1.2 how markets work Flashcards
rational decision making
underlying assumption that people will aim to maximise utility & firms will aim to maximise profit
PED equation
% change in quantity demanded / % change in price
PED < 1
price inelastic
PED = 1
UNIT ELASTIC
PED = 0
PERFECTLY INELASTIC
PED INFINITY
PERFECTLY ELASTIC
what decides PED
availability of substitutes % income spent on good addictive & habit forming goods the time period branding & consumer loyalty
YED equation
% change demand / % change in real income
what is YED dependant upon
inferior good
normal good
luxury
PES equation
% change in supply of a good / % change in price of a good
XED equation
% change in demand for good b / % change in demand for good a
cross elasticity of demand (XED) is dependant upon
substitutes
complementary goods
unrelated goods
invisible hand - its nature
nature of the market to elimate surpluses and shortages
price mechanism devices
rationing
signalling
incentives
how does direct tax work
levied on an individual or organisatoin
how does indirect tax work
levied on the purchase of a good or service
how does specific tax work
fixed amount per unit
how does ad valorem tax work
% of price of good
define indirec tax
An indirect tax is a tax that is levied upon goods and services before they reach the customer who ultimately pays the indirect tax as a part of market price of the good or service purchased.
advantages of using indirect taxes
convinience
ease of collection
collection from poor
equitable contributions
disadvantages of using indirect tax
not industry friendly
can be regressive in nature
sometimes cumulative
