Economics Flashcards
PED
PED= %change in QD / %change in P
PES
PES=%change in QS / %change in P
XED
XED=%change in QD of good B/ %change in P of good A
YED
YED= %change in QD / %change in Y
TC (Total Costs)
TFC + TVC
ATC (Average Total Costs)
ATC= AFC + AVC
AFC (Average Fixed Costs)
AFC= TFC / Output
TR (Total Revenue)
TR= P x Q
MR (Marginal Revenue)
MR= change in TR / change in Q
AR (Average Revenue)
AR= TR / Q
Demand
Quantity of a good or service that consumers are willing to buy at any given price.
Law of Demand
Price - Decreases
Demand - Increases
Inverse relationship
Inward shift in D curve
- Level of Income -Decreases
- Substitute P. -Decreases
- Compliment P. -Increases
- Direct Taxation -Increases
- Population Size -Decreases
Outward shift in D curve
- Level of Income -Increases
- Substitute P. -Increases
- Compliment P. -Decreases
- Direct Taxation -Decreases
- Population Size -Increases
Supply
Quantity of a good or service that producers are willing to produce at any given price.
Supply Profit Motive
-Price -Increases
-Supply -Increases
-Profits -Increases
Positive Relationship
Inward shift in S curve
- Prod. Costs -Increases
- Tech. -Decreases
- Availability of Inputs -Decreases
- Indirect Taxation -Increases
- Value of Subsidies -Decreases
Outward shift in S curve
- Prod. Costs -Decreases
- Tech. -Increases
- Availability of Inputs -Increases
- Indirect Taxation -Decreases
- Value of Subsidies -Increases
PED definition
The responsiveness of the QD of a good or service to a change in price.
PES definition
The responsiveness of the QS of a good or service to a change in the price.
YED definition
The responsiveness of the QD of a good or service to a change in income.
XED definition
The responsiveness of the QD of a good or service to a change in the price of another good or service.
Elasticity of demand
Elasticity of demand measures how much spending will be reduced by in response.
Perfectly elastic demand
Where the value if elasticity is infinity.
- a fall in P would lead to an infinite increase in QD.
- an increase in P would lead to the QD becoming zero (0).
- Curve is a horizontal straight line.
Price inelastic demand
If P increases then QD decreases (but not by much).
- e.g. cigarettes
- The responsiveness of demand is proportionately less than the change in price.
- Less than 1.
Unit elastic demand
The value of price elasticity of demand =1.
- The responsiveness of demand of demand is proportionally equal to the change in price.
- Therefore, total spending by consumers on the product will remain the same at each price level.
- Curve is a curve.
Substitute goods
A good which can be replaced by another to satisfy a want.
- They have a positive XED with each other.
- XED>0 (positive)
Complementary goods
A good that is purchased with other goods to satisfy a want.
- They have a negative XED with each other.
- XED<0 (negative)
What does XED=0 indicate?
No relationship (between the two goods).
Inferior goods
Where demand falls when income increase.
- (a negative YED).
- YED<0 (negative).
Normal goods
Necessity + Luxury goods
- Where demand demand increase when income increases .
- (a positive YED).
-Luxury goods
A normal good with a positive YED that is greater than one.
-YED>1
-Necessity goods
A normal good with a positive YED that is less than one.
-YED<1
Ad valorem tax
An indirect tax based on a percentage of the sales price of a good/service.
Adverse selection
Where the expected value of a transaction is known more accurately by the buyer or the seller due to an asymmetry of information. e.g. health insurance.
Allocative efficiency
Occurs when the value that consumers place on a good/service (reflected in the price they are willing and able to pay) equals the cost of the resources up for production.
Asymmetric information
When somebody knows more than somebody else in the market. Such asymmetric information can make it difficult for the two people to do business together.
Average cost (AC)
Total cost divided by the no. of units of the commodity produced.
Barriers to entry
Factors making it expensive for new firms to enter a market. e.g. the effect of patents, brand loyalty among consumers, the high costs of buying capital equipment and the need to win licences to operate in certain markets.
Black market
An illegal market in which the market price is higher than a legally imposed price ceiling. Black markets can develop where there is excess demand for a commodity.
Buffer stock
Buffer stock schemes seek to stabilize the market price of agricultural products by buying up supplies of the product when harvests are plentiful and selling stocks of the product onto the market when supplies are low.
Bulk-buying
The purchase by one organisation of large quantities of a product or raw material, which often results in a lower price because of their market power and because it is cheaper to deal with one customer and the deliveries can be on a larger scale.
Carbon credits
An allowance to a business to generate a specific level of emissions - may be traded in a carbon market.
Cartel
A formal agreement among firms. Members may agree on prices, total industry output, market shares, and allocation of customers, allocation of territories, bid rigging, establishment of common sales agencies, and the division of profits or combination of these. Cartels are illegal under UK and European competition laws.
Ceteris paribus
All other factors remaining constant.
Collusion
Any explicit or implicit agreement between suppliers in a market to avoid competition. The main aim of this is to reduce market uncertainty and achieve a level of joint profits similar to that which might be achieved by a pure monopolist.
Common recourses
Goods or services that have characteristics of rivalry in consumption and non-excludability - e.g. grazing land or fish stocks. The over exploitation of common resources can lead to the “tragedy of the commons”.
Complements
Two complements are said to be in joint demand.
Composite demand
Where goods or services have more than one use so that an increase in the demand for one product leads to a fall in supply of the other.
Consumer surplus
The difference between the total amount that consumers are willing and able to pay for a good or service and the total amount that they actually pay (the market price).
Consumption
The act of buying and using goods and services to satisfy wants.
Contestable market
Market with no barriers to entry (firms can enter or leave without significant cost.
Deadweight loss
The loss in producer and consumer surplus due to an inefficient level of production perhaps resulting from market failure or government failure.
Demand
Quantity of a good or service that consumers are willing and able to buy at a given time period.
De-merit goods
The consumption of de-merit goods can lead to negative externalities which causes a fall in social welfare. The govt. normally seeks to reduce consumption of these goods. Consumers may be unaware of the negative externalities that these goods create - they have imperfect information.
Derived demand
Occurs when the demand for a particular product depends on the demand for a particular product depends on the demand for another product or activity.
Diminishing returns
As more of a variable factor (e.g. labour) is added to a fixed factor (e.g. capital) a firm will reach a point where it has a disproportionate quantity of labour to capital ans so the marginal product of labour will fall, thus raising marginal costs.
