1.2 how markets work Flashcards
rational economic decision making
-consumers aim to maximise utility
-firms aim to maximise profit
-governments aim to maximise social welfare
things that can increase/ decrease demand
-population
-income
-related goods
-advertising
-tastes/ fashion
-expectations
-season
-government legislation
ped formula
% change in quantity demanded/ % change in price
unitary elastic
ped = 1
relatively elastic
ped > 1
relatively inelastic
ped < 1
perfectly elastic
ped = infinity
perfectly inelastic
ped = 0
factors influencing ped
-availability of substitutes
-time
-necessity
-how large of a % of total expenditure
-addictiveness
significance of ped
-determines the effects of the imposition of indirect taxes and subsidies
-more elastic the demand curve, the lower the incidence of tax on the consumer
-when demand is elastic, tax will mainly passed to the consumer
ped and revenue
-elastic demand curve, decrease in price leads to an increase in revenue and vice versa
-inelastic demand curve, decrease in price leads to decrease in revenue
-unitary elastic curve, a change in price does not affect total revenue
income elasticity of demand formula (yed)
% change in quantity demanded/ % change in income
numerical values of yed
-inferior good, yed<0
-normal good, yed>0
-luxury good, yed>1
significance of yed
-important for businesses to know how their sales will be affected by changes in the income of the population
-may have an impact on the type of good that a firm produces
cross elasticity of demand formula (xed)
% change in quantity demanded of A/ % change in price of B
numerical values of xed
-substitute good xed>0
-complementary good xed<0
-unrelated good xed=0
significance of xed
-firms need to be aware of their competition and those producing complimentary goods
-need to know how price changes by other firms will impact them
conditions of supply
-costs of production
-price of other goods
-weather
-technology
-goals of the supplier
-government legislation
-taxes and subsidies
-producer cartels
price elasticity of supply formula (pes)
% in quantity supplied/ % change in price
numerical values of pes
-unitary, pes =1
-relatively elastic, pes > 1
-relatively inelastic, pes < 1
-perfectly elastic, pes = infinity
-perfectly inelastic, pes = 0
factors affecting pes
-time
-stocks
-working below full capacity
-availability of factors of production
-ease of entry into market
-availability of substitutes
price mechanism functions
-rationing function, price increase so people may not be able to afford to buy the product and others may not have the desire to buy
-signalling function, when prices rise, producers move resources into the manufacture of the product. change in price indicates that market conditions have changed so they should change the quantity bought and sold
-incentive function, the more money people have the more they can buy. suppliers make more they sell more and more profit
consumer surplus
the difference between the price the consumer is willing to pay and what they actually pay
producer surplus
the difference between the price the supplier is willing to produce their product at and the price they actually produce at
