Exam Revision Semester 1 Flashcards
What is income effect?
When price of good rises, consumers are not willing to buy as much of the good as their purcahsing power has decreased.
Example of income effect?
if you have 100 dollars and price of pizza is 10 dollars, your real income is 10 pizzas
What is substituition effect?
when price of good rises, other goods look more attractive as they are cheaper.
What is ceterus paribus
Law of demand
Non price factors affecting demand
Level of disposable income
Price of related goods
Tastes and preferences
Expectation of consumers
Demographic factors
What is law of supply?
as price of good rises quantity supplied will also rise
Non price factors affecting supply
coost of production
technology
prices of other goods
number of sellers
expectation of producers
Total revenue formula
TR = Q times price
What is price discrimnation?
the action of selling the same product at different prices to different buyers, in order to maximize sales and profits.
Eg of price discrimantion?
Cinemas charge children and students low price and adult are charged are higher.
Factors affecting Price elasticity of demand?
availability of substiutes
whether good is neccessary or luxury
proportion of income spent
time
Determinants of supply elasticity
time - if time is not of essence of producer will be able to obtain more inputs and expand mor easily.
nature of industry - agricultural products tend to bbe more inelastic
What is excise tax?
Excise tax is tax on products like cigarettes, tobacco, petrol, alcohol.
How to find consumer surplus
CS = difference bbetween total benefits and expenditure
Basically if i willing to pay $50 and i actually pay $40 then consumer surplus is $10.
HOW TO FIND TOTAL SURPLUS
CONSUMER SURPLUS+PRODCUER SURPLUS= TOTAL SURPLUS
eG OF PRICE CONTROLS
PRICE CEILINGS
PRICE FLOOR
What is a rival good with an example
. A rival good is something that can only be possessed or consumed by a single user. Example is food.
What is non rival good with example
a good consumed y multiple people/users. Example lsitenign to the radio
Non excludable good +example
Non-excludable goods are public goods that cannot exclude a certain individual or group of individuals from using them. Example is a public road
What is excludable good+example
is a good that some people are restricted from using. Excludable goods are private goods, while non-excludable goods are public goods. Eg golf memberships and netflix subsription
What is public good
public good is a good that is both non-excludable and non-rivalrous. Use by one person neither prevents access by other people.
What is free rider good with example?
when people are benefiting from resources, goods, or services that they do not pay for. Example is using reacreational swimming pool witout paying.
Common resoruces def. Example is
The characteristics of common resources are that they are nonexcludable and that they are rival in consumption. eg public forests, clean air
Tragedy of commons def+example
where the individual consumes a resource at the expense of society. Example is overfishing.
What is Market effiecny
Market efficiency also occurs when resources are allocated to maximised society’s benefits
What demand cruve show
A
A demand curve is a willingness to pay curve. It reflects the maximum price that a consumer will pay for a good.
Eg of barriers to entry
echnolgoical adavance, patent, controlling of scare resource
What supply curve show
supply curve reflects the minimum price that producers are willing to sell their products
What is producer surplus?
Producer surplus is the difference between what a producer is willing to receive and what they actually receive.
What happens when there is makret power
When there is market power, there is an incentive for firms to collude. This reduces competition, increases prices and reduces output. This will decrease economic welfare for society.
Whats market failure
Market failure occurs when resources are not allocated efficiently.
Competitive market characteristics
large number of firms, little barriers to entry and exit, and little product differentiation.
4 main types of market failure?
Market Power
Externalities
Public Goods
Common Goods
MEPC
Does subsidy go to total surplus?
The subsidy cost is removed from our total surplus.
What is private cost
These refer to the cost of the user of the product/service
What is social cost?
These refer to the cost to society as a whole due to the product or service.
Causes of Market Power
High entry barriers prevent new firms from entering the market.
Firms with superior technology can produce goods at lower costs or offer better-quality products.
