EC1202 WEEK 4,5,6 Flashcards
What is equilibrium?
a state of balance between opposing forces
what is the equilibrium point?
Graphically , the intersection of supply and demand
what is the equilibrium quantity?
The numerical quantity (supplied and demanded) at the equilibrium price
what are the three steps for analysing changes in equilibrium?
- Decided: the event shifts the supply curve, the demand curve, or both curves
- Decide: curve shifts to right or to left
- Use supply-and- demand diagram
__ and ____ play a key role in determining prices in the market economy
supply
demand
what curve is downslopping
demand
what curve is upslopping
supply
what is surplus
It is the amount by which the quantity supplied exceeds the quantity demanded at the current price.
when does a surplus only occur?
It occurs only if the current price exceeds the equilibrium price.
what is a shortage?
The amount by which the quantity demanded exceeds the quantity supplied at the current price.
what is a price floor?
It is the minimum price that suppliers can be sure to receive for their output.
where must a price floor be set?
above the equilibrium price.
what are moral hazard?
A situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost.
What determines whether a good is price elastic or price inelastic?
- Availability of close substitutes
- Necessity or Luxury
- Time horizon (The timeline in which an investor plans to gain value on their investment)
- Proportion of income spent on the good
- Definition of the market
what it the Formula of PED?
percentage change in quality demanded/ percentage change in price
what is an elastic good?
An elastic good is defined as one where a change in price leads to a significant shift in demand and where substitutes are available for an item, the more elastic the good will be.
what is an inelastic good?
Inelastic goods demand means that when the price of a good or service goes up, consumers’ buying habits stay about the same, and when the price goes down, consumers’ buying habits also remain unchanged.
example of inelastic goods
gas
electricity
cigarretts
example of elastic good
bread
milk
cars
clothing
what does elasticity tell us?
The law of demand of demand tells us that when the prices goes up the demand goes down. Elasticity tells us how much it goes down by
what happen a good has a lot of substitutes?
That the good is elastic
necessities tend to have an inelastic or elastic demand?
inelastic demands
Luxuries tend to have an inelastic or elastic demand?
elastic demand
what is elasticity?
The measures the responsiveness of quantity demanded after a change in one of it determinants, the two most important being price and income.
what is the cross price elasticity of demand?
Cross price elasticity (CPED) measures the responsiveness of demand for good X following a change in the price of a related good Y.
when we calculate income elasticity of demand, we find that normal goods have a positive IED. why is this?
because when income goes up the demand for goods also goes up.
As a rule, if a good or services has an IED of greater than +2 it is considered a __?
LUXURY GOOD
what is an inferior good?
a good that when the demand increase the income decrease
what is an example of an inferior good?
instant noodles
some frozen foods?
what is an example of an inferior good?
instant noodles
some frozen foods?
IED less than 0 what type of good?
inferior good
IED less than 1 greater them 0 what type of good?
normal and necessity good
IED greater than 1 what type of good?
Normal and Luxury
wha is IED
Income elasticity of demand measures the willingness of consumers to change their preferences towards a good or service as a result of changes in their income level.
What is an externality?
An externality is the cost or benefit that affects a party who did not choose to incur that cost or benefit”
an externality is also referred as?
a spillover effects
Are externalities negative or positive?
both
what are the assumptions underlying perfect competition? (9)
large number of buyers and sellers
homogenous products
no discrimination
perfect knowledge
free entry or exit of firms
perfect mobility
profit maximisation
no selling cost
no transport cost
what factors cause a shift in the supply curve
technology
number of sellers
government policy
resource price
expectations
price of other goods
what happens when there is a negative externality?
The market produces too much of a good
What happens when there is a positive externality?
The market produces too little of a good
What are the two approaches to address inefficient outcomes?
Private solutions
Government solutions
What are the private solutions to address inefficient in externalities
- Moral codes and social sanctions
- Charities
- Self-interest of the relevant parties
- Interested parties – enter a contract
What are the government solutions to address inefficient in externalities
- Command-and-control = direct regulation
- Market-based policies = provide incentives
The Pigouvian Subsidy has three additional problems what are they?
- Raises profits, encouraging other firms to join the market and produce externalities
- The financing of the subsidy cost often comes from additional distortionary taxation that further restricts the economy
- Paying a firm not to pollute is regarded as unappealing
what is a public good?
a good that is both non-rival and non-excludable
what are rival goods?
If their consumption by one consumer prevents simultaneous consumption by other consumers
what a non-rival goods?
if they can be consumed by more than one person at a time
what is an excludable good?
if it prevents non-paying consumers from accessing it.
what is an non- excludable good?
If non-paying consumers cannot be prevented from accessing it.
when does the The free-rider problem happen?
occurs when those who benefit from resources, public goods, or services do not pay for them, which results in an under-provision of those goods or services (e.g. R&D)
Common Pool Resource when does this happpen?
Resources to which more than one individual has access but when one person’s consumption reduces the potential value of the resources to others
what are Solutions to tragedy of the commons?
- Private ownership (defined by the government)
- Government regulation (fishing limits, for example)
- Tax on use
