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Economics A-Level > 1.2 (PMT flashcards 1.2.1-1.2.3) > Flashcards

1.2 (PMT flashcards 1.2.1-1.2.3)

1
Q

What are the 3 underlying assumptions of rational economic decision making?

A
  • Consumers aim to maximize utility
  • Firms aim to maximize profits
  • Governments aim to maximize social welfare
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2
Q

What is demand?

A

the willingness and ability to buy a particular good at a given price and at a given moment in time

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3
Q

What is a movement along the demand curve caused by?

A

A change in price

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4
Q

What is the relationship between price and quantity demanded?

A

inverse, so as price increases quantity demanded decreases, and vice versa

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5
Q

What is a contraction in demand?

A

A decrease in quantity demanded as price increases

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6
Q

What is an extension in demand?

A

An increase in quantity demanded as price decreases

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7
Q

What are the conditions for demand? (PIRATES)

A
  • Population
  • Income
  • Related goods (compliments or substitutes)
  • Advertising
  • Tastes/Fashion
  • Expectations
  • Seasons
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8
Q

What is a usually forgotten condition of demand related to the government?

A

Government legislation, if something is banned, there is a decrease in demand for it, but if something is a legal requirement there is an increase in demand for it

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9
Q

What is total utility?

A

it represents the satisfaction gained by a customer as a result of their overall consumption of a good

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10
Q

What is marginal utility?

A

it represents the change in satisfaction resulting from the consumption of the next unit of a good

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11
Q

What does the law of diminishing marginal utility state?

A

it states that the satisfaction derived from the consumption of an additional unit of a good will decrease as more of a good is consumed

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12
Q

Explain why the demand curve slopes downwards?

A
  • As if more of a good is consumed, there is less satisfaction derived from the good
  • This means consumers are less willing to pay high prices at high quantities since they are gaining less satisfaction
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13
Q

What does PED measure?

A

the responsiveness of quantity demanded given a change in price

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14
Q

What is the equation for PED?

A

% change in quantity demanded / % change in price

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15
Q

Why do we disregard the negative sign in values of PED?

A

As most values of PED are negative, so we look at the integer value alone

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16
Q

What is elastic demand?

A

When the change in price causes a proportionately greater change in quantity demanded

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17
Q

What is inelastic demand?

A

When the change in price causes a proportionately smaller change in quantity demanded

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18
Q

What is a unitary elastic PED?

A

where PED = 1

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19
Q

What is a elastic PED?

A

Where PED > 1

20
Q

What is an inelastic PED?

A

Where PED < 1

21
Q

What is a perfectly elastic PED?

A

Where PED = infinity

22
Q

What is a perfectly inelastic PED?

A

Where PED = 0

23
Q

What are the factors affecting PED?

A
  • Availability of substitutes
  • Time
  • Necessity
  • How large of a % of total expenditure
  • Addictive
24
Q

What do PED and PES determine?

A

the effects of the imposition of indirect taxes and subsidies

25
Q

What does a more elastic demand curve mean for the incidence of tax on consumers?

A

it means a lower incidence of tax on consumers

26
Q

When PED is elastic why does that mean a lower incidence of tax on consumers?

A

As when PED is elastic, a tax will only lead to a small increase in price, and the supplier will have to cover majority of the costs of the tax

27
Q

What does inelastic demand mean for the incidence of tax on consumers?

A

it means a higher incidence of tax on consumers

28
Q

When PED is inelastic why does that mean a higher incidence of tax on consumers?

A

since consumers are relatively unresponsive to the price of the good, quantity demanded will not fall by a large amount

29
Q

What will a tax when there is inelastic demand be ineffective at?

A

reducing output

30
Q

What will a tax when there is inelastic demand generate?

A

a higher tax revenue for the government

31
Q

For a elastic demand curve, what does an increase and decrease in price lead to in terms of revenue?

A
  • an increase in price causes a decrease in revenue
  • a decrease in price causes an increase in revenue
32
Q

For an inelastic demand curve, what does an increase and decrease in price lead to in terms of revenue?

A
  • an increase in price causes an increase in revenue
  • a decrease in price causes a decrease in revenue
33
Q

What is income elasticity of demand? (YED)

A

the responsiveness of demand to a change in income

34
Q

What is the equation for YED (income elasticity of demand)?

A

% change in quantity demanded / % change in income

35
Q

What is the equation for total revenue?

A

Price x quantity sold

36
Q

What is the equation for percentage change?

A

difference / original x 100

37
Q

What is a normal good?

A

When YED > 0,
- a rise in income will lead to a rise in demand for the good (positive relationship)

38
Q

What is an inferior good?

A

When YED < 0
- a rise in income will lead to a fall in demand of the good

39
Q

What is a luxury good?

A

A type of normal good, when YED > 1

40
Q

What is the significance of YED?

A
  1. It is important for businesses to know how their sales will be affected by the changes in the income of the population
  2. it may impact the type of goods that a firm produces
41
Q

What is XED?

A

Cross elasticity of demand

42
Q

What is Cross elasticity of demand (XED)?

A

the responsiveness of demand for one product (A), to the change in price of another product (B)

43
Q

What is the equation for XED?

A

% change in quantity demanded of A / % change in price of B

44
Q

What are substitute goods?

A

where the increase in price of good B will cause the increase in demand for good A

45
Q

What are complementary goods?

A

where an increase in the price of good B will decrease the demand for good A

46
Q

What are unrelated goods?

A

where a change in price of good B has no impact on good A

47
Q

What is the significance of XED?

A
  • firms need to be aware of their competition and those producing complementary goods

Economics A-Level (8 decks)

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