1.2. How Markets Work Flashcards
What Is Demand
The quantity of a good/service consumers are willing and able to buy at a given price at a given time period.
Contraction and Extention of Demand
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.
Non Price Factors Affecting Demand
Population
Advertising
Substitute Price
Income
Fashion / Taste
Interest Rates
Complement’s Price
What is Supply
the quantity of a good / service producers are willing and able to produce at a given price in a given time period.
Law Of Supply
Direct relationship with Price and quantity supplied.
As price increases Quantity supplied increases.
Non Price Factors Affecting Supply
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
Equilibrium
Where Demand = Supply (Market Clearing) [ Allocative Efficiency ]
Disequilibrium
Where Demand ≠ Supply
Price Mechanisms
Allocate scarce resorces efficiently
Ration scarce by Encouraging / Discouraging consumptions
Signal excess Demand / Supply and need for ↑ / ↓ resources
Incentivise produces to ↑ / ↓ output to ↑ profit
Consumer/Produces Surplus
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.
- Joint Demand ( Complements )
- Competitive Demand (Substitutes)
3.Derived Demand (Input Demand)
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
1.) Composite Demand
2.) Joint Supply
1.) Two goods require the same imput.
- Bread and Livestock -> Wheat
- Cheese and Butter -> Milk
- Increase of supply in one good will increase supply in the other good.
- Honey and Beezwax
- Crude Oil and Petroleum
What Is PED And The Formula.
Supply / Demand
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 )
PED Law
Supply / Demand
> 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
When is price elastic or inelastic
Substitutes (no.)
Percentage of income
Luxury / Necessity
Addictive / habit forming
Time Period
What Is XED And The Formula.
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 )
What is YED And The Formula
YED (Income Elasticity Of Demand) measures the responsiveness of quantity of demanded given a change in income.
YED = ( %∆ Qd ) / ( %∆ Y )
Law of YED
⊕ 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
Direct Tax and Two Examples
Tax on income that can’t be transferred
e.g - Income Tax , NI , Corporation Tax
Indirect Tax and Two reasons to why goverment use this.
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 )
Indirect Tax
Specific / Ad Valorem
Specific - Tax Per Unit
Ad Valorem - Tax As A % Of Price ( VAT 20% )
Specific / Ad Valorem ( ↕ repesents tax on supply )
Indirect Tax
PED / PES
>1 Elastic
<1 Ineleastic
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
What Is Subsidy
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
What Is Minimum Price
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
What Is Maximum Price
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
What is Allocative Efficiency & Assumptions
- Maximisation of Society Surplus ( Sum of CS & PS ) D=S
- Maximisation of Net Social Benifit MSB = MSC
- 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