advances, new products and
services emerge that fulfil wants that didn't even exist before. Examples include smartphones,
streaming services, and smart home devices.
In economics, the differentiation between needs and wants is important because it helps
economists understand consumer behaviour, demand patterns, and the allocation of resources.
Consumers make choices based on their limited resources (such as money and time) to satisfy
their needs and wants. This leads to the concept of scarcity, where resources are insufficient to
satisfy all human wants and needs.
Scarcity in Economics:
Scarcity is a fundamental concept in economics that refers to the condition where resources
(such as time, money, labour, and natural resources) are limited and not enough to satisfy all
human wants and needs. In other words, there is a gap between the unlimited wants and needs
of people and the limited resources available to fulfil those wants and needs.
Key Points to Understand:
Unlimited Wants: People have various desires and needs that they want to fulfil, ranging from
basic necessities like food and shelter to more luxurious desires like vacations or the latest
gadgets.
Limited Resources: The resources available to us are limited. These resources include not
only physical things like money and materials but also intangible resources like time and
human effort.
Choice: Due to the scarcity of resources, individuals, businesses, and governments must make
choices about how to allocate these resources. When one choice is made, it often means giving
up something else. This is known as a trade-off. For example, if a person spends money on a
new smartphone, they might have less money to spend on other things like clothes or
entertainment.
Opportunity Cost: The value of the next best alternative that must be given up when a choice
is made is known as the opportunity cost. It represents what you could have gained if you chose
an alternative option instead.
Supply and Demand: Scarcity leads to the concepts of supply and demand. Supply refers to
the quantity of a good or service available, while demand refers to the quantity of that good or
service that people want to buy. Prices in a market are influenced by the balance between supply
and demand.
Why Scarcity Matters:
Understanding scarcity helps us grasp the basic economic problem of how to make the best use
of limited resources to satisfy unlimited wants. It also drives the need for efficient resource
allocation, responsible consumption, and thoughtful decision-making. Economists study
scarcity to develop strategies for making choices that maximize individual and societal well-
being given the constraints of limited resources.
Assessment questions:
1. Define scarcity and explain why it is a fundamental economic problem.
2. Provide an example of an opportunity cost that you might face in your daily life.
3. Imagine you have $20 to spend and you can either buy a new video game or go to a
movie with friends. Explain the trade-offs involved in making this decision.
Application:
4. Your community has limited water resources due to a drought. Explain the concept of
scarcity in this situation and discuss how the community might allocate the available
water resources among households, farms, and industries.
5. Imagine you are a government policymaker. Your country has limited funds and needs
to decide between investing in healthcare or education. Discuss the opportunity cost of
each choice and how you would approach this decision.
Critical Thinking:
6. How might advancements in technology impact the concept of scarcity? Provide
examples to support your answer.
7. Consider the statement: "Scarcity is a universal problem that cannot be solved." Discuss
whether you agree or disagree with this statement, providing reasons for your stance.
References:
  Text book: "Economics for the IB Diploma" by Ellie Tragakes
 Explored online resources like Khan Academy, Investopedia, and the IB's official
website.

Factors of Production
In economics, the factors of production are the resources required to produce goods and
services. These resources are classified into four main categories:
Land
Land refers to all natural resources used in production.
This includes not only the physical land itself but also everything that is found on or beneath
it, such as minerals, water, forests, and agricultural soil.
Land is considered a fixed factor because its quantity is generally fixed in the short run.
Labour
Labour represents the human effort, skills, and knowledge used in the production process.
It includes both physical and mental work contributed by individuals.
The quantity and quality of labour can vary and can be influenced by factors like education,
training, and health.
Capital
Capital refers to the man-made goods used to produce other goods and services.
It includes machinery, equipment, tools, factories, and even money used for investment.
Capital is a produced factor, meaning it is created by human effort over time.
Entrepreneurship
Entrepreneurship involves the innovation, risk-taking, and management skills required to
organize the other factors of production (land, labor, and capital) to create goods and services.
Entrepreneurs are individuals who identify opportunities, make business decisions, and take on
the financial risks of their ventures.
Entrepreneurship is essential for economic growth and development.
Factors as Inputs in Production
These factors of production are used as inputs in the production process.
Combining these factors efficiently is essential for producing goods and services.
The level of technology and the organization of these factors can significantly impact
production efficiency and output.

