2.0 Flashcards
Definition of consumer surplus
The additional satisfaction gained by a consumer over and above the price paid for the product; it is the difference between what a consumer is willing and able to pay for a good/service and the price they pay
Definition of producer surplus
Is the difference between the price a seller is willing and able to sell a good/service for and the price the seller receives for the good/service
Extent of change of price on producer surplus
- The extent to which the price changes
2.the price elasticity of supply
3 assuming nothing else changes ( I.e. income )
Extent of Chang in price on consumer surplus
1 the extent of change in price
2 price elasticity of demand
3 other things may not be the same (income)
Availability and accessibility of substitutes (effect on PED )
The fewer the number of close substitutes the lower the PED as consumers cannot switch to an alternative good or service, demand for the good/service will ne less responsive to a change in price. If there are many substitutes PED will be higher as consumers/buyers can switch to other alternative easily
Ease of switching to alternatives (effect on PED)
Substitutes may be available but if it is difficult to switch suppliers e.g. switching cable to contract to satellite tv PED will be reduced (less responsive)
The extent to which a product is a necessity - effect on PED
Necessity have a lower PED than luxuries. Products with a ‘brand loyalty’ are also likely to experience low PED
Quantity demanded for products that part of non essential consumption are likely to be far more responsive
Proportion of expenditure consumer allocates to the products - effect on PED
Generally, the lower the proportion of total expenditure required to purchase the product the lower the PED; this higher the proportion of income required to purchase the product the higher the PED
Timer period - effect onPED
Generally, the shorter the time period the lower the PED. PED rises over time as information increases and/or consumption habits change
Necessity of product - effect on YED
If a product is a necessity a changing in quantity demanded will be far less responsive to a change in income. Products with a ‘brand loyalty’ are also likely to experience low YED
Whether or not the product is a superior (luxury) product
Demand for products that are part of non essential consumption are likely to be far more responsive to a change in income
Inferior good - effect on YED.
Are products that have negative income elasticity of demand because the demand decreases as income increases e.g. value brand baked beans
Time period - effect on PES
Over short time period producers find it harder to extend supply. Supple tends ti be relatively inelastic in the short run (particularly for agricultural product)
Availability of storage/stored stock - effect on PES
If a product is not easily stored or there is limited stock stored of the product the supply is likely to be inelastic. Supple tends to be more elastic for good that are more easily stored
Access to factors used in production - effect on PES
If the supply of factors used in production is relatively price inelastic. The supply of the good/service is highly likely to be price inelastic. This may be due to limited access to additional skilled labour required in production,specialist machinery, or limited raw materials. If supple of factors is elastic then PES is likely to be price elastic.
Spare capacity - effect on PES
If producers/sellers have spare capacity, with additional output produced without requiring an increase in the scale of production firms are able to extend quantity supplied in response to an increase in price (elastic). If firms do not heave spare capacity it will be very difficult to supply more at the new price level as it may take too long
Mobility of factors of production
If the supply of factors used in production are relatively mobile, the supply of the good/service is more likely to be price elastic. For example, this may be due to labour required in production being more mobile and more easily switched between tasks and production of different goods/services
What is marginal revenue (MR)
The additional revenue received from the sale of an additional unit of output
What is marginal cost (MC)
The additional cost of producing an additional unit of output
What is marginal private benefit (MPB)
The additional benefit from the consumption of an additional unit of a good or service
What is market failure
The inefficient allocation of resources (capital land labour enterprise). The price mechanism fails to maximise social welfare
What is a negative externality
A harmful effect imposed on any third party outside the economic transaction
for which no compensation is paid
What is a positive externality
A beneficial effect enjoyed by any third party outside the economic transaction for which no compensation is paid
What is social welfare
Social welfare is a term given to total surplus. It is the total surplus/ welfare of economic agents in society. In a free market social welfare is the sum of consumer surplus and producer surplus (assuming no market failures and a competitive markets)
