Econimcs Revision Flashcards
Name the three functions of the price mechanism
Rationing function
Signalling function
Incentive function
What is the price mechanism?
Where the price reflects the forces of supply and demand. Resources move to where they are shortest in supply, relative to demand and move away from places of low demand.
What is the rationing function?
If resources are scarce, demand exceeds supply and price rises. This rise discourages demand.
What is the signaling function?
Price changes sends contrast if messages to consumers and producers. Rising prices give the signal for consumers to lower demand and for producers to higher demand or enter the market.
What is the incentive function?
Incentive motivate the producer or consumer to buy or make more. Higher prices cause producers to make more to get a higher profit, while lower prices cause consumers to buy more.
What is TU?
Total utility
What is MU?
Marginal utility
What does the demand curve show?
The amount of people willing to buy at a certain price
Factors for a shift in demand curve
Change in price of substitute or complimentary good
Income
Advertising
Population
Factors for a shift on supply curve
Government: tax or subsidy Fashion Bad weather Raw materials Technology
Define price electricity of demand
The responsive of demand to a change in price
What is the formula for price electricity of demand?
% change in quantity demanded / % change in price
How do you work out % change?
Find difference between new and original number / by original number and x 100
What if the price elasticity calculation gives you a number greater than 1?
The good is elastic
What if the price elasticity calculation gives you a number less than 1?
The price is in elastic
What if the price elasticity calculation gives you a number = to 1?
It is unit elastic
Name the determinants for elasticity of demand
Time period Number of closeness of substitutes Proportion of income taken up by the product Luxury or necessity Habit forming
What is the price elasticity of supply
The responsiveness to supply of a change in its price
Give the formula for price elasticity of supply
% change in quantity supplies / % change in price
What are the determinants of elasticity of supply?
Land-availability of raw materials Labour Capital Enterprise - skills Time Spare capacity Spare stock and components
What is income elasticity of demand
The responsiveness to demand in a change in income
What is a normal good
Demand rise as income rises
What is an inferior good
Demand rises and income falls
What if the good is 2+ in the income elasticity of demand calculation
It is a luxury
What is cross elasticity
The responsiveness of demand of one goods to changes in price of a related food.
What is the formula for cross elasticity of demand
% change in quantity demanded of good a / % change in price of good b
What are the uses if cross elasticity of demand
Firms will see how price impacts demand
Shows how price impacts complimentary products
Measures how big the substitute is e.g. little rise in price causes big increase in substitute sales
What is an absolute advantage?
Being able to produce more of something than another country
What is a competitive advantage
Being able to produce something at. A much lower opportunity cost than another country
