chapter 2 Flashcards
PED
- Measure responsiveness of qd when theres a change in price.
- %change in qd/ % change in p
- If ped >1 = elastic, ped<1 = inelastic
5 values of PED
1) PED = 0, perfectly inelastic (change in qd =0 when price changes )
2) PED < 1, relatively inelastic (change in qd is little when price changes)
3) PED=1,Unitary elastic ( change in qd = change in p)
4) PED>1, Relatively elastic (change in qd is more than change in p)
5) PED=INFINITE, Perfectly elastic (qd changes when price doesnt change, buyers will only buy at one price)
Usefulness & Importance of PED
- Can determine price strategies (increase or decrease price for most profit)
2.Government could increase TR (inelastic good = tax)
3.if goods are elastic, with many substitutes, producers could identify competitors.
4.investment decisions for a firm- if a product is elastic, firm can invest in improving its quality rather than quantity.
Determinants of PED
What makes a g/s elastic/inelastic?
- Substitutes (more subs = elastic) - makes it hard for business to thrive
- Time (longer time to consider the g/s, the more elastic it is) - if its the short run, its inelastic and higher prices can be charged.
- Necessity or Luxury - expanding a luxury market may be hard due to income inequality.
- Expenditure percentage ( If good take a low % of income = inelastic )
- Habit forming - addiction
6.Brand image & Customer loyalty (if high in these 2 aspects, more inelastic )
When will PED not be useful/limited
- When main factor affecting dd is non - price factors. (demographic changes)
- Ped doesn’t tell EXACT price to set.
- Only works for a given period of time as changes in dd will occur again.
XED
how qd of one good is affected by a change in price of another good.
% change in qd of one good/ %change in price of another good
SIGNS AND SIZE OF XED
(+) = substitue
(-)= complement
If a good has a high + coefficient, its a strong sub, vice versa
If it has a weak -, it is a weak complement, vice versa.
if xed=0, the goods are UNRELATED (price change wont affect qd of other good)
Importance of xed
- Identify which products are purchased together to come up with pricing strategies. (sensitivity)
- Asses their environment, to come up with price / non price strategies and also predictions for increased revenue.
- Able to asses future pricing plans (if a competitor rises price, firm can decrease price to grab more market share)
Limitations of xed
- Does not take into account all other factors that might affect dd besides price factors. (consumer preferences & income changes)
- In a monopoly market, xed may not be useful as price changes will not affect demand and there are less subs.
- May not be useful in the long term because changes in the price and qd are changing, so xed calculations will have to be done often.
- If brand loyalty is high for the brand A, a decrease in price of good B will increase qd, even if theyre subs.
usefulness of xed
- Able to respond to a change in price of another good immediately in the short run
- forecast future sales.
YED
Responsiveness to a change in qd when theres a change in price.
%Change in qd / %change in income
SIGNS OF YED
(+) = Normal good
(-)= Inferior good
determinants of yed
- If good has a sub that is higher quality and price, good A is an inferior good.
- Normal goods have a higher yed value as a higher % of income is needed to purchase that good
Importance / usefulness of yed
- Can determine whether to increase or decrease prices when economy changes
- Firms can be more versatile with their output. They can produce both inferior and normal goods in case of a boom/recession.
- Helps determine if g/s is inferior / normal to set pricing strategies.
- Can adapt quickly in the short term.
- in the short run, incomes are unlikely to change.
- where to sell products (in high street/city - can sell normal goods)
Limitations of yed
1.Income changes may be different for all consumers
2. only works for a specific period of time as income may fluctuate again, so firms have to change output/prices again.
3. Firms will have to constantly keep track of income chnages
merit goods
- goods when consumed result in positive externalities.(benefits society as a whole)
- under consumed due to imperfect information.
- although these goods are typically provided and (fully) subsidised by the government, it is still rivalrous and excludable (edu, health) making it a private good.
Main points when comparing a private and a public good
- excludability
-rivalry - free rider
Why are market and mixed economies better than a planned economy
advantages of market and mixed are not the same, but can be similar when compared to a planned economy.
- high consumer choice
- innovation and productivity
-profit motive
-flexible and adaptable
-individual freedom (jobs, etc)
Why private and public sector can provide merit goods
private sector
- higher competition, so the quality and quantity of goods are much better
- profit motive
-consumer choice, whereas consumers can choose from a variety of goods that they specifically want (private education)
public sector
- positive externalities to generate economic growth
- reduction of inequality, anyone can access merit goods.
-maximise social welfare
- long term benefits of society
Why is the provision of public goods associated with market failure?
- public goods lack profit incentive, reducing quantity and quality of goods sold.
- pub goods can be over consumed as the incentive to conserve them doesn’t exist within the economy due to imperfect info.
-resources might be inefficiently allocated due to lack of proper mechanisms ( some may benefit when others don’t, eg: stretlights in a city but not in an underdeveloped area.)
PPC
A diagram that illustrates the maximum potential out put of an economy with existing resources.
Assumptions :
1) only 2 good produced (on each axis)
2)Level of tech is fixed
3)resources are fully utilised
4)fop are fixed
Scarcity , opportunity cost and and choice on a PPC diagram.
-Scarcity is shown through the movement of the curve. If a point moves up a curve, the production of good X is increased and good Y is decreased.
-Opportunity cost is shown by the shape of the curve
-Choice is demonstrated by a movement on the ppc by a change in consumer preferences.
Why are demerit goods over consumed ?
- Imperfect information - not fully aware of negative effects, underestimate risks
2.Short term pleasure and long term consequence - momentary enjoyment - Social norms/peer pressure
4.Addiction/habits
5.Ineffective regulations by the government - tax implied on cigs, but still sold everywhere
Why are merit goods under consumed ?
1.Imperfect info - positive externalities are underestimated.
2.Long term benefits vs immediate costs - subscription to a gym may be costly and time consuming , but health and death rate will improve.
3.Income disparities - low income, cant afford good healthcare.
4. limited access to merit goods in underdeveloped areas.
Externalities
- spillover costs / benefits
Positive externality - social benefit > private benefit
Negative externality - social cost > private cost
PES
responsiveness to a change in supply when price changes
change in % qs / change in % P
Values of PES
PES > 1 - Price elastic
PES =1 -Unit elastic supply
PES<1 - Price inelastic supply
PES=0 - Perfectly inelastic supply
PES=♾️ - Perfectly elastic supply
Determinants of PES
- FOP substitution - can FOP be switched when demand changes (if it can, pes is elastic, but if fop are highly specialised, then pes is inelastic )
2.Spare production capacity - output can be expanded if the firm has spare capacity
