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Theme 1 economics > 1.2 > Flashcards

1.2 Flashcards

1
Q

What are the assumptions of rational economic decision making?

A
  • consumers aim to maximise utility
  • firms aim to maximise profits.
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2
Q

What is a consumer’s utility?

A

the total satisfaction received from consuming a good or service.

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3
Q

What is demand?

A

the q of a good or service that consumers are able and willing to buy at a given price during a given time.

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4
Q

What causes movements along the demand curve?

A
  • lower the price, more affordable the demand and so demand increases.
    Expansion of demand (increase in quantity)
    Contraction (decrease in demand)

ONLY price causes movement along

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5
Q

What factors shift the d curve?

A

P- population
I- income
R- related goods
A- advertising
T- tastes and fashions
E- expectations
S- seasons

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6
Q

What are the 3 types of demand?

A

Derived demand= demand for one good is linked with demand for another good.

composite demand= when a good demanded has more than one use. Example= milk.
- an increase in demand for cheese, means less butter is supplied.

Joint demand= when goods are bought together

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7
Q

Why is the demand curve downwards sloping?

A

the law of diminishing marginal utility.
As a extra unit of good is consumed (marginal utility), the benefit derived from consuming the good, falls. Therefore, consumers are willing to pay less for the good.

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8
Q

What is PED?

A

responsiveness of a change in demand to a change in price.

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9
Q

How do you calculate PED?

A

% CHANGE IN QD/ % CHANGE IN PRICE

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10
Q

What is a price elastic goods value?

A
  • very responsive to a change in price.
  • PED >1
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11
Q

What is a price inelastics goods value?

A

demand is relatively unresponsive to a change in price.
PED<1

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12
Q

What is a unitary elastic good?

A

a change in demand is equal to a change in price.
PED=1
a 1% decrease in price, leads to a 1% increase in QD.

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13
Q

Value for perfectly inelastic good?

A

0

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14
Q

Value for a perfectly elastic good?

A

infinity.

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15
Q

What are the factors that influence PED?

A
  • necessity - inelastic
  • substitutes- elastic if more substitutes available
  • addictiveness- inelastic
  • proportion of income spent on good- only inreases from £1 to £1.50= inelastic.
  • peak or off peak demand- peak times= more inelastic
  • durability of the good= a good which lasts a long time, will have elastic demand, consumers wait to buy another.
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16
Q

How does the burden of the indirect tax depend on the elasticity of the good?

A
  • taxes shift supply, not demand.
  • if a firm sells a good with inelastic demand, likely to put most of tax burden on the consumer, because a p increase won’t cause a huge change in demand.
  • most effective for raising gov revenue.
  • if firm sells good with elastic demand, most of tax burden will go to the producer.
  • good for reducing the demand of a particular good.
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17
Q

How does the elasticity of the good affect subsidies?

A
  • increases supply.
  • opposite effect of a tax.
  • the benefit of a subsidy can go to both the producer (increased revenue) or to the producer ( lower prices).
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18
Q

What is the relationship between ped and total revenue?

A

TR= P X Q
If a good is inelastic demand, firm can raise its price and increase total revenue.

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19
Q

What is income elasticity of demand YED?

A

responsiveness of a change in demand due to a change in income

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20
Q

formula for YED?

A

YED= % CHANGE IN QD/ % CHANGE IN INCOME

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21
Q

What is an inferior good?

A

a fall in demand as income increases.
For example, as income increases consumers switch to branded goods

YED<0

22
Q

What is a normal good?

A

Demand increases, as income increases
YED>0

23
Q

What is a luxury good?

A

an increase in income, causes an even bigger increase in demand.
For example, a holiday is a luxury good.
YED>1

24
Q

What happens to luxury goods when there is economic growth?

A

They increase as incomes are rising.
Fewer inferior goods.

25
Q

What is cross elasticity of demand? XED

A

the change in demand of one good X, to a change in price of another good Y.

26
Q

What is the formula for XED?

A

% CHANGE IN QD OF X / % CHANGE OF PRICE OF Y

27
Q

XED of a complementary good?

A
  • negative XED
  • if one good becomes more expensive, the QD for both goods will fall.
28
Q

XED of a subsitute good?

A

substitutes can replace another good so XED is positive.
- demand curve is upward sloping

29
Q

XED of unrelated goods?

A

=0

30
Q

Why are firms interested in XED?

A

allows them to see how many competitors they have.

31
Q

What is supply?

A

the quantity of a good or service that a producer is able and willing to supply at a given price at a given time.

32
Q

Why is the supply curve upward sloping?

A
  • if price increases, it is more profitable for firms to supply the good, so supply increases.
33
Q

What factors cause a shift in supply?

A

PINTSWC
productivity- outward shift
indirect taxes- inward shift
number of firms- more, outward shift
technology= outward shift
subsidies= outward shift
weather= favourable conditions increase supply
costs of production= if they fall, firms can afford to supply more.

34
Q

What is joint supply?

A

increasing the supply of one good causes an increase or decrease in supply of another good.

35
Q

Formula of price elasticity of supply?

A

% change in qs/ % change in p

36
Q

Value for elastic supply?

A

PES>1

37
Q

Value for inelastic supply?

A

PES < 1

38
Q

perfectly inelastic supply?

A

PES=0

39
Q

Perflectly elastic supply?

A

PES= infiinity

40
Q

What factors influence PES?

A
  1. Time scale- in SR, supply is more inelastic because producers cannot quickly increase supply. In the LR= more elastic.
  2. spare capacity- if there are spare resources supply can be increased quickly.
  3. levels of stocks- if goods cannot be stored for long, such as apples, supply is more inelastic.
  4. how substitutable factors are= if capital and labour are mobile, supply is more elastic because resources can be allocated where extra supply is needed.
  5. barriers to entry to the market= high barriers means inelastic, difficult for new firms to enter.
41
Q

1.2.6

A
42
Q

What are the 3 functions of the price mechanism to allocate resources?

A
  • rationing
  • incentive
  • signalling
43
Q

How is rationing used?

A

When there is scare resources, price increases due to excess demand.
- the increase in price discourages demand and rations the resources.

44
Q

How is incentive used?

A

this encourages a change in behaviour of a consumer or producer.
for example, a high price would encourage firms to supply more.

45
Q

How is signalling used?

A

the price acts as a signal to consumers and new firms entering the market.
A high price signals to firms to enter the market because it is profitable.

46
Q

What is consumer surplus?

A

difference between the price the consumer is willing to pay and the price they actually pay.

(top triangle)

47
Q

How can consumer surplus be increased?

A

increase in demand

48
Q

What is producer surplus?

A

difference between the price the producer is willing to charge, and the price they actually charge.
The bottom triangle

49
Q

What is total economic welfare?

A

total benefit society receives from an economic transaction.
both producer and consumer surplus added.

50
Q

What are two types of indirect taxes?

A

ad valorem= percentages, such as VAT
specific taxes= a set tax per unit.

Theme 1 economics (4 decks)

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