1.2 How markets work Flashcards
what is demand?
being willing and able to buy something
draw the demand curve
inverse realtionship between quanitty demanded and price
What is an extension in demand
When prices decrease……there is an expansion in demand
Assuming ceteris Paribus (other factors like competitors ignored)
What is a contraction in demand ?
If price increases…l there will be a contraction in demand
What will happen to the demand curve if there is an increased amount of advertising?
More advertising means more demand for the same price, so there will be a shift outwards in the demand curve
Define demand
The quantity of a good or service purchased at a given price over a given time period
what are the two assumptions in econimics ?
- consumers wish to maximise utility
- firms wish to maximise profit
what is ‘utility’?
the hapiness recieved
* the satisfaction/ benefit derivd from consuming a good
why may consumers not act rationally?
- herd behaviour: influenced by other people
- habitual behaviour: doing same thing again and again- loosing out on utility
- consumer inertia: fear of the unknown
- consumer weakness at computation (understanding data)
so they don’t switch
what do economic agents require to make rational decisions?
- time
- information
- ability to process information
what factors cause shifts in the demand curve?
conditions of demand
-
seasons (christmas trees)
2.price of other goods (income and subsititues) - advertising, fashion & trends
-
population and age structure (larger population/ more older people)
5.** i**ncome
SOAPI
what are normal and inferior goods?
- inferior: when icome increases demand decreases
- basic goods (ms mollies)
as income increases, demand decreases, shifting demand out ot the right - normal : as income increases, demand increases
how do substitute goods and complinentary goods affect demand
CAUSE MOVEMENTS OF CURVE (EVEN THO PRICE RELATED)
* Substitute goods : inversley proprtional (apple & samsung)
* complimentary goods : propetional (iphone+ apps)
what is supply?
when a producer is willing and able to sell a good
draw a supply curve
as the price of a good increases, the profit that can be made for the producer incraeses and so they have more of an incentive to supply a larger quantity
define supply
the quanitity of a good or service that firms are willing to sell at a given price over a given time period
what are the assumptions of a supply curve?
- firms want to maximise profits
- doesn’t consider why the price increases
- just tells us what were to happen if price increases
what are the conditions of supply?
- weather
- technology
- cost of production (profit & incentive, cannot afford)
- number of suppliers
- productivity
shift inwards/ outwards
what happens when the price of soomething increases?
- a contraction in demand (less consumers can afford)
- an extention in supply (producers can make more profits)
demand: consumer POV
supply: producer POV
what is excess supply/ surplus?
the gap between supply and demand at a given price
* producers will decrease their prices to get eliminate excess supply
* (when price is above equalibrium price)
when is there equilibrium?
quantity supplied = quantity demanded
supply and demand meet
what is the excess supply/demand at
* 90p
* 40p
* 50p
what happens when there is excess demand/shortage?
(when price is below equilibrium price)
* consumers bid up their price
* only those who can pay high prices can afford
eliminating excess demand
incease in supply
- s1 to s2
- leading to p1 to p2 (decrease in price)
- because Q1 to Q2 (quantity supplied increased)
what is direct tax?
tax paid directly to the government.
Levi dead directly on an individual or organisation
* income tax
* corporation tax
what is income tax
What is indirect tax?
tax on goods and services
* VAT
what are the two types of indirect tax?
- specific tax
- ad velorum tax
both are paid by producers
what is specific tax
a fixed amount of tax paid on each unit sold
fixed tax of £4 per item, if 5 units sold then £20, if 100 items sold then £400
affects producers
how specific tax impact graph
impacts supply curve as producers are the ones that have to pay.
* Shift vertically upwatds creating new line S tax
* difference between original line and S tax is the specific tax applied
* because peoducers require higher prices to make up for the tax
what will the new price equalibrium be after the £4 specific tax?
as price increases, the quantity demanded also decreases
what is the tax revenue that the goverment recieves in total?
sixe of speciic tax × quantity sold (of new equailibrium)
what is the incidence of tax on consumers?
how much the consumers pay on the total tax revenue
differnec between selling prices × quanitity sold
top box
what is the incidence of tax on producers?
how much of the total tax revenue the producers have to pay
draw a speific tax diagram
what is ad velorum tax?
a percentage of the price of a good/serive
eg: VAT
draw an ad valoreum diagram?
what are the two purposes of tax?
- discourage production and consumption of harmful goods
- increase goverment revenue
how do goverments spenf their tax reveue?
- encouraging the production and consumption of goods that are good to society
what is a subsidy?
a grant from the goverment to a firm to increase supply
grant for every unit of output
what is the effect of subsidies on the supply demand diagram
subsidy moves supply line vertically down. The differnce between the two lines is the size of the subsidy. Increase im supply as producers get an inective to make more
what is the new price after a 400 £ subsidy?
£5,800
what is the goverment spending/ total cost of subsidy?
size of subsidy × quantity sold
what is the
* total cost of subsidy
* consumer benfit
* producer benefit
Draw a subsidy diagram
what is price elasticity of demand (PED)?
measures how much quantity demanded will respond to a chnage in price
what is the formula for PED?
%Δ Quantity Demanded/ %Δ Price
what does it mean when the PED value after the negative sign is larger than 1?
this means that the PED of elastic - very responsive to changes in price
what does it mean when the value of PED after the negative sign is smaller than 1?
