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Econs as 23 > chapter 2 > Flashcards

chapter 2 Flashcards

1
Q

PED

A
  • Measure responsiveness of qd when theres a change in price.
  • %change in qd/ % change in p
  • If ped >1 = elastic, ped<1 = inelastic
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2
Q

5 values of PED

A

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)

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3
Q

Usefulness & Importance of PED

A
  1. 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.
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4
Q

Determinants of PED
What makes a g/s elastic/inelastic?

A
  1. Substitutes (more subs = elastic) - makes it hard for business to thrive
  2. 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.
  3. Necessity or Luxury - expanding a luxury market may be hard due to income inequality.
  4. Expenditure percentage ( If good take a low % of income = inelastic )
  5. Habit forming - addiction
    6.Brand image & Customer loyalty (if high in these 2 aspects, more inelastic )
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5
Q

When will PED not be useful/limited

A
  1. When main factor affecting dd is non - price factors. (demographic changes)
  2. Ped doesn’t tell EXACT price to set.
  3. Only works for a given period of time as changes in dd will occur again.
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6
Q

XED

A

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

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7
Q

SIGNS AND SIZE OF XED

A

(+) = 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)

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8
Q

Importance of xed

A
  1. Identify which products are purchased together to come up with pricing strategies. (sensitivity)
  2. Asses their environment, to come up with price / non price strategies and also predictions for increased revenue.
  3. Able to asses future pricing plans (if a competitor rises price, firm can decrease price to grab more market share)
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9
Q

Limitations of xed

A
  1. Does not take into account all other factors that might affect dd besides price factors. (consumer preferences & income changes)
  2. In a monopoly market, xed may not be useful as price changes will not affect demand and there are less subs.
  3. 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.
  4. If brand loyalty is high for the brand A, a decrease in price of good B will increase qd, even if theyre subs.
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10
Q

usefulness of xed

A
  1. Able to respond to a change in price of another good immediately in the short run
  2. forecast future sales.
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11
Q

YED

A

Responsiveness to a change in qd when theres a change in price.

%Change in qd / %change in income

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12
Q

SIGNS OF YED

A

(+) = Normal good
(-)= Inferior good

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13
Q

determinants of yed

A
  1. If good has a sub that is higher quality and price, good A is an inferior good.
  2. Normal goods have a higher yed value as a higher % of income is needed to purchase that good
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14
Q

Importance / usefulness of yed

A
  1. Can determine whether to increase or decrease prices when economy changes
  2. Firms can be more versatile with their output. They can produce both inferior and normal goods in case of a boom/recession.
  3. Helps determine if g/s is inferior / normal to set pricing strategies.
  4. Can adapt quickly in the short term.
  5. in the short run, incomes are unlikely to change.
  6. where to sell products (in high street/city - can sell normal goods)
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15
Q

Limitations of yed

A

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

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16
Q

merit goods

A
  • 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.
17
Q

Main points when comparing a private and a public good

A
  • excludability
    -rivalry
  • free rider
18
Q

Why are market and mixed economies better than a planned economy

A

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)

19
Q

Why private and public sector can provide merit goods

A

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

20
Q

Why is the provision of public goods associated with market failure?

A
  • 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.)
21
Q

PPC

A

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

22
Q

Scarcity , opportunity cost and and choice on a PPC diagram.

A

-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.

23
Q

Why are demerit goods over consumed ?

A
  1. Imperfect information - not fully aware of negative effects, underestimate risks
    2.Short term pleasure and long term consequence - momentary enjoyment
  2. Social norms/peer pressure
    4.Addiction/habits
    5.Ineffective regulations by the government - tax implied on cigs, but still sold everywhere
24
Q

Why are merit goods under consumed ?

A

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.

25
Q

Externalities

A
  • spillover costs / benefits
    Positive externality - social benefit > private benefit
    Negative externality - social cost > private cost
26
Q

PES

A

responsiveness to a change in supply when price changes
change in % qs / change in % P

27
Q

Values of PES

A

PES > 1 - Price elastic
PES =1 -Unit elastic supply
PES<1 - Price inelastic supply
PES=0 - Perfectly inelastic supply
PES=♾️ - Perfectly elastic supply

28
Q

Determinants of PES

A
  1. 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

Econs as 23 (1 decks)

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