1.2 Flashcards
what are the assumptions of rational economic decision making
consumers aim to maximise utility - satisfaction gained from receiving a product
firms aim to maximise proft
governments aim to maximise social welfare
define demand
demand is the ability and willingness to buy a particular good at a given price at a given time
what does a movement along a demand curve represent compared to a shift in the demand curve
movement along a curve is a change in price of a good
short of demand curve is a change in the factors that affect demand
what does it mean if there is the shift to the right on demand curve compared to a shift to the left
increase In demand if shifts to the right
decrease in demand if shifts to the left
what does it mean if there is movement to the right along the demand curve compared to a movement to the left
extension in demand if to the right, quantity demand rises as prices fall
contraction in demand if to the left, quantity demanded decreases as prices rise
what are the conditions of demand
PIRATES
Population
Income
Related goods
Advertising
Taste
Expectations
Seasons
what is diminishing marginal utility
the satisfaction derived from the consumption of an additional unit will decrease as more of a good is consumed
what is PED
price elasticity of demand
responsiveness of demand to a change in the price of a good
what is the formula of PED
% change in quantity demanded divided by % change in price
what are the numerical values of PED
unitary elastic = 1 - quantity demanded changes by how much price changes
relatively elastic = PED>1
Relatively inelastic = PED<1
perfectly elastic = PED = infinity
perfectly inelastic = PED = 0
factors influencing PED
availability of substitutes
time
necessity
size of total expenditure
addictive
significance of PED
if demand is inelastic, the imposition of tax will be ineffective as quantity demanded will not fall
PED and revenue
for elastic demand curve, prices decrease increase revenue as there is a higher quantity demanded
for inelastic demand curve, prices decrease, decrease revenue as
for unitary elastic curve - change in price does not effect revenue
income elasticity of demand equation
%chnage in quantity demanded divided by % change in income
what is income elasticity of demand
responsiveness of demand to a change in income
numerical values for income elasticity of demand
YED<0- inferior good
YED>0- normal good
YED>1 - luxury good
significance of YED
during times of high income, businesses may produce more luxury goods, likely increasing sales
what is cross elasticity of demand
responsiveness of demand for one product to the change of price of another product
equation of cross elasticity of demand
%change of quantity demanded for A divided by %chnage in price of B
numerical values for XED
XED> 0 is substitutes
XED < 0 is complimentary goods
XED -0 is unrelated goods
significance of XED
firms need to be aware of their competition and those producing complementary goods, need to know how price changes by other firms will impact them
what is supply
ability and willingness to provide a good or service at a particular price and a given moment in time
what does a movement along the supply curve signify compared to a shift
movement means change in price
shift due to change in factors of supply
What are the conditions of supply
Cost of production
Price of other goods (joint supply, competitive supply)
Weather
Technology
Goals of supplier
Government legislation
Taxes and subsidies
What is the elasticity of supply
Responsiveness of a Change of supply to a change in price of a good
What is the equation for PES
% change in quantity supplied divided by % change in price
What are factors influencing PES
Time
Stock
Efficiency
Availability of factors of production
Substitutes availability
Ease of entry into market
what does it mean if a point on the supply curve moves to the left compared to a move to the right
to the left is a contraction in supply, quantity supplied falls due to a decrease in price
to the right is extension in supply, quantity supplied rises due to an increase in price.
what are the conditions of supply
cost of production
price of other goods
weather
technology
government legislation
taxes and subsidies
what is the price elasticity of supply
responsiveness of supply to a change in the price of the good
price elasticity of supply equation
% change in quantity supplied divided by % change in price
factors affecting PES
time
stocks
working below full capacity
availability of factors of production
ease of entry into the market
availability of substitutes
what does the price equilibrium mean
supply is equal to demand, no more forces bringing about change.
what is the price mechanism
allocates resources and price is determined by the interactions of demand and supply
what are the price mechanism functions
rationing function- limited resources can be rationed and allocated to those who value them the most
signalling function- acts as a signal of where resources should be used
incentive function- incentive to work harder
what is consumer and producer surplus
consumer - difference between price consumers willling Pay and the price they actually pay
producer- difference between the price the supplier is willing to produce and how much they actually produce for
what is an indirect tax
where the person who pays for the product is not responsible for the tax but they are charged tax which the business is required to pay
what are the two type off indirect taxes
ad valorem- tax increases based on in proportion to the value of goods.
specific tax- an amount added to the price of the product
how does tax affect the supply curve
shift to the left since cost of production increases
what is the incidence of tax and how does the demand or supply elasticity affect it
tax burden on the taxpayer
if perfectly elastic, consumer will pay all tax
if demand curve perfectly inelastic, consumer will pay all tax
if demand curve is elastic, suppliers will pay all the tax
what is a subsidy
subsidy is a grant given by the government.