Scarcity and Choices

Scarcity is a fundamental economic problem that arises due to limited resources (factors of
production) and unlimited wants.
Because resources are limited, societies and individuals must make choices about how to
allocate these resources efficiently.
Economic systems, like capitalism, socialism, or mixed economies, differ in how they make
these allocation decisions.
Conclusion
Understanding the factors of production is crucial for analyzing how goods and services are
produced and distributed in an economy. It also helps in studying how resource allocation
affects economic growth, efficiency, and societal well-being. In real-world economics, these
factors are often interrelated and influence each other in complex ways, making their study a
central part of economic analysis.
Production Possibility Curve (PPC)
A Production Possibility Curve (PPC), also known as a Production Possibility Frontier (PPF),
is a graphical representation used in economics to illustrate the trade-offs an economy faces
when allocating its limited resources to produce different combinations of two goods or
services. This concept is essential for understanding opportunity cost, scarcity, and the efficient
allocation of resources in an economy.
Key Points to Understand:
Scarcity: The fundamental problem in economics is scarcity, which means that resources are
limited, but human wants are unlimited. Therefore, societies must make choices about what to
produce and how to allocate resources efficiently.
Two Goods: In a simplified model, we consider the production of only two goods or services.
For example, you can think of two goods like "guns" and "butter," or "cars" and "computers."
The Curve: The PPC is typically represented as a curved line on a graph, with one good on
the x-axis and the other on the y-axis. Each point on the curve represents a specific combination
of the two goods that an economy can produce efficiently, given its resources and technology.
Efficiency: Points on the curve represent production levels at maximum efficiency. This means
that all available resources are fully utilized, and the economy is producing as much as it can
without waste.
Inside the Curve: If a point falls inside the curve (below it), it indicates that the economy is
not using its resources efficiently. It's producing fewer goods than it could with the same
resources.
Outside the Curve: Points outside the curve are currently unattainable with the given
resources and technology. To reach these points, an economy would need to increase its
resources or improve its technology.
Opportunity Cost: The slope of the PPC represents the opportunity cost of producing one
good over the other. Opportunity cost is what you give up to produce something else. The
steeper the curve, the higher the opportunity cost.
Shifts in the PPC: The PPC can shift outward (to the right) if an economy experiences
economic growth. This can result from factors like increased resources, improved technology,
or a more skilled workforce. Conversely, the PPC can shift inward (to the left) due to factors
like natural disasters or resource depletion.
Choice: Societies and economies must decide what combination of goods to produce along the
PPC based on their preferences and needs. This choice is influenced by factors such as
consumer demand, government policies, and cultural values.
Conclusion:
The Production Possibility Curve is a fundamental tool in economics that helps us understand
the concept of scarcity, opportunity cost, and resource allocation. It demonstrates that there are
limits to what an economy can produce, and choices must be made about what to produce to
maximize societal well-being. It's a useful model for analyzing economic trade-offs and
decision-making.
Assessment questions:
Factors of Production:
Short Answer: Define and explain the roles of each of the four main factors of production
(land, labor, capital, and entrepreneurship) in the production of goods and services.
Essay: Discuss how advancements in technology can affect the efficiency of labor as a factor
of production. Provide real-world examples to support your argument.

