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Y1 OF L&E > Economics Stage 2 > Flashcards

Economics Stage 2 Flashcards

1
Q

What is “Quantity Supplied” (QS)?

A

Quantity Supplied describes the number of goods or services that suppliers will produce and sell at a given market price.

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2
Q

What is the term “Quantity Demanded” in Economics?

A

Quantity Demanded (QD), represents the amount of a good which is desired.

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3
Q

What six factors of “Quantity Demanded” affect a good in Economics?

A

Price of a good, price of related goods, income, expectation of future prices, population and preference.

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4
Q

What is the “Law of Demand” in Economics?

A

The Law of Demand is “All other things being equal, the higher price of a good, the smaller QD of a good”.

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5
Q

What are the names of the two reasons for the “Law of Demand” in Economics?

A

The two reasons for the law of demand are: Substitution effect and income effect.

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6
Q

What is the term “Substitution Effect” in Economics?

A

Substitution effect is when similar goods become cheaper than your own good, causing consumers to but the cheaper product instead of your own.

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7
Q

What is the term “Income Effect” in Economics?

A

Income effect is when fewer goods can be afforded by consumers due to the current amount of income gained by consumers.

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8
Q

What is the term “Demand Curve” in Economics?

A

Demand Curve is a model used to illustrate the the relationship between the QD of a good and the price of a good.

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9
Q

Why is a “Demand Curve” always downwards sloping?

A

A Demand Curve is downwards sloping due to the law of demand.

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10
Q

What are the two points that are always represented on a “Demand Curve” in Economics?

A

The two points represented on a Demand Curve are: Quantity Demanded and Price.

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11
Q

What is the term “Supply” in Economics?

A

Supply is the total amount of a good or service that is available to a consumer.

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12
Q

What is the term “Quantity Supplied” in Economics?

A

The quantity supplied of a good, represents the amount of a good which a firm plans to sell.

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13
Q

What are the 6 factors that affect the “Quantity Supplied” of a good in Economics?

A

▪ The price of the good
▪ The price of the factors of production
▪ The price of related goods
▪ Expectations of future prices
▪ The number of suppliers of the good
▪ Technology

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14
Q

What is the “Law of Supply” in Economics?

A

The Law of Supply is: ‘All other things being equal, the higher the price of a good, the greater the quantity supplied of the good’.

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15
Q

What causes movement along demand/supply curves in Economics?

A

Movements along the demand and supply curves are caused by changes in the price level.

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16
Q

What causes shifts in demand/supply curves in Economics?

A

Shifts in the curves can be caused by a set of factors such as the price of related goods, changes in preferences, and changes in FOP costs.

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17
Q

What is “Elasticity” as a term in Economics?

A

Elasticity in its simplest form reflects the responsiveness of one variable to changes in another variable.

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18
Q

What are the four forms of “Elasticity” in Economics?

A
  1. Price elasticity of demand
  2. Cross elasticity of demand
  3. Income elasticity of demand
  4. Price elasticity of supply
19
Q

What is the term “Price Elasticity of Demand” in Economics?

A

The price elasticity of demand (PED) is a measure of how RESPONSIVE QD of a good is to a change in the price of the good.

20
Q

How is responsiveness of PED on a demand curve demonstrated?

A

This responsiveness is indicated by the slope of the demand curve
▪ The steeper the slope of the demand curve, the lower the PED
▪ The shallower the slope of the demand curve, the higher the PED

21
Q

How is PED calculated?

A

% change in quantity demanded/ % change in price

22
Q

What are the four primary factors affecting the “PED” of a good in Economics?

A
  • There are four primary factors that affect the PED of a good:

▪ Closeness of Substitutes– if a good has close substitutes (e.g. close substitutes for apples are pears and oranges), then its PED will tend to be
elastic

▪ Necessities or Luxuries– if a good is a necessity (e.g. medication), then its PED will tend to be inelastic with the opposite being true for luxuries

▪ Income Allocation– if a good absorbs a small proportion of a consumer’s budget (e.g. notepad paper), then its PED will tend to be inelastic

▪ Addictive– if a good has addictive properties (e.g. alcohol dependence),
then its PED will tend to be inelastic

23
Q

What is the term “Short-Run and Long-Run Demand” in Economics?

A

Demand tends to be more price inelastic in the short-run as consumers don’t have time to find alternatives. In the long-run, consumers become more aware of alternatives.

24
Q

What is the term “Cross-Elasticity of Demand” in Economics?

A

The cross elasticity of demand (CED) is a measure of how responsive QD of a good is to a change in the price of another good.

25
Q

How does CED relate to substitutes and complements in economics?

A

This is often applied in the case of complements and substitutes:

▪ If the price of a substitute good increases, the QD of a good increases.

▪ If the price of a compliment good increases, the QD of a good decreases.

26
Q

How is CED calculated in Economics?

