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economics > chapter 2 > Flashcards

chapter 2 Flashcards

1
Q

Demand definition

A

the quantity of well-defined g&s that consumers are both willing and able to buy at each and every price given a period of time, ceteris paribus

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2
Q

Law of Diminishing Marginal Utility

A

as an individual consumes more & more of a good, the additional satisfaction he derives from each additional unit of the good decreases

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3
Q

Law of Demand

A

in a given period, the quantity demanded of a product is inversely related to its price, ceteris paribus

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4
Q

Law of Supply

A

in a given period, the quantity supplied of a product is directly related to its price, ceteris paribus

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5
Q

Types of Demand & Supply Determinants

A
  • price determinants
  • non-price determinants
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6
Q

Non-Price Determinants of Demand

A

change in :
- income
- taste & preference
- substitutes/complements in consumption
- consumers’ expectation
- number/composition of consumers
- government policies

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7
Q

Supply definition

A

the quantity of well-defined g&s that producers are both willing and able to produce at each and every price given a period of time, ceteris paribus

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8
Q

Non-Price Determinants of Supply

A
  • changes in cost of factors of production
  • changes in substitutes/complements in consumption
  • changes in supply shocks
  • changes in producers’ expectations
  • changes in technology
  • changes in number of sellers
  • government policies
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9
Q

Shortage definition

A

demand exceeds supply

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10
Q

Surplus definition

A

supply exceeds demand

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11
Q

Revenue definition

A

total amount of money earned by a firm from the sales of the g&s produced

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12
Q

Price Adjustment Process

A

the surplus/shortage leads to a downward/upward pressue on price until a new market equilibrium (Qs = Qd) is achieved.

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13
Q

Types of Elasticites

A
  • price elasticity of demand (PED)
  • income elasticity of demand (YED)
  • cross elasticity of demand (XED)
  • price elasticity of supply (PES)
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14
Q

PED definition

A

the degree of responsiveness of quantity demanded of a good to a change in its price, ceteris paribus

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15
Q

Coefficient of PED

A
  • 1 < lPEDl < infinity : price elastic
  • 0 < lPEDl < 1 : price inelastic
  • lPEDl = 1 : unitary price elastic
  • lPEDl = infinity : perfectly price elastic
  • lPEDl = 0 : perfectly price inelastic
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16
Q

Factors affecting PED

A
  • availability & closeness of substitutes
  • degree of necessities
  • proportion of income spent on g&s
  • time period
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17
Q

YED definition

A

the degree of responsiveness of demand of a good to a change in income, ceteris paribus

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18
Q

Types of Goods

A
  1. inferior goods
  2. normal goods :
    - necessities
    - luxury goods
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19
Q

Coefficient of YED

A
  1. YED < 0 : inferior goods
  2. YED > 0 : normal goods
    - 0 < YED < 1 : neccesities
    - YED > 1 : luxury goods
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20
Q

Factors affecting YED

A
  • type of goods
  • initial level of income
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21
Q

XED definition

A

the degree of responsiveness of demand of a good A to a change in price of good B, ceteris paribus

22
Q

Coefficient of XED

A
  1. XED > 0 : substitutes
  2. XED < 0 : complements
23
Q

Factors affecting XED

A
  • closeness of substitute / complement
24
Q

PES definition

A

the degree of responsiveness of quantity supplied of a good to a change in its price, ceteris paribus

25
Q

Coefficient of PES

A
  • PES > 1 : price elastic
  • PES < 1 : price inelastic
  • PES = 1 : unitary price elastic
  • PES = infinity : perfectly price elastic
  • PES = 0 : perfectly price inelastic
26
Q

Factors affecting PES

A
  • time period
  • existance of spare capacity
  • availability & durability of stocks
  • length of production period
  • factor mobility
  • proportion of marginal cost of production as output changes
27
Q

Limitations of elasticity capacity

A
  1. assumption of ceteris paribus
  2. reliability and accuracy of elasticity data
  3. interactions between demand & supply
28
Q

Direct Price Controls

A
  • price ceiling
  • price floor
29
Q

Price Ceiling definition

A

the maximum legal market price set & allowed by the government (usually set below current market price level)

30
Q

Purpose of Price Ceilings

A
  • increase affordibility & fairness
  • to protect consumers’ SOL
31
Q

Problems with Price Ceilings

A
  • emergence of black markets
  • inefficient resource allocation
  • increased opportunity cost due to more time spent searching and waiting for the good
32
Q

Price Floor definition

A

the minimum legal market price set & allowed by the government

33
Q

Purpose of Price Floors

A
  • protect producers’ incomes
  • protect producers’ SOL
34
Q

Problems with Price Floors

A
  • can be ineffective
  • might be unneccesary
35
Q

Direct Quantity Controls

A
  • quota
36
Q

Quotas examples

A
  • tradable permits
37
Q

Quota definition

A

the legal limit set by the government on the quantity on a good that can be transacted in a market

38
Q

Purpose of Quotas

A
  • reeduce consumption of certain goods
  • protect domestic industries from foreign competition
39
Q

Taxes definition

A

involuntary payment of funds to the government by a household / firm for which they receive no g&s in return

40
Q

Types of Taxes

A
  • direct taxes
  • indirect taxes
  • specific taxes
  • ad valorem
  • lump-sum
41
Q

Direct Taxes definition

A
  • taxes on income & wealth
  • by households to the government
42
Q

Indirect Tax definition

A
  • taxes on expenditure
  • by firms to the government
43
Q

Specific Tax definition

A

when a fixed amount is taxed per unit of good sold

44
Q

Ad Valorem Tax definition

A

when a percentage of the good’s value is taxed

45
Q

Lump-Sum Tax definition

A

when a fixed amount is taxed regardless of output level / revenue

46
Q

Subsidies definition

A

the payment of money to a household / firm by the government for which it receives no g&s in return

47
Q

Types of Subsidies

A
  • direct subsidies
  • indirect subsidies
48
Q

Direct Subsidies definition

A

subsidies that increase households’ income & wealth

49
Q

Indirect Subsidies definition

A

subsidies on expenditure, paid directly to the producers of the g&s

50
Q

Income analysis

for demand

A

increased/decreased purchasing power

economics (18 decks)

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