Critical Thinking: Imagine you are a policymaker in a country with high unemployment.
What policies or strategies could you implement to better utilize the labour force as a factor of
production?
Essay: Explain the concept of a "fixed" factor of production and provide an example. How
does the fixed nature of this factor impact a country's production possibilities?
Production Possibility Curve (PPC):
Short Answer: What does a Production Possibility Curve (PPC) illustrate, and why is it
considered a fundamental concept in economics?
Critical Thinking: If an economy is operating beyond its PPC, what does this indicate, and
what might be the implications for the economy?
Essay: Describe the concept of opportunity cost as it relates to the PPC. Provide an example
of how opportunity cost can help policymakers make decisions about resource allocation.
Short Answer: If a country's PPC is a straight line, what does this imply about the opportunity
cost of producing the two goods represented on the curve?
References:
 Text book: "Economics for the IB Diploma" by Ellie Tragakes
 Explored online resources like Khan Academy, Investopedia, and the IB's official
website.
Positive and Normative Economics :
Positive Economics:
Definition: Positive economics is a branch of economics that deals with objective analysis and
the study of economic facts. It focuses on what is and can be tested through empirical evidence.
Objective Analysis: Positive economics seeks to answer questions about economic phenomena
in an objective and scientific manner. It aims to describe and explain economic events without
making value judgments.
Facts and Data: Positive economics relies on empirical data, statistics, and observable evidence
to make conclusions. It avoids opinions, beliefs, or personal values.
Predictive Nature: This branch of economics is often used to make predictions about future
economic events based on past data and trends. For example, economists might use positive
economics to predict inflation rates based on historical data.
No Policy Recommendations: Positive economics does not make policy recommendations.
Instead, it provides policymakers with the information they need to make informed decisions.

Normative Economics:
Definition: Normative economics is a branch of economics that deals with subjective analysis
and the study of economic policies and outcomes based on value judgments and opinions.
Subjective Analysis: Normative economics involves making value judgments and expressing
opinions about what should be, rather than what is. It is inherently subjective and often
influenced by personal beliefs and values.
Policy Recommendations: Normative economics is concerned with making policy
recommendations and advocating for specific economic policies. It goes beyond describing
economic facts and aims to prescribe what ought to be done.
Ethical Considerations: This branch of economics often considers ethical and moral principles
when making recommendations. For example, it may argue that a certain policy is desirable
because it promotes social equity or environmental sustainability.
Debate and Controversy: Normative economics can be highly contentious, as different
individuals and groups may have conflicting values and opinions about what is desirable in the
economy. It often involves public policy debates and discussions.
Subject to Change: Normative economics can change over time as societal values and norms
evolve. What is considered a desirable economic policy today may not be the same in the future.
Key Differences:
Objective vs. Subjective: Positive economics deals with objective analysis based on facts and
data, while normative economics involves subjective analysis based on value judgments and
opinions.
Descriptive vs. Prescriptive: Positive economics describes economic phenomena, while
normative economics prescribes what should be done to achieve certain economic goals.
Predictive vs. Advocacy: Positive economics predicts future economic events, while normative
economics advocates for specific policies or outcomes.
Empirical vs. Ethical: Positive economics relies on empirical evidence, while normative
economics considers ethical and moral principles.
Policy Neutrality vs. Policy Advocacy: Positive economics is generally policy-neutral, whereas
normative economics is explicitly policy-oriented.
Remember that both positive and normative economics play important roles in the field of
economics, and a well-rounded understanding of both is essential for making informed
economic decisions and policies.

Absolute advantage and comparative advantage:

Absolute advantage and comparative advantage are two concepts in economics they both deal
with a country's or an individual's ability to produce goods or services more efficiently than
others, but they approach the idea from slightly different angles.
Absolute Advantage:
Absolute advantage refers to a situation in which one country or individual can produce a
particular good or service using fewer resources (such as labor, capital, or time) than another
country or individual. In other words, it's the ability to produce more of a good or service with
the same amount of resources or the same amount of a good or service with fewer resources.
Example of Absolute Advantage:
Let's consider two countries, Country A and Country B, and two products, cars and computers.
Assume the following hypothetical data:
Country A can produce 1 car in 10 hours or 1 computer in 5 hours.
Country B can produce 1 car in 8 hours or 1 computer in 4 hours.
In this scenario, Country B has an absolute advantage in the production of both cars and
computers because it can produce both goods using fewer hours of labor. However, absolute
advantage doesn't necessarily mean that Country B should produce both goods; it merely shows
that it's more efficient in production.
Comparative Advantage:
Comparative advantage, on the other hand, focuses on the opportunity cost of producing one
good or service compared to another. It suggests that even if one country or individual has an
absolute advantage in producing everything, there are still gains from trade if each specializes
in producing the goods or services for which they have the lowest opportunity cost.
Example of Comparative Advantage:
Using the same countries and products, let's analyze comparative advantage. The opportunity
cost of producing 1 car in Country A is 10 hours of computer production (since 1 car takes 10
hours, and in that time, they could have produced 2 computers). In Country B, the opportunity
cost of producing 1 car is 8 hours of computer production.
Here's a breakdown:
Country A: 1 car = 10 hours of computer production
Country B: 1 car = 8 hours of computer production
In this example, Country B has a lower opportunity cost in car production because it sacrifices
fewer computer hours to produce 1 car. Country A, on the other hand, has a comparative
advantage in computer production because it has a lower opportunity cost (1 car = 10 hours)
compared to Country B (1 car = 8 hours).