Monopolies
Collusion between big companies
Imperfect market characterisitics
limited number of firms
There are barriers .
price setters
Demand is often relatively elastic
Classification of goods
Goods are classified based on rivalry (whether one person’s consumption affects others) and excludability (ability to exclude non-payers). Rivalrous goods include food and cars, while non-rivalrous goods like public parks. Excludable goods can be private (clothing) or club goods (satellite TV), while non-excludable goods include public goods like national defense
What is socail cost
These refer to the cost to society as a whole due to the product or service. When a negative externality occurs, the social cost (cost to society) is higher than the private costs.
What role does gov do when there is market failure
egulation and correcting externality by adding subsidy or tax
3 fundamental questions
What goods and services will be produced and how many?
How will the goods and services be produced?
For whom will the goods and services be produced?
3 parts of market
Buyers (demand)
Sellers (supply)
Something to exchange (a good, a service or a resource)
Factors of Production
Land
Labour
Capital
Enterprise
Compettive Market characteristics
price takers
sell homogenous products
no barriers to enter/exit
lots of sellers and buyers
Whats factor market
In a factor market households sell their resources to firms.
Non competive market characteristics
barriers to enter
few seller
product differntation - product is different in consumer eyes
price setters
What does PPF assume?
fixed or level if resources
technology is fixed
Economy produces 2 things (eg pizza and coke)
Formula for calc Oppurtunity Cost
Oppurtunity cost=what is given up/what is gained
Why is normal sahpe of PPF owed outwards
Due to law of increasing oppurtunity cost.
What is law of increasing oppurtunity cost?
As you increase the production of one good, the opportunity cost to produce the additional good will increas
What are the 4 types of goods?
Normal Goods
Inferior Goods
Complementary Goods
Substitute Goods
What are the causes of shifts in demand?
Change in consumer income for a normal good
Change in consumer income for an inferior good
Change in the price of a complementary good
Change in the price of a substitute good
Change in tastes and preferences
Change in the expectation of the future price of the good.
Change in the number of consumers in the market
What are normal goods and example
Normal Good – good that experiences an increase in demand due to an increase in a consumer’s income. Example - Clothing
What are substitute goods and example
Substitute Good – Are bought instead of another good. Example – Butter and margarine
What are inferior goods and example
Inferior Good – an inferior good is a good whose demand decreases when consumer income rise. Example – Home brand food or generic clothing
Causes of shifts in supply
Change in technology
Change in production costs (input costs)
Change in the expectation of future prices
Change in the number of producers in the market
What are complementary goods and example
Complementary Good – Are used or bought with other goods. Example – Cereal and milk
What is inelastic prodcuts?
Inelastic demand is when a buyer’s demand for a product does not change as much as its change in price.
What is elastic demand?
Elastic demand occurs when change in products quantity demanded is greater than a change in price. Usually has a flatter demand curve.
Examples of elastic products
house
boat pizza
EG of inelastic products
nappies
petrol
toilet paper
cigarettes
Determinants of Price elasticity of demand (PED)
The availability of substitutes
Whether it is a luxury or necessity
Time
Proportion of Income spend
ES?
Es> 1 - Price elastic
Es < 1 - Price inelastic
Es = 1 - unitary elastic
es = 0 - Perfectly inelastic
What is substitution effect?
The substitution effect is the decrease in sales for a product that can be attributed to consumers switching to cheaper alternatives when its price rises
What is the law of demand?
There is an inverse relationship between price of product and quantity of product demanded. When price rises consumers buy less of quantity and vice versa.
What is income effect?
The income effect identifies the change in consumers’ demand for goods and services based on their incomes. In general, as one’s income rises, they will begin to demand more goods and vice versa.
What is market economy
A market economy is an economic system where the prices of goods and services are determined by supply and demand, with minimal government intervention. In this system, individuals and businesses make most economic decisions, such as the 4 questions when producing things.
Importance of economic models
predict and understand human behaviour
Non price factors affecting demand
Income. effect on normal and inferior goods
population
tastes and preferences
prices of substitutes and complements
expected future prices
What is the law of demand?
Price and dmeand has inverse relationship. When price decreases demand increases and vice versa.
Externalti
