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ECONS AS LEVEL > 2. PRICE SYSTEM AND THE MICROECONOMY > Flashcards

2. PRICE SYSTEM AND THE MICROECONOMY Flashcards

1
Q

Effective demand

A

Demand supported by the ability and willingness to pay

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2
Q

Individual Demand/Supply

A

Demand or supply for a good from one consumer or producer

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3
Q

Market Demand/Supply

A

Total demand or supply for a good across all consumers or producers in the market

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4
Q

Determinants of Demand

A

Price of the good

Income levels

Prices of related goods
- Substitutes (e.g higher price of tea -> higher demand for coffee)
- Complements (e.g lower price of cars -> increase demand for fuel

Taste and preferences

Expectations of future prices

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5
Q

Determinants of supply

A

Production cost

Technology

Prices of related goods
- Joint supply
- Competitive supply

Gov policies

Producer expectations

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6
Q

Joint supply

A

A situation where an increase in the supply of one leads to a decrease in supply of another by-product (vice versa)

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7
Q

Competitive supply

A

Alternative products a firm could make with its resources

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8
Q

Movement along demand/supply curve

A

Caused by price changes of the good itself

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9
Q

Shift in demand/ supply curve

A

Caused by non-price factors (e.g., income, tastes, or production costs) Price of itself does not affect

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10
Q

PED

A

Measures the responsiveness of QD for a good or service to a change in its price

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11
Q

PED calculation

A

% change in QD/ % change in price

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12
Q

PED >1

A

Elastic
QD is highly reponsive to price change
E.g luxury goods

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13
Q

PED <1

A

Inelastic
QD less responsive to change in price
Necessities

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14
Q

PED = 1

A

Unitary Elastic
Proportional response; a 10% price change leads to a 10% quantity change

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15
Q

PED = 0

A

Perfectly Inelastic
No response to price changes

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16
Q

PED = ∞

A

Perfectly Elastic
Demand is infinite at a particular price and drops to zero if the price changes

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17
Q

Importance of PED

A

For firms: Helps set prices to maximize revenue
For gov: Used for taxation strategies, especially on inelastic goods like tobacco

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17
Q

Factors affecting PED

A

Availability of substitutes (more subs = higher elasticity)
Nature of good
Proportion of income spend (higher proportion = higher elasticity)
Time period
Addiction/ habits

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18
Q

Income elasticity of demand

A

Measures the responsiveness of demand for a good or service to changes in consumer income

19
Q

Positive YED

A

Normal goods

19
Q

YED calculation

A

% change in QD/ % change in consumer income

20
Q

YED>1

A

Luxury good
Demand increases more than income increas

21
Q

Negative YED

A

Inferior goods

22
Q

Importance of YED

A

For Firms: Helps predict changes in demand during economic growth or recession
For gov: Assists in planning welfare programs and tax policie

23
Q

Cross elasticity of demand

A

Measures the responsiveness of demand for one good to a change in the price of another related good

24
Q

XED calculation

A

% change in QD of good A/ % change in price of good B

25
Q

Positive XED

A

Substitutes

26
Q

Negative XED

A

Complements

27
Q

Importance of XED

A

For firms: Helps understand competition & pricing strategies
Helps decide on complementary good pricing

For gov: Understanding how price controls on one product affects others

28
Q

Price elasticity of supply

A

Measures responsiveness of quantity supplied to price changes

29
Q

PES calculation

A

% change in QS/ % change in price

30
Q

Factors affecting PES

A

Time: More time allows greater adjustments in supply.

Spare capacity: More capacity increases elasticity.

Stock levels: High stocks increase elasticity.

Ease of factor substitution: Flexibility of resources increases elasticity.

31
Q

Joint demand

A

Complements

Demand for one good increases demand for its complement

32
Q

Alternative demand

A

Substitutes

Demand for one good decreases demand for its substitute

33
Q

Derived demand

A

Demand for a good depends on demand for another

e.g demand for steel increase w demand for cars

34
Q

Joint supply

A

Production of one good leads to production of another

35
Q

Functions of price in resource allocation

A

Rationing
Signalling
Incentivizing

36
Q

Rationing in resource allocation

A

Prices ration scarce resources among competing uses

High prices during a drought ration water supply

37
Q

Signalling in resource allcation

A

Prices signal information to buyers and sellers about market conditions

Rising oil prices signal increased scarcity

38
Q

Incentivizing

A

Prices incentivize changes in behavior

Higher wages attract more workers

39
Q

Consumer surplus

A

Difference between what consumers are willing to pay and what they actually pay

Willing to pay $10, but market price is $7

40
Q

Producer surplus

A

Difference between the price producers receive and the minimum price they’re willing to accept

Willing to sell for $5 but receives $7

41
Q

When does consumer surplus increase

A

Lower prices or greater demand

prices decrease, consumers pay less than their willingness to pay, increase consumer surplus

demand increase, more consumers, willing to pay more than actual market price

42
Q

When does producer surplus increase

A

Higher prices or lower costs

higher price for their goods, increase diff between production cost & selling price

production cost fall, minimum price are willing to accept decrease, increase production surplus

43
Q
A

ECONS AS LEVEL (6 decks)

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