So, according to comparative advantage, it makes sense for Country A to specialize in computer
production, and Country B to specialize in car production. By doing so and engaging in trade,
both countries can benefit from lower opportunity costs and access a wider variety of goods at
a lower cost.
In summary, absolute advantage focuses on who can produce more efficiently, while
comparative advantage emphasizes the opportunity cost of production. These concepts
underpin the theory of international trade and demonstrate the benefits of specialization and
trade for all parties involved.
Cost Benefit Analysis:
Cost-Benefit Analysis (CBA) is a systematic and quantitative approach used to assess the
feasibility of a project, policy, or decision by comparing the costs and benefits associated with
it. The goal of CBA is to determine whether the benefits of a particular course of action
outweigh the costs and to provide a framework for making informed decisions. Here are the
key steps and components of a cost-benefit analysis:
Steps in Cost-Benefit Analysis:
Define the Problem or Decision: Clearly identify the problem or decision that needs to be
analyzed. Determine the scope and objectives of the analysis.
Identify Alternatives: Identify the various options or alternatives available for addressing the
problem or decision. This can include doing nothing (the "status quo" option) or different
courses of action.
List Costs and Benefits: For each alternative, make a comprehensive list of all the relevant
costs and benefits associated with it. Costs can be both direct and indirect, while benefits can
be tangible and intangible.
Assign Monetary Values: Assign monetary values to each cost and benefit. This step can be
challenging for intangible factors, but it's essential for making a quantitative comparison.
Techniques like market prices, willingness-to-pay surveys, and expert judgment can be used.
Make a Decision: Based on the analysis and comparison of alternatives, make an informed
decision about which course of action to pursue
Advantages of Cost-Benefit Analysis:
 Provides a systematic and quantitative framework for decision-making.
 Allows for a comprehensive assessment of all relevant costs and benefits.
 Helps prioritize projects or policies based on economic efficiency.
 Facilitates transparency and accountability in decision-making.
 Assists in allocating resources efficiently.

Disadvantages of Cost-Benefit Analysis:

 Valuing intangible benefits or costs can be challenging.
 Relies on accurate data and assumptions, which may not always be available.
 Subject to manipulation or bias in assigning values to costs and benefits.
 May not account for ethical, social, or distributional considerations.
 Overemphasis on monetary values may neglect important qualitative factors.
References:
 Text book: "Economics for the IB Diploma" by Ellie Tragakes
 Explored online resources like Khan Academy, Investopedia, and the IB's official
website.
 UNIT : 2 Theory of DEMAND

Introduction to demand
In order for a market to function, there must be demand for a product or a
resource. Butwhat, exactly IS demand?

Think of your favorite candy, and ask yourself, how much of it would you be
willing to buyin one week if it cost the following: $5, $4, $3, $2, $1.

The table below shows how many Butterfingers™ Carl would buy in a week at
each of theprices indicated.

Quantity
Price
demande
d

$5 1

$4 2

$3 3
 $2 4

$1 5

Notice that as the price of Butterfingers decreases, Carl demands a greater quantity.
This is Carl’s individual demand for Butterfingers.
Demand is defined as the quantity of a particular good that consumers are willing
and ableto buy at a range of prices at a particular period of time.

