1.2. How Markets Work Flashcards

1
Q

What Is Demand

A

The quantity of a good/service consumers are willing and able to buy at a given price at a given time period.

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2
Q

Contraction and Extention of Demand

A

When price goes down demand goes up. (Extention Of Demand)
When price goes up demand goes down. (Contraction Of Demand)
Shows a Inverse relationship between Demand and Quantity Of Demand.

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3
Q

Non Price Factors Affecting Demand

A

Population
Advertising
Substitute Price
Income
Fashion / Taste
Interest Rates
Complement’s Price

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4
Q

What is Supply

A

the quantity of a good / service producers are willing and able to produce at a given price in a given time period.

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5
Q

Law Of Supply

A

Direct relationship with Price and quantity supplied.
As price increases Quantity supplied increases.

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6
Q

Non Price Factors Affecting Supply

A

Productivity- labour/capital could change cost of profuction

Indirect Tax- tax on production ->increast cost of production

Number Of Firms

Technology- improvement in technology-> lowers cost of production

Subsidy- money grant given to lower cost of production

Weather

Cost Of Production- transport,labour,rent,regulations)> could change cost of production

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7
Q

Equilibrium

A

Where Demand = Supply (Market Clearing) [ Allocative Efficiency ]

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8
Q

Disequilibrium

A

Where Demand ≠ Supply

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9
Q

Price Mechanisms

A

Allocate scarce resorces efficiently

Ration scarce by Encouraging / Discouraging consumptions

Signal excess Demand / Supply and need for ↑ / ↓ resources

Incentivise produces to ↑ / ↓ output to ↑ profit

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10
Q

Consumer/Produces Surplus

A

Consumer Surplus: ◣-> The difference between the price consumers are willing and able to pay for a good/service and the price they actually pay.

Produces Surplus: ◤-> The difference between the price producers are willing and able to supply a good/service for and the price they actually recieve.

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11
Q
  1. Joint Demand ( Complements )
  2. Competitive Demand (Substitutes)

3.Derived Demand (Input Demand)

A

1.) things bought together.
- printers and ink
- razor and razor blades

2.) similar but rival good .
- Coke and Pepsi
- IPhone and Galaxy

3.) demand from good or service comes from something alse.
- Cars and Aluminium
- Holiday and Airlines

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12
Q

1.) Composite Demand

2.) Joint Supply

A

1.) Two goods require the same imput.
- Bread and Livestock -> Wheat
- Cheese and Butter -> Milk

  1. Increase of supply in one good will increase supply in the other good.
    - Honey and Beezwax
    - Crude Oil and Petroleum
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13
Q

What Is PED And The Formula.
Supply / Demand

A

PED (Price Elasticity Of Demand) mesures the responsiveness of quantity demanded given a change in price

PES mesures the responsiveness of quantity supplied given a change in price.

PED = ( %∆ Qd or Qs ) / ( %∆ P )

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14
Q

PED Law
Supply / Demand

A

> 1 Demand / Supply is price elastic

<1 Demand / Supply is inelastic

0 Demand / Supply is perfectly price inelastic

∞ Demand / Supply is perfectly price elastic

1 Demand / Supply is unit price elastic

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15
Q

When is price elastic or inelastic

A

Substitutes (no.)

Percentage of income

Luxury / Necessity

Addictive / habit forming

Time Period

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16
Q

What Is XED And The Formula.

A

XED (Cross Elasticity Of Demand) measures the responsiveness of quantity demanded of a good / service given a change in price of another.

XED = (%∆ Qda ) / ( %∆ Pb )

> 1 Demand between the goods is price elastic ( Strongly Related )
<1 Demand between the goods is price inelastic ( Weakly Related )
0 = Demand between the goods is perfectly price inelastic
( No Relationship )

17
Q

What is YED And The Formula

A

YED (Income Elasticity Of Demand) measures the responsiveness of quantity of demanded given a change in income.

YED = ( %∆ Qd ) / ( %∆ Y )

18
Q

Law of YED

A

⊕ Normal Good
⊖ Inferior Good

Normal Good
>1 Demand is income elastic Normal Luxury
<1 Demand is income inelastic Normal Necessity
Inferior Good
>1 Demand is income elastic
<1 Demand is income inelastic
0 Demand is perfectly income elastic

19
Q

Direct Tax and Two Examples

A

Tax on income that can’t be transferred
e.g - Income Tax , NI , Corporation Tax

20
Q

Indirect Tax and Two reasons to why goverment use this.

A

Expenditure tax that increases cost of production for firms but can be transferred to consumers via higher prices

i > Raise Gov Revenue ( VAT )
ii > Solve Market Failures ( Cigarette , Alcohol , Duel Duty )

21
Q

Indirect Tax
Specific / Ad Valorem

A

Specific - Tax Per Unit
Ad Valorem - Tax As A % Of Price ( VAT 20% )

Specific / Ad Valorem ( ↕ repesents tax on supply )

22
Q

Indirect Tax
PED / PES
>1 Elastic
<1 Ineleastic

A

PED >1
Consumer Burden : Lower
Producer Burden : Higher
Gov Revenue : Lower
PES >1
Consumer Burden : Higher
Producer Burden : Lower
PED <1
Consumer Burden : Higher
Producer Burden : Lower
Gov Revenue : Higher
PES <1
Consumer Burden : Lower
Producer Burden : Higher

23
Q

What Is Subsidy

A

Money grant to firms by the government to reduce cost of production and encourage an increase in output.

government gives it to :
i ) Solve Market Failures
ii ) Increase Affordability

24
Q

What Is Minimum Price

A

A fixed price ( price floor ) enacted by the goverment usually set above the equilibrium market price.

i ) Solve Market Failure
ii ) Protect Producers From Price Volatilility

𝐁𝐔𝐓
1. Price Inelastic Demand
2. Regressive
3. Black Markets
4. Set at Right Leval

25
Q

What Is Maximum Price

A

A fixed price ( price ceiling ) enacted by the goverment usually set below the equilibrium market price.

i ) To ↑ affordability of necessity goods / services

𝐁𝐔𝐓
1. Shortage
2. Black Markets
3. Enforcement
4. Setting Right Level
5. Cost

26
Q

What is Allocative Efficiency & Assumptions

A
  1. Maximisation of Society Surplus ( Sum of CS & PS ) D=S
  2. Maximisation of Net Social Benifit MSB = MSC
  3. Where resources perfectly follow consumer demand. D=S

Assumptions
i ) Many Buyers / Sellers
ii ) Perfect Information
iii ) No Barriers To Entry
iv ) Firms Profit Max
v ) Consumers Utility Max