1.3 Flashcards
what is the formula for income elasticity of demand?
YED
Y= income
what does YED measure?
income elasticity of demand
how much quantity demanded will respond to a chnage in income
what is the YED value for inferior goods?
- the YED will be negative
- as income decreases, demand increases
what is the YED value for normal goods?
- will be positive
- as when income increases demand also increases
what are income inelastic goods?
- normal goods
*0< YED<1 - QD will increase by a smaller percentage than I
- seen as necessities
what are income elastic goods?
- normal good
- YED between 1 and ∞
- QD will increases by a larger % than Y
- seen as a luxury
what are inferior goods?
as income increases, the demand for the good decreases
YED= -
what are normal goods?
as income increases, demand for the good increases
YED=+
what are income elastic goods?
QD is very responsive to chnages in income
* luxury goods
YED from 1 to ∞
what are income inelastic goods?
when QD is unresponsive to chnages in income
* necessitiy goods
YED between 0 and 1
what is cross elasticty of demand (XED)?
how is the demand for good A affected by chnages in price of good B
what is the formula for (XED) cross elasticity of demand?
what type of good has an XED of 0?
unrelated goods
what type of good has a negative XED?
- complementary goods
- as price of good A increases, demand for good B will decrease
what are complemenatry goods?
- goods bought and used together
- if price of good A increases then demand of good B decreases
XED= -
what type of good has a positive XED?
- substitute goods
- as the price goes up for price A, demand for price B goes up
What are substitute goods?
- goods which can replace another
- if price of good A increases then demand for good B decreases
XED= +
what is the price mechanism?
the interaction of supply and demand to determine prices
what are the functions of the price mechanism?
- signalling
- rationing
- incentivising
prices have fallen. (to eliminate excess supply)
Describe the signalling function of the price mechanism
- decrease in price signals to producers that consumrs want fewer goods
- therefore it signals to reduce the quantity supplied
extension in supply (along the curve)
Prices have risen (to eliminate excess demand).
Describe the incentivising function of the price mechanism
- prices are increasing, this increases the incentive to supply as more profit can be made
- therfore there is an increase in quantity supplied
extension in supply (along the curve)
Prices have gone up (excess demand).
Describe the rationing function of the price mechanism
- fewer consumers are willing and able to demand high prices
- decrease in quanity demanded
contraction in demand
what does rationing do?
limit/ration the quanity demanded by consumers
what happens to the revenue when the price changes for a elastic demand good?
- price increases= revenue decreases
- price decreases= revenue increases
what happens to the revenue when the price of an inelastic demand good changes?
- price increases = revenue increases
- prices decrease= revenue decreases
how is revenue affected by unitary price demand?
no relationship/ correlation
* as price increases/decreases revenue stays the same
what are negative externalities?
two types of negative externalities
costs which affec third parties outsid the price mechanism
* negative consumption externalities
* negative production externalities
negative effect on others
what is the price mechnaism?
the transaction between the consumer and producer
what are negative comsumption externalities?
when consuming a good leads to negative externalities
eg: alchohol, cars
what are negative production externalities?
when producing goods leads to negative externalities
eg: building buildings, factories
what are private costs?
a cost to a producer or consumer within the price mechanism
what is market failure?
when the price mechanism leads to an inefficent allocation of resources
price/quantity produced not beneficial to society
what are the 4 types of market failure?
- negative externalities
- positive externalities
- public goods
- information gaps
what are public goods?
- non-excludable
- non- rival
what does it mean for a good to be exludable/ non excludable?
- excludable: to can stop others from using a good
- non- excludable: yo cannot stop others from using a good
what does it mean for a good to be rival/ non rival?
- rival: your consumption stops others from enjoying
- non- rival: your consumption of a good cannot stop anyone else from using it (no cost)
what is the free rider problem?
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
what is the state provision of good?
when the goverment provide (public) goods
not always public: education/ healthcare
what types of goods are the following:
1. healthcare
2. flood defences
3. education
4.police force
5. fire brigade
- private
- public
- private
- public
- public
although could become rival/ non rival, exludable/ non excludable (Ev)
How can you argue tha tthese goods are not pure public goods:
1. parks
2. police
3. roads
- parks can become excludable
- police can become rival goods if a large incidence stops police attending others
- roads can become exludble(road tarrifs )
