Question 1 (a) Explain what the term 'price elasticity of demand' means, using appropriate examples. The price elasticity of demand analyzes the change in quantity demanded as the price changes. Elasticity is the responsiveness of how a simple change in one variable can intensify another change, especially the change in supply and demand. The formula for calculating price elastic demand is Price elasticity of demand = % ∆ in quantity demand / % ∆ in price. As for the price elasticity question, an example I can give is to assume that electricity prices increased by 50% and electricity purchases decreased by 25%. Using the formula above we can calculate that the price elasticity of electricity is Price elasticity = ( -25%) / (50%) = - 0.50. So for every percentage of electricity increase the quantity purchased decreases by half a percentage. Price elasticity is usually negative, as indicated in the example, as electricity prices rise, electricity demand will decrease. It also means that it cooperates with the law of demand when the price increases, the quantity of demand decreases. Understanding price elasticity is very important to know how the relationship between the price and demand of the product exists and how it can determine the demand of the product. If the quantity demanded changes a lot while the price changes slightly, the products are elastic, these are mainly products that have alternatives and products that can change consumers' minds if the price changes even by 1 cent. For example, if the price of acetaminophen A increases, the quantity demanded will decrease as consumers switch to the cheaper acetaminophen B. With no change in price and no change in demand, this product is inelastic. For example, the price of oil is... middle of paper... a reason for rising prices as many companies have large amounts of loans. Finally, exchange rates can affect the company, especially if they import raw materials. For example, the demand for petrol is high as we need it to live but even with prices rising by 40% 50% of people still buy petrol as it is an essential need in life but when there is a shortage of supply this pushes prices down. thus increasing costs pushes inflation. In the new equilibrium there is a shortage of supply which pushes prices up which represents cost-push inflation. Question 5 (a) Give an example of how a government might use fiscal policy to achieve an increase in employment. Use appropriate diagrams. (b) Provide an example of how a central bank might use monetary policy to achieve economic growth. Use appropriate schemes.