The Difference between Macro and Micro Economics and Price Elasticity of Demand - Essay Example

So all the choices a particular person makes come under microeconomics because he is just concerned with what he is producing rather than the total production of a particular good in an economy. Macroeconomic issues are related to the balance between aggregate supply and aggregate demand. If the aggregate demand gets much higher than the aggregate supply, inflation and a balance of payment deficit (exports become greater than imports) can take place. On the other hand, if the aggregate demand gets lower than the aggregate supply, recession, and unemployment may occur.

So it is crucial to maintain the balance between aggregate supply and aggregate demand and macroeconomics helps in doing so. . Task 2: The Price Elasticity of Demand (PED) measures how much the quantity demanded of a commodity responds to a change in the price of that commodity. Price Elasticity of Demand can be calculated by using the following formula: Price elasticity of demand = Percentage change in quantity demanded / Percentage change in price For example, if there is a 40% rise in oil price and the demand for oil decreases by 10% then Price Elasticity of Demand will be -10% / 40% = -0.25. The value of PED is always negative, because demand graphs are mostly downward slopping, meaning that price and demand always go opposite.

An increase in price will result in a decrease in demand and vice versa. Thus there will always be a negative figure which would make the sign negative. If the quantity demanded responds substantially to the changes in price, the demand for that good is said to be elastic. On the other hand, if the quantity demanded responds slightly to changes in prices, the demand for that good is said to be inelastic. PED helps us in determining whether a good has elastic or inelastic demand. Ignoring the negative sign, if PED is greater than 1 then the demand will be elastic and if PED is less than 1 then the demand will be inelastic.

Consider the example of oil. A rise in the price of oil may result in a slight decrease in the demand for oil. The vehicles will continue to use oil, so people would have to pay higher prices. A slight decrease in demand may occur because some people might shift to bicycling. In this case, the demand for oil is inelastic. Goods that are classified as necessities have inelastic demand.