1.3 Flashcards

1
Q

what is the formula for income elasticity of demand?

YED

A

Y= income

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2
Q

what does YED measure?

income elasticity of demand

A

how much quantity demanded will respond to a chnage in income

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3
Q

what is the YED value for inferior goods?

A
  • the YED will be negative
  • as income decreases, demand increases
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4
Q

what is the YED value for normal goods?

A
  • will be positive
  • as when income increases demand also increases
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5
Q

what are income inelastic goods?

A
  • normal goods
    *0< YED<1
  • QD will increase by a smaller percentage than I
  • seen as necessities
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6
Q

what are income elastic goods?

A
  • normal good
  • YED between 1 and ∞
  • QD will increases by a larger % than Y
  • seen as a luxury
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7
Q

what are inferior goods?

A

as income increases, the demand for the good decreases

YED= -

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8
Q

what are normal goods?

A

as income increases, demand for the good increases

YED=+

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9
Q

what are income elastic goods?

A

QD is very responsive to chnages in income
* luxury goods

YED from 1 to ∞

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10
Q

what are income inelastic goods?

A

when QD is unresponsive to chnages in income
* necessitiy goods

YED between 0 and 1

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11
Q

what is cross elasticty of demand (XED)?

A

how is the demand for good A affected by chnages in price of good B

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12
Q

what is the formula for (XED) cross elasticity of demand?

A
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13
Q

what type of good has an XED of 0?

A

unrelated goods

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14
Q

what type of good has a negative XED?

A
  • complementary goods
  • as price of good A increases, demand for good B will decrease
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15
Q

what are complemenatry goods?

A
  • goods bought and used together
  • if price of good A increases then demand of good B decreases

XED= -

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16
Q

what type of good has a positive XED?

A
  • substitute goods
  • as the price goes up for price A, demand for price B goes up
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17
Q

What are substitute goods?

A
  • goods which can replace another
  • if price of good A increases then demand for good B decreases

XED= +

18
Q

what is the price mechanism?

A

the interaction of supply and demand to determine prices

19
Q

what are the functions of the price mechanism?

A
  • signalling
  • rationing
  • incentivising
20
Q

prices have fallen. (to eliminate excess supply)
Describe the signalling function of the price mechanism

A
  1. decrease in price signals to producers that consumrs want fewer goods
  2. therefore it signals to reduce the quantity supplied

extension in supply (along the curve)

21
Q

Prices have risen (to eliminate excess demand).
Describe the incentivising function of the price mechanism

A
  1. prices are increasing, this increases the incentive to supply as more profit can be made
  2. therfore there is an increase in quantity supplied

extension in supply (along the curve)

22
Q

Prices have gone up (excess demand).
Describe the rationing function of the price mechanism

A
  1. fewer consumers are willing and able to demand high prices
  2. decrease in quanity demanded

contraction in demand

23
Q

what does rationing do?

A

limit/ration the quanity demanded by consumers

24
Q

what happens to the revenue when the price changes for a elastic demand good?

A
  • price increases= revenue decreases
  • price decreases= revenue increases
25
Q

what happens to the revenue when the price of an inelastic demand good changes?

A
  • price increases = revenue increases
  • prices decrease= revenue decreases
26
Q

how is revenue affected by unitary price demand?

A

no relationship/ correlation
* as price increases/decreases revenue stays the same

27
Q

what are negative externalities?

two types of negative externalities

A

costs which affec third parties outsid the price mechanism
* negative consumption externalities
* negative production externalities

negative effect on others

28
Q

what is the price mechnaism?

A

the transaction between the consumer and producer

29
Q

what are negative comsumption externalities?

A

when consuming a good leads to negative externalities

eg: alchohol, cars

30
Q

what are negative production externalities?

A

when producing goods leads to negative externalities

eg: building buildings, factories

31
Q

what are private costs?

A

a cost to a producer or consumer within the price mechanism

32
Q

what is market failure?

A

when the price mechanism leads to an inefficent allocation of resources

price/quantity produced not beneficial to society

33
Q

what are the 4 types of market failure?

A
  1. negative externalities
  2. positive externalities
  3. public goods
  4. information gaps
34
Q

what are public goods?

A
  • non-excludable
  • non- rival
35
Q

what does it mean for a good to be exludable/ non excludable?

A
  • excludable: to can stop others from using a good
  • non- excludable: yo cannot stop others from using a good
36
Q

what does it mean for a good to be rival/ non rival?

A
  • rival: your consumption stops others from enjoying
  • non- rival: your consumption of a good cannot stop anyone else from using it (no cost)
37
Q

what is the free rider problem?

A

1.public goods non excludable so others can use your public good for free- without paying
2. consumers wait for others to buy and free ride
2. no one demands the public good
3. producers won’t supply the public good because they cannot make profit

resources underproduced/ underprovided in the market

38
Q

what is the state provision of good?

A

when the goverment provide (public) goods

not always public: education/ healthcare

39
Q

what types of goods are the following:
1. healthcare
2. flood defences
3. education
4.police force
5. fire brigade

A
  1. private
  2. public
  3. private
  4. public
  5. public

although could become rival/ non rival, exludable/ non excludable (Ev)

40
Q

How can you argue tha tthese goods are not pure public goods:
1. parks
2. police
3. roads

A
  1. parks can become excludable
  2. police can become rival goods if a large incidence stops police attending others
  3. roads can become exludble(road tarrifs )
41
Q
A