Chapter 1-4 D&S, PED, Price ceiling stuff Flashcards
Define allocative efficiency
Refers to producing the quantity of goods mostly wanted by society. MB=MC
Define demand
The willingness and ability to purchase a quantity of a good or service
Define free market
A market in which resource allocation is determined by one of the following:
· demand and supply
· price mechanism
· producers and consumers
Define marginal cost
The extra cost of producing an additional unit of output
Or
The change in total costs divided by the change in output/quantity
Define minimum price/price floor
A price set by the government above the equilibrium price, such that the price may not fall
Define price ceiling
A price set by the government below the equilibrium price, such that the market price cannot go above this price ceiling
Define price inelastic
A change in the price of a product leads to a
proportionately smaller change in the quantity demanded
Define supply
The willingness and ability of a producer to produce a quantity of a good or service at a given price
Define total revenue
Total revenue is the income that a firm generates by selling goods or providing services to its customers
TR= P x Q of product sold
Define subsidies
The government gives money to an industry in order to, (any one):
* reduce cost of production
* increase output/supply of a good
* protect producers from foreign imports
* reduce the price of a product
Explain the 3 determinants of PED
Number and closeness of substitutes
more substitutes allow consumers to find one with lower price, more price elastic
Necessity vs luxuries
if the good is a necessity, the change in price cannot greatly reduce the quantity demand for the good, relatively price inelastic
if it is a luxury, consumers can choose not to buy the good since it is unnecessary, relatively price elastic
Length of time
more time to make decision
more time to look for substitutes
relatively more price elastic
Proportion of income spent on a good
takes up a greater proportion means more expensive to the consumer
relatively more price elastic
Define price elasticity of demand
PED is a measure of the responsiveness of quantity of good demanded to the changes in price
Suppose consumers buy 5000 VCD players when the price is $30 per unit and they buy 3000 VCD players when the price is $35. Calculate the PED when the price increase from $30 to $35.
% change in Q/ % change in P
percentage change in Q= (3000-5000)/5000 x 100%
percentage change in P= ($35-$30)/30 x 100%
PED= -2.4 (elastic)
Explain the application of PED on firm pricing decisions and indirect taxes
Firms:
PED determine total revenue
total revenue determine profit
will the change in price lead to an increase in TR and hence profit?
Indirect tax (government):
Tax revenue
Reduce quantity (e.g. cigarette)
Limitations of PED
Difficulties in measuring
PED change over time (cuz determinants)
P change -> PED change
Holding other factors constant does not exist in real-life