The table above represents only Carl’s demand. But a market is made up of many
consumers and producers. Market demand is the sum of the individual demands of
all the consumers in the market.

For example, assume that Carl is one of 5 individual consumers who demand
Butterfingersin a small town (a really small town!)

The table below shows the weekly individual demands of the five consumers for
Butterfingers at a range of prices.

Carl’ Sarah’ Henry Lara’ Jade’ Total

Price s s ’s s s Deman
quanti quanti quanti quanti quanti d
ty ty ty ty ty

$5 1 0 3 0 1 5

$4 2 1 3 1 2 9

$3 3 1 4 3 3 14

$2 4 1 6 5 6 21

$1 5 2 8 7 7 29

This is the market demand for candy in a week. The market demand is simply
the sum ofall the individual consumers’ demands in a market
The demand Curve
The table above represents only Carl’s demand. But a market is made up of many
consumers and producers. Market demand is the sum of the individual demands of
all the consumers in the market.

For example, assume that Carl is one of 5 individual consumers who demand
Butterfingersin a small town (a really small town!)

The table below shows the weekly individual demands of the five consumers for
Butterfingers at a range of prices.

Carl’ Sarah’ Henry Lara’ Jade’ Total

Price s s ’s s s Deman
quanti quanti quanti quanti quanti d
ty ty ty ty ty

$5 1 0 3 0 1 5

$4 2 1 3 1 2 9

$3 3 1 4 3 3 14

$2 4 1 6 5 6 21

$1 5 2 8 7 7 29

This is the market demand for candy in a week. The market demand is simply
the sum ofall the individual consumers’ demands in a market
The demand curve plots the quantity demanded along the horizontal axis against
the price on the vertical axis. The red dots represent a price/quantity
combination from the demand schedule. By connecting the dots we get a
demand curve.

Some observations about the demand curve:

● At higher prices, a smaller quantity is demanded
● At lower prices, a larger quantity is demanded
● The curve is downward sloping
● There is an inverse relationship between price and quantity demanded

The law of demand

The downward sloping demand curve illustrates the law of demand, which
states, there is an inverse relationship between a good’s price and the quantity
demanded by consumers

While it may seem obvious that people want to buy more stuff at lower prices and
less stuff at higher prices, there are a few explanations economists have
developed for the law of demand which are called as determinants of demand.

Determinants of demand:
The determinants of demand, also known as the factors that influence demand,
are the various factors that can affect the quantity of a good or service that
 consumers are willing and able to buy at different prices and in different
circumstances. These determinants help economists and businesses understand
how changes in these factors can impact the overall demand for a product. The
key determinants of demand include:
Price of the Product: The most basic determinant of demand is the price of the
product itself. As the price of a product rises, all else being equal, the quantity
demanded tends to decrease, and vice versa. This relationship is known as the
law of demand.
Income of Consumers: Consumer income has a significant impact on demand.
For normal goods, as consumer incomes increase, demand for these goods
tends to rise. For inferior goods, as incomes increase, demand may actually
decrease. Inferior goods are those for which demand increases when consumer
incomes fall.
Tastes and Preferences: Consumer preferences and tastes can change over
time and influence demand. A product that becomes more fashionable or
desirable is likely to see an increase in demand, while a product that falls out
of favor may see a decrease in demand.
Prices of Related Goods:
Substitutes: The demand for one product may be influenced by the price of a
substitute product. For example, if the price of coffee rises, the demand for tea
(a substitute) may increase.
Complements: Some goods are consumed together, such as hot dogs and hot
dog buns. If the price of one complement rises, it can lead to a decrease in
demand for the other complement.
Number of Consumers: The total demand for a product is influenced by the
number of consumers in the market. An increase in the number of potential
buyers can lead to an increase in demand, while a decrease can lead to a
decrease in demand.
Consumer Expectations: Consumers' expectations about future prices,
income, or product availability can influence their current purchasing
decisions. For example, if consumers expect the price of a product to rise in the
future, they may buy more of it now.