A

CED =

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐷𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑜𝑓 𝑎 𝐺𝑜𝑜𝑑
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝐴𝑛𝑜𝑡ℎ𝑒𝑟 𝐺𝑜𝑜𝑑

  • When CED is negative, the two goods in question are complements
  • When CED is positive, the two goods in question are substitutes
27
Q

What is the term “Income Elasticity of Demand” (YED) in Economics?

A

The income elasticity of demand (YED) is a measure of how responsive QD of a good is to a change in income.

28
Q

How is YED calculated in Economics?

A

YED =

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐷𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑜𝑓 𝑎 𝐺𝑜𝑜𝑑
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐼𝑛𝑐𝑜𝑚𝑒

29
Q

What is the term “Price Elasticity of Supply” (PES) in Economics?

A

The price elasticity of supply (PES) is a measure of how responsive QS of a good is to a change in the price of a good.

30
Q

How is PES calculated in Economics?

A

PES =

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑆𝑢𝑝𝑝𝑙𝑖𝑒𝑑
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒

31
Q

How does PES affect a Supply Curve in Economics?

A

▪ The steeper the slope of the supply curve, the lower the PES.

▪ The shallower the slope of the supply curve, the higher the PES.

  • PES is deemed to be inelastic if it has a value of less than 1 and elastic if it has a value greater than 1.
32
Q

What two primary factors affect the PES of a good?

A

▪ Availability of FOPs – if a good uses FOP which are rare then their PES is likely to be inelastic when
substitutes are not present. Goods which use common FOPs tend to have an elastic PES.

▪ Timeframe – the PES of a good may change across a period of time since a change in the price
occurred.

33
Q

What are the 3 forms of PES explained?

A

▪ Momentary PES – the instantaneous change in supply which can be achieved by goods. Non-
rivalrous goods tend to have elastic momentary PES.

▪ Short-Run PES – the change in supply which can be achieved when at least one FOP can be varied but not all. Labour is often the most flexible FOP, with firms making use of overtime and zero-hour contracts.

▪ Long-Run PES - the change in supply which can be achieved when all FOPs can be varied. Capital can be increased through the expansion of manufacturing plants and Land can be increased through the purchase of new real estate.

34
Q

How can Elasticity be useful overall?

A
  1. Price Setting Decisions – firm strategy concerning how to set prices to achieve the best outcome.
  2. Tax Revenue Decisions – government strategy regarding the equity and effectiveness of imposing or changing fiscal policy.
35
Q

What is the term “Total Revenue” (TR) in Economics?

A
  • The revenue a firm receives from selling its
    product can be calculated by:
  • Total Revenue (TR) = Price (P) * Quantity
    Demanded (QD)
36
Q

How does PED affect the Total Revenue (TR)?

A
  • If a firm has the ability to control the price level for its product, it should be mindful of the PED.
  • Elastic PED – TR will shrink if prices rise and grow if prices fall.
  • Inelastic PED – TR will grow if prices rise and shrink if prices fall.
  • Unity PED – a change in price has no bearing on TR.
37
Q

How do Cost Reductions form in a Market?

A
  • Markets may experience reductions in the costs of manufacturing their product due to changes in the price of factors of production/technology breakthroughs.
38
Q

How will Cost Reductions affect a Market?

A
  • This reduction in the cost of FOPs is illustrated by a rightward shift in the supply curve for the market.
  • What implications will this have for the market agents?
  • This will depend on the PED:
  • Inelastic PEDs – consumers will gain more from the situation.
  • Elastic PEDs – firms will gain more from the situation.
39
Q

What is Government Taxation?

A
  • Governments raise revenue by levying taxes on economic activities such as duties and value added taxes (VAT).
  • Some taxes are referred to as ‘sin taxes’ as they attempt to discourage an undesirable activity.
40
Q

What must always be considered when taxes are introduced into a problem?

A
  • Who pays them – the distribution between consumers and firms.
  • How demand is affected – the PED
41
Q

What is the Burden of Taxation and how does it affect PES?

A
  • The incidence of taxation on the market agents will depend on the elasticities of demand and supply.
  • PED elastic and PES inelastic: the burden of the tax will be felt disproportionately by the firms in the market.
  • PED inelastic and PES elastic: the burden of the tax will be felt disproportionately by the consumers in the market.
42
Q

How is GDP measured?

A

State and briefly outline the main components of an expenditure approach to measuring the
gross domestic product of an economy
GDP represents the value of all products traded within an economy.

An expenditure approach to
measuring GDP contains a number of elements set out in the following equation:

GDP = C + I + G + (X – M)

Where:

C represents consumer spending on goods and services (e.g. food)

I represents investments made by firms (e.g. machinery)

G represents government spending (e.g. healthcare and welfare)

(X – M) represents net-exports being the difference between the value of goods exported
from an economy and the value of goods imported to the economy

43
Q

What is the profit maximisation point?

A

Profit Maximization occurs at the level of output where Marginal Revenue equals Marginal Cost.

44
Q
A

Y1 OF L&E (7 decks)

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