1.2 Flashcards
income effect definition
falling/rising prices allow consumers to buy more/less with a fixed income
substitution effect definition
as a price of a good rises, consumers find substitute goods (inferior) preferable
acronym for factors which shift demand curve
Population
Advertising
Substitute
Income
Fashion
Interest Rates
Complementary Goods
Speculation
acronym for factors which shift supply curve
Productivity
Indirect Tax
No. of Firms
Technology
Subsidies
Weather
CoP
profit incentive definition
firms will try to maximise profit
crowding out of fixed factors
prices are set higher to cover expansion (marginal) costs
law of diminishing marginal utility
for Qd to increase, prices must fall as buying the same good again gives less utility
price mechanism acronym
Signalling function (signals info to consumers and producers)
Incentive function (encourages firms to produce more/less)
Rationing function (rations supply to those who can afford)
consumer surplus definition
difference between price buyers are willing to pay vs. what they actually pay
area under demand and above market price
producer surplus definition
difference between price producers are willing to sell at vs. the price they actually sell at
area above supply and under market price
total surplus
cs + ps
equilibrium price definition
price where planned purchases = planned sales
supply definition
quantity of goods producers are willing to sell (direct relationship)
demand definition
quantity of goods consumers are willing to buy (inverse relationship)
PED definition and formulae
how Qd changes given a change in price, measures consumer reponsitivity
△Qd/ △P or Qd1/Y1 X Y2/Qd2
always negative
YED definition and formulae
how Qd changes given a change in income
△Qd/ △Y or Qd1/Y1 X Y2/Qd2
both -ve and +ve
XED definition and formulae
how Qd changes given a change of price in another good
△Qd2/ △P1
both -ve and +ve
PED elastic
△Qd > △P
(perfect) -∞ < PED < -1 (unitary)
flat gradient
perfect when identical goods and infinite producers
PED inelastic
△P > △Qd
(perfect) 0 > PED > -1 (unitary)
perfect when no substitutes
steep
PED determinants acronym
Substitutes (availability of)
Proportion of income
Luxury or Necessity
Addictive
Time (short or long term)
Breadth of market (broad or narrow)
YED elastic
△Qd > △Y
-∞ < YED < -1 (inferior)
1 < YED < ∞ (normal/ luxury)
perfectly at both ∞
YED inelastic
△Y > △Qd
-1 < YED < 1
inferior - perfect - necessity
positive YED means
normal good, consumption tracks income
negative YED means…
inferior good
XED elastic
△Qd1 > △P2
-∞ < XED < -1 (complementary)
1 < XED < ∞ (substitute)
strong, perfect at both ∞
XED inelastic
△P2 > △Qd1
-1 < XED < 1
weak - perfect/ unrelated - weak
indirect taxes
on goods/ services (expenditure), are specific or ad valorem
specific and ad valorem tax chain
CoP↑ π↓
supply shift, price increases
indirect tax graph notes
CB + PB = gov. tax revenue
E2 is allocatively inefficient as DWL
specific S shifts by tax
ad valorem S angle changes
ad valorem tax summary
% based tax e.g. VAT
specific tax summary
set p/u on goods with negative social impacts e.g. smoking
PES definition and formulae
%ΔQs/ %ΔP or ΔQs/ ΔP x P/Qs
responsiveness of quantity supplied given a change in price
SR - at least one FoP is fixed
LR - all FoP are variable
always positive
PES determinants acronym
Barriers to entry (permits)
Raw materials
Inventory
Time
Spare capacity
Skilled labour
PES inelastic
0 < PES < 1
ΔP > ΔQs
perfectly when finite/ exclusive product (e.g. art)
vertical gradient
PES elastic
1 < PES < ∞
ΔQs > ΔP
perfectly when producers can shift FoP easily, cost-free and infinite raw materials
indirect vs direct subsidies
indirect - linked to number of units supplied to keep prices low
direct - one off/ lump sum e.g. Help to Buy
subsidy definition
government grant to lower price/ increase production
causes of irrational behaviour (4)
human-ness (morals feelings and that stuff)
habitual - routine/ addictive
computational - cognitive limit or information gap
herd - social norms/ peer effects
law of diminishing marginal utility
as quantity consumed increases, marginal utility from each extra unit decreases
direct taxes
tax on profit/ income/ wealth