Assessment questions:
1. Explain the law of demand and provide an example.
2. List and briefly describe three determinants of demand.
3. How can changes in consumer expectations affect the demand for a product?
4. Differentiate between substitutes and complements in the context of demand.
5. Imagine you are a business owner who produces a popular snack. Explain how an increase
in consumer incomes in your area would likely impact the demand for your snack product.
References:
 Text book: "Economics for the IB Diploma" by Ellie Tragakes
 Explored online resources like Khan Academy, Investopedia, and the IB's official
website.

Elasticity of Demand:
Elasticity of demand, often simply referred to as "elasticity," is a measure of how sensitive the
quantity demanded of a good or service is to a change in its price. In other words, it quantifies
the responsiveness of consumers' demand for a product when there is a change in its price.
Elasticity of demand is a fundamental concept in economics and is crucial for businesses,
policymakers, and economists to understand market dynamics.
Types of Elasticity of Demand:
1. Price Elasticity
2. Income Elasticity
3. Cross Elasticity
Price Elasticity of Demand: (PED)
Price Elasticity of Demand (PED) measures how sensitive the quantity demanded of a good is
to a change in its price. It indicates the responsiveness of consumers to a change in price.

PED can be calculated with the formula =

Percentage change in the quantity demanded of the product
Percentage change in the Price of the product
PED =( Q2 - Q1/Q1 ) / (P2 - P1/ P1)

Problem:
Suppose the quantity demanded of a product decreases from 120 units to 80 units when the
price increases from $10 to $15 per unit. Calculate the price elasticity of demand.

Solution:
First, we need to calculate the percentage change in quantity demanded and the percentage
change in price using the following formulas:

PED can be calculated with the formula =

Percentage change in the quantity demanded of the product
 Percentage change in the Price of the product
PED =( Q2 - Q1/Q1 ) / (P2 - P1/ P1)

Given, Q1 = 120 units Q2 = 80 units

P1= $10 P2= $15
Applying the values in the formula : PED = (80-120/120) / (15-10)/10
= (-40/120 ) / (5/10)
= (- 1/3) / (1/2)
= - 0.666
The price elasticity of demand for this product is approximately - 0.67
Interpretation: Since the price elasticity of demand is negative, indicating the inverse
relationship between price and quantity demanded, PED < 1, the demand for this product is
inelastic This means that the percentage decrease in quantity demanded is proportionally
smaller than the percentage increase in price.

Types of Price Elasticity of Demand :

1. Relative elastic
2. Relative inelastic
3. Unitary
4. Perfect elastic
5. Perfect inelastic
Relative Elastic Demand (PED > 1):
When the percentage change in quantity demanded is greater than the percentage change in
price (i.e., |PED| > 1), the demand is considered elastic. In elastic demand, consumers are highly
responsive to price changes. If the price increases, the quantity demanded significantly
decreases, leading to a decrease in total revenue.
Goods and services with relatively elastic demand are those for which consumers are quite
responsive to changes in price. Here are a few examples of goods with relatively elastic
demand:
Electronics: Items like smartphones, laptops, and tablets often have elastic demand. When the
price of a particular smartphone model increases significantly, consumers may opt for a
different brand or model that offers similar features at a lower price.
Airline Tickets: The demand for airline tickets can be elastic, especially for leisure travelers. If
the price of airfare rises substantially, travelers might choose to travel by alternative means,
delay their trips, or choose different destinations.
Fast Food: Fast food items generally have elastic demand. If the price of a particular fast food
item or combo meal increases, consumers might opt for a similar meal at a different fast food
chain where prices are lower.
Clothing: Clothing items often have elastic demand, especially in competitive markets. If the
price of a specific clothing brand increases significantly, consumers can easily switch to other
brands that offer similar styles and quality at lower prices.
Soft Drinks: Soft drinks like cola or soda beverages typically have elastic demand. If the price
of a specific brand of cola rises significantly, consumers might switch to other brands or opt
for alternative beverages like water or juice.
Holidays and Tourism: The demand for holiday packages and tourism-related services can be
elastic. If the cost of a particular holiday package increases substantially, consumers may
choose to travel to a different destination where prices are more affordable or delay their
vacation plans.
In these examples, consumers have various alternatives or substitutes, and they are willing to
adjust their purchasing decisions based on price changes, making the demand for these goods
relatively elastic.
Relative Inelastic Demand (0 < PED < 1):
When the percentage change in quantity demanded is less than the percentage change in price
(i.e., 0 < |PED| < 1), the demand is considered inelastic. In inelastic demand, consumers are not
very responsive to price changes. If the price increases, the quantity demanded decreases, but
the decrease in quantity demanded is proportionally smaller than the increase in price, leading
to an increase in total revenue.

