1.2 Flashcards
what factors affect demand?
.Real Income,
.Size or age of the population,
.Tastes, fashions or preferences,
.Prices of substitutes or compliments,
.The amount of advertisement or
promotion
.Interest Rates
Explain a decrease in marginal utility.
This is where the increase of consumption of a good/service results in a fall in marginal utility
What are the Factors that influence the Price elasticity of demand?
1- Availability of substitutes
2- Proportion of income spent on a product. (High proportion = elastic) (Low proportion = in elastic)
3- Nature of the product: If the product is addictive then demand tends to be inelastic
4- Durability of the product: (long lasting = elastic, it is possible to delay purchases) (non durable = inelastic, because they must be replaced regularly)
5- Length of time under consideration: demand is usually more price elastic in the long run.
6- Breadth of definition of a product: if a product is vaguely defined demand is likely to be price inelastic, and if it is defined it is likely to be price elastic
Define Price Elastic
When a change in price results in a proportionally larger change in quantity demanded
Define Price Inelastic
When a change in price results in a proportionally smaller change in quantity demanded.
What does it mean when a good is unit elastic?
Unit elasticity of demand refers to a situation in which the percentage change in the quantity demanded of a good or service is equal to the percentage change in the price of the good or service.
Define Cross elasticity of demand
The measure of the responsiveness of quantity demanded of one product to a change in price of another product
When XED is positive, what does this indicate?
That the products are Substitutes
When XED is negative, what does this indicate?
That the products are complements
Define YED
The measure of the responsiveness of quantity demanded to a change in real income.
When YED is Positive, What does this indicate?
That it is a Normal good
When YED is negative, What does this indicate?
That the good is inferior
What factors influence Income Elasticity of Demand?
1- Availability of substitute goods.
2- The necessity of the good or service.
3- The proportion of income spent on the good or service.
Define supply.
The amount supplied by producers at given prices over a period of time.
Why does the Supply curve slope upwards?
As there is a proportional relationship with price and quantity supplied. When price increases quantity supplied will also increase. Producers are willing to supply more at higher prices
What factors shift supply?
1- Costs of production
2- Productivity of workforce
3- Indirect Taxes
4- Subsidies
5- Technology improvements.
6- Discoveries of new reserves of a raw material.
Define Price Elasticity of supply
It is a measure of the responsiveness of the change in supply due to a change in price.
State the formula for Price Elasticity of Supply.
Percentage change of quantity supplied / percentage change in price.
What is the numerical value for a price elastic good or service?
PES > 1
What is the numerical value for a price inelastic good or service?
0 - 1
What factors influence Price Elasticity of Supply?
1- Level of Stock: If stock is available then supply will be relatively elastic.
2- Spare capacity: If a firm has underutilised machinery and underemployed workers, then supply is likely to be elastic.
3- Availability and cost of switching resources from use to another.
4- Time: Supply may be inelastic in the short run and elastic in the long run
Define short run
A time period in which there is at least one fixed factor of production.
Define long run
A time period in which factors of production are variable.
Describe what an Inelastic supply curve looks like
A steeper supply curve. (perfectly inelastic is vertical)
Describe what an elastic supply curve looks like?
A shallow supply curve. (Perfectly elastic is horizontal)
What is the numerical value of PES that is Perfectly inelastic.
PES = 0
What is the numerical value of PES that is perfectly elastic?
PES = infinity
Why are firms more price elastic in the long run?
As in the long run all resources are variable.
What is Excess supply?
Excess supply implies that the quantity supplied is greater than the quantity demanded at the existing price.
What is Excess demand ?
Excess demand implies that the quantity demanded is greater than the quantity supplied at the existing price.
What are the 3 functions of the price mechanism?
1- As a rationing device: market forces will ensure that the amount demanded is exactly equal to the amount supplied.
2- As an incentive: the prospect of making a profit acts as an incentive to firms to produce goods and services.
3- Signalling Function: If prices are rising because of high demand from consumers, this is a signal to suppliers to expand production to meet the higher demand.
If there is excess supply in a market, the price mechanism will help to eliminate a surplus of a good by allowing the market price to fall.
Define consumer surplus
Consumer surplus is the additional benefit that consumers receive. It is measured by the difference between the price consumers are willing to pay and the price they actually pay. A consumer surplus happens when the price consumers pay for a product or service is less than the price they’re willing to pay
Define producer surplus.
Producer surplus is the difference between the price the producers receive and the costs of supply
Where is consumer surplus on a supply and demand graph?
It is the area under the demand curve and above the market price. (it is the higher triangle)
Where is producer surplus on a supply and demand graph?
It is the area between the supply curve and the market price. (it is the lower triangle)
What factors affect consumer surplus?
1- The gradient of the demand curve: the steeper it is the greater the consumer surplus will be.
2- An increase in demand will impact the amount of consumer surplus.
What factors affect the producer surplus?
1- The gradient of the supply curve: the steeper it is, the greater the producer surplus will be.
2- Changes in conditions of supply: An increase in supply will increase amount of producers surplus.
What is an indirect tax.
Indirect taxes are taxes on expenditure.
What is an example of an indirect tax?
VAT
What are the 2 types of indirect tax?
1- Ad valorem tax
2- Specific tax
What is an ad valorem tax?
It is a tax that is a percentage of the price of the product. It causes a left shift in the supply curve and a steeper gradient of the supply curve.
What is a specific tax?
(what is the impact on the supply curve?)
It is a set amount of tax on each unit consumed. Supply cure shifts to the left parallel to the original supply curve.
What is the incidence of tax?
It is how the burden of a tax is distributed between different groups.
What is a Subsidy?
It is a government grant that reduces the costs of production for the firm.
What is the impact of a Subsidy on the supply and demand curve?
The supply curve shifts to the right.
Why may consumers not act rationally?
1- Hearding: This is where the behaviour of one person is influenced by others.
2- Habitual behaviour: Consumers may rely on habits.
3- Consumer weakness at consumption: Limited information or limited cognitive abilities.