0.7, 0.1
the Qd is smaller than p, suggesting that it is inelastic, suggesting that they are unreactive to the chnage in price
what happens when the PED is exactly -1?
the change in price gives the same chnage in quantity demanded.
unitary elastic demand
define elastic demand and inelastic demand
- elastic: demand is very responsive to changes in price
- inelastic demand: when demand is unresponsive to chnages in price
*
what does an elastic demand curve look like?
very horizontal
what does an inelastic demand curve look like?
very vertical
what is perfectly inelastic?
when the PED is excatly 0
vertical I for inelastic
what are some examples of perfectly inelastic goods?
- drugs for drug addicts
- life saving medicine
what is perfect elasticity?
if prices chnaged at all literally no one would buy. Consumers are extremly responsive.
PED at negative ∞
horizontal
what does unitary demand curve look like?
which factors affect Price Elasticity of Demand?
- necessity/luxury good
- addiction/habit
- availability of substitutes
- brand loyalty
- proprtion of income
- time period
NASBIT
out of necessities and luxuries which are inelastic and elastic?
necessities= inelastic
luxuries= elastic
what PED are addiction goods and habit goods (games, junk foods)?
inelastic
how doe availbility of substitutes affect?
the more substitutes, the more elastic the price will be
how does brand loyalty/brand image affect elasticity
- more brand loyalty= more price inelastic (ferrari)
- less brand loaylty/imaginne= more price elastic (NIssan)
how dos proportion of income affect elasticty?
- the larger the proprtion in your income, the more cautions, so more price elastic
- the smaller the proportion in income the more price inelastic
how does time affect price elasticity?
- the less time given (short run), the more price inelastic
- the more time given (long run) , the more price elastic, time to consinder substitutes
what is price elasticity of supply?
a measure of the responsivness of quantity supplied to a change in price
what is the formula for price elasticty of supply?
PES = %change in quantity supplied / %change in in price
%ΔQs/ %ΔP
what is the range of PES elastic, inelastic, unitary elastic?
- Elastic: 1- ∞
- Inelastic: 0-1
- unitary elastic =1
what do the elastic and inelastic supply curves look like?
what are the five main factors which effect elasticity of supply?
- time
- state of the economy
- availibilty of factors of production
- spare capacity
- stockpile& perishability
TEASS
what does spare capacity mean?
how much capacity is there that is not being used
how does spare capacity affect price elasicity of suppply?
the larger the spare capacity, the more price elastic something is, as they can actually respond to change in price
how does availbility of factors of producition affect price elasticity of supply?
how easy is it to find factors of production
the higher the availibity of factors of production, the more elastic it is likley to be, as it is alot more easier to respond to chnag ein price and supply more
how does the state of the economy affect price elasticity of supply?
- bad state of economy, more easy to hire workers/ expand business and respond to changes in price- more elastic
- good state of the economy, less easier to expand business and respond to changes in price- inelastic
how does stockpiles & perishability affect price elasticity of supply?
- the more perishable a good, the more inelastic
- if good is able to be kept in stockpile, then if prices chnage they can immediatly supplied, elastic
what are the specific quanitities of short run and long run in terms of production/supply?
- short run: when at least one factor of production is fixed
- long run: when all factors of production can be changed
how does time affect price elasiticity of supply?
- short run: price inelastic as they cannot respond due to a factor os production being fixed, cannot produce more
- long run: price elastic as they can respond to changes in priceand produce more
argriculture and farmers
what is the value of a perfectly inelastic supply, perfectly elastic supply?
- perfectly inelastic: PES=0 [I]
- perfectly elastic : PES= ∞ [-]
What are some examples of perefctly inelastic goods (price elasticity of supply) ?
- short run: farmers, football match tickets (maxium capacity)
What is joint demand ?
Describes the relationship between complementary goods. (As demand for x increases demand for y decreases)
What is competing demand ?
Describes the relationship between between substitute goods
What is composite demand?
Demand for a good which has two uses
What is derived demand ?
Demand for a good which is used in the production of other goods.
eg: milk
What is joint supply?
When supply of a particular good also leads to supply of a by product. The production process leads two or more different outputs. Increase in production leads to an increase in the by product
Eg: milk, whey
What is competing supply?
When a goods can be put to more than one use. Employing it in one form means that it cannot be used in another manner. Situations where the factors of production are used to produce different goods
eg: if a farmer decides to use his land to rear cows then he may not be able to rear other animals
what is effective demand?
when some can buy is and also affford it
useful demand
what are veblen goods?
goods which are percieved to be of better quality if it costs more
exceptions of the law of deamnd
describe the marginal benefit curve
marginal benefit curve= demand curve
* the price shows the marginal benefit
* maximum price willing to pay for a qyantity of a good (marginal benefit )
what is the law of dimishing marginal utility?
as the consumption of a good increases, the marginal utility from an additional unit decreases
downwards sloping demand curve
what is marginal utility?
the additional benefit recieved from consuming an extra unit of a good
show consumer surplus on a graph
were willing to pay more, but equilibrium is less
what is the marginal cost curve?
the supply curve.
* shows the lowest price producer is willing to sell for
* marginal cost = lowest price producer is willing to sell for
what is the marginal cost?
the cost of supply each extra unit of a good
show the producer surplus on a graph