Goods and services with relatively inelastic demand are those for which consumers are not
very responsive to changes in price. Here are a few examples of goods with relatively inelastic
demand:
Insulin: For people with diabetes, insulin is a life-saving medication. Even if the price of insulin
increases significantly, consumers are unlikely to reduce their quantity demanded significantly
because they depend on it for their health and well-being.
Gasoline: While the price of gasoline can fluctuate, the demand for it is relatively inelastic,
especially in the short term. People still need to drive to work, school, and other essential
places, so they continue to buy gasoline even if prices rise.
Prescription Medications: Many prescription medications have inelastic demand, especially for
chronic conditions. Patients rely on these medications to manage their health, and they are often
not easily substitutable. Even if prices increase, patients may continue purchasing their
prescribed medications.
Tobacco Products: Despite tax increases and public awareness campaigns about the dangers of
smoking, the demand for cigarettes and other tobacco products remains relatively inelastic.
Many smokers find it difficult to quit, so they continue to buy cigarettes even if the price goes
up.
Basic Utilities (Electricity, Water, Gas): The demand for essential utilities like electricity, water,
and gas is inelastic because these services are necessary for daily life. People continue to use
these utilities even if the prices increase because they need them for basic functions at home
and work.
Salt: Salt is a fundamental ingredient in cooking, and its demand is relatively inelastic. Even if
the price of salt increases, consumers are unlikely to reduce their quantity demanded
significantly because it is a basic necessity in many recipes.
In these examples, consumers have few substitutes or alternatives, and the goods or services
are considered essential or highly important to consumers' well-being, leading to relatively
inelastic demand.
Unit Elastic Demand (PED = 1):
When the percentage change in quantity demanded is equal to the percentage change in price
(i.e., |PED| = 1), the demand is considered unit elastic. In unit elastic demand, any change in
price is exactly offset by a proportionate change in quantity demanded, resulting in constant
total revenue.

Goods and services with unit elastic demand are those for which the percentage change in
quantity demanded is exactly equal to the percentage change in price, resulting in a constant
total expenditure. Here are a few examples of goods with unit elastic demand:
Generic Products: Generic products, which are essentially identical to brand-name products
but sold at a lower price, often have unit elastic demand. If the price of the generic product
decreases, consumers might switch from the more expensive brand-name product to the generic
version, leading to a proportional increase in quantity demanded.
Mid-Range Clothing Brands: Clothing brands that fall in the mid-price range often have unit
elastic demand. If the price of a specific mid-range clothing item decreases, consumers might
buy more of that particular item without significantly changing their overall clothing budget.
Certain Food Items: Some common food items, like certain types of breakfast cereals or canned
goods, may have unit elastic demand. If the price of a specific cereal brand decreases,
consumers might buy more of that brand without significantly altering their total expenditure
on breakfast cereals.
Basic Electronic Devices: Certain basic electronic devices, such as DVD players or basic
smartphones, might exhibit unit elastic demand. If the price of a basic smartphone decreases,
consumers might buy more of that smartphone model without drastically changing their overall
spending on electronic devices.
Public Transportation: In some cases, public transportation fares can have unit elastic demand.
If the price of public transportation decreases, more people might choose to use public transit,
resulting in a proportional increase in ridership without a significant change in total expenditure
on transportation.
In these examples, the responsiveness of consumers to price changes results in a proportional
change in quantity demanded, leading to unit elastic demand. The concept of unit elasticity is
essential for businesses and policymakers to understand, as it helps in predicting changes in
total revenue and consumer behavior when prices are altered.
Perfectly Elastic Demand (PED = ∞):
Perfectly elastic demand occurs when consumers are willing to buy any quantity of a good at
a specific price but none at any higher price. The demand curve is a horizontal line, indicating
that consumers will not buy the good if its price increases even slightly.

