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
