1.2 Flashcards
Define consumer and producer surplus
Consumer surplus- the difference between the price the consumer is willing to pay vs the price they actually pay
Producer surplus- the difference between the price the producers is willing to supply a good for vs what they actaully supply a goods for
Shift left in supply or demand= decrease both surplus
Shift right in demand= increase both surplus
Functions of price mechanism
- Signaling= changes in price act as a signal to producers. If prices rise producers see less demand = reduce output
- Incentive= low prices act as an incentive for producers to buy. High demand= profit incentive for firms to charge higher prices
- Rationing = increased price= people dont want ot buy the good as they arent willing or able.Get rid of demand. Decreased price= encourages demand
What do firms, consumers and give aim to maximise
Firms aim to maximise profits
Consumers aim to maximise utility
Govs aim to maximise social welfare
Define demand
Demand is the willingness and ability to buy a particular good/service at a given price and a given period of time
Causes of shifts in demand
- Population, more people in country= increased deamnd
- Income, higher incomes= more demand
- Related goods, substitutes/complements
- Advertising, more people aware and willing to try good= increased demand
- Tastes and fashions, trend = increased demand
- Expectations, future predictions can increased demand eg food shortages
- Seasons, demand for christmas trees increase in winter
Define diminishing marginal utility
Diminishing marginal utility- as consumption of a good increases, the utility gained from each additional unit declines
> It explains why demand sloped down, if more of a good is consumed,people receive less satisfaction= consumers are less willing to pay high price and quantity since less utility is gained
Factors affecting PED
- Substitutes, if product has many suvs and prices increase, ppl can switch= elastic, if no subs = inelastic
- Percentage of income- small % of income= inelastic as increased price will have a small impact on quantity. Large % = elastic
- Luxury/neccesity. Luxury= elastic. Necessity= inelastic
- Addictive= inelastic
- Time. LR=elastic
Relationship between PED and revenue
-Unitary- change in price doesnt affect revenue
-Elastic- decreased price= increased revenue as change in price is smaller than change in output
-Inelastic= decreased price= decreased revenue as change in price is greater than change in qty
Define PED and give values
PED- measures the responsiveness of a % change in qty demanded relative to a % change in price
PED= %change in qty demanded/ % change in price
Less than 1 = inelastic
More than 1= elastic
Infinity= perfectly elastic change in price= qty falls to 0
0= perfectly inelastic no change in qty
1= unitary elastic same change
YED
YED= measures the responsiveness of a % change in qty demanded relative to a % change in income
Normal goods are positive
- If 0-1 its a normal necessity
- If 1-infintiy then normal luxury
Inferior goods are negative
- If more than 1 its elastic
- If less than 1 its inelastic
Significant as may impact what types of good they produce, and sales could change
XED
XED- measures the responsiveness of a % change in qty demanded of good x relative to a % change in price of good y
-Substitutes are positive
-Complements are negative
If greater than 1 = elastic = strongly related
If less than 1= inelastic = weakly related
0 = perfectly inelastic = no relationship
Significant as firms need to know how changes of price by other firms will impact their goods
Define supply
Supply is the willingness and ability to provide a particular goods/ service at a particular price and given period of time
Excess demand is below
Excess supply is above
SR and LR meaning
SR= atleast one factor of production is fixed
LR= all factors of production are variable
Factors affecting PES
-Barriers to entry-high start up costs can make it hard to increase supply = inelastic. If market is easy to enter= more producers= increased supply
-Stock- stockpiles , if prices goes up they can increase supply by using piles = elastic. If no piles = inelastic
-Spare capacity, if firm is working below full capacity and prices rise they can respond by operating at full capacity= elastic, if no spare capacity= inelastic
- Substitutes of resources, high producer substitutes = elastic as they can switch if prices of resources increase. Low subs = inelastic
- Time, SR= inelastic, LR= elastic
Whys is PED and PES significant in indirect taxes
- Elastic demand= lower tax incidence on consumer = tax will lead to a small change in price and producer has to cover majority of cost
- Inelastic- tax passed onto consumer as they are relatively unresponsive to change in price= tax ineffective at reducing output, but high revenue for gov
Whys PED and PES significant in subsidies
- More elastic= see fall in price for consumer and producer gains extra revenue
- Inelastic= subsidy leads to high change in price but small change in output
> subsidies on inelastic goods are ineffective because it reduces prices but output doesnt increase alot
Factors affecting supply
- Productivity, increase= increase productivity
- Indirect tax = decrease supply
- Number of firms, more producers= increased supply
- Technology
- Subsidies
- Weather, droughts or cold weather could effect growth and hot weather could help growth
- Cost of production
Why might consumers not act rationally
- Weaknes at computation= people may be unable or willing to compare prices so they buy expensive option
- Influence of habitual behaviour- barrier to decision making since it blocks people from looking at alternatives
- Influence of people- people could buy something to git in, to go with norms of society when it doesnt benefit them
EVAL- they may be higher quality goods
Depends on information provided