Perfectly elastic demand, also known as infinitely elastic demand, occurs when consumers are
willing to buy any quantity of a good at a specific price, but not at any higher price. In other
words, the price elasticity of demand is equal to infinity. This situation rarely occurs in the real
world, but it can be used in theoretical economic models. Here's an example to illustrate perfect
elastic demand:
Example: Agricultural Commodities in Perfectly Competitive Markets
Imagine a perfectly competitive market for a basic agricultural commodity, such as wheat, in
which numerous farmers produce identical wheat. In this scenario:
Identical Products: All farmers produce identical wheat, so consumers cannot differentiate
between the wheat produced by one farmer or another.
Homogeneous Market: The market is perfectly competitive, meaning there are many sellers
and buyers, and no individual seller can influence the market price. Farmers are price takers.
Infinite Substitutability: Consumers are willing to buy any quantity of wheat at a specific price.
If any farmer tries to sell wheat at a higher price than the market price, consumers will
immediately switch to buying from other farmers still selling at the market price.
In this perfectly competitive market, the demand for wheat from an individual farmer is
perfectly elastic. If the farmer tries to sell the wheat at a price even slightly above the market
price, consumers will buy from other farmers, and the farmer won't sell any quantity. However,
at the market price, the farmer can sell any quantity of wheat they want because consumers
have an infinite number of sellers to choose from, all offering the same product at the same
price.
It's important to note that perfect elasticity of demand is a theoretical concept and does not
accurately represent real-world markets, as markets are rarely perfectly competitive, and
products usually have some degree of differentiation.
Perfectly Inelastic Demand (PED = 0):
Perfectly inelastic demand occurs when consumers are willing to buy a specific quantity of a
good at any price. The demand curve is a vertical line, indicating that the quantity demanded
remains constant regardless of changes in price.

Perfectly inelastic demand occurs when the quantity demanded remains constant regardless of
any change in price. In other words, consumers will buy the same quantity of a good or service
no matter what the price is. Perfectly inelastic demand is a theoretical concept and is very rare
in real-world markets. However, here are a few hypothetical examples to illustrate the concept:
Life-Saving Medications: For individuals who rely on a life-saving medication with no
alternative, the demand can be perfectly inelastic. Regardless of the price, these individuals
will continue to buy the medication to sustain their lives.
Emergency Medical Services: In situations where a person's life is at stake, the demand for
emergency medical services can be perfectly inelastic. People will pay any price to receive
urgent medical attention or life-saving procedures, making the demand for these services
completely insensitive to price changes.
Critical Organ Transplants: For patients in need of a critical organ transplant, the demand for
compatible organs can be perfectly inelastic. Patients who need an organ to survive will
undergo the procedure regardless of the cost.
Specific Antique or Unique Artwork: If a collector is determined to own a specific antique or
unique artwork, the demand for that particular item could be perfectly inelastic. Even if the
price is exorbitantly high, the collector might be willing to pay it to acquire the specific piece
they desire.
Niche Monopoly Products: In certain cases where a product has a monopoly in the market due
to unique features or patents, and there are no substitutes, the demand could be perfectly
inelastic. Consumers might have no choice but to buy the product at any price set by the
monopolist.

It's crucial to emphasize that these examples are highly specific and rare. In most real-world
situations, demand is not perfectly inelastic; it typically varies with price changes to some
extent. Perfectly inelastic demand is more of a theoretical concept used in economic models to
understand extreme cases rather than a common occurrence in practical markets.

Assessment questions :
1. Explain the concept of price elasticity of demand. How is it calculated?
2. If the price elasticity of demand for a luxury car is -2.5, how would a 10% increase in the
car's price affect the quantity demanded? Show the calculations.
3. Discuss the importance of price elasticity of demand for businesses. Provide real-world
examples to illustrate your points.
4. Why is the demand for essential goods like salt or water inelastic? Provide an example of an
elastic good.