AS Microeconomics: C2-3 Flashcards

Question

What will the value of PED always be?

Answer 1

-PED will always have a negative value because price and quantity move in opposite directions (since demand curve is downward sloping).

Answer 2

**unit elastic demand:**PED= -1 {downward sloping curve from top left to bottom right} **perfectly inelastic demand:**PED= 0 {vertical line} **perfectly elastic demand:**PED= -infinity {horizontal line}

Answer 3

-**availability of substitutes:**if substitutes are available, then there will be a strong incentive to shift consumption to them when the price of the product rises. The existence of substitutes will therefore tend to make demand for the product elastic. -**proportion of income spent on a product:**if only a small % of income is spent on a product, then demand will tend to be inelastic.

Answer 4

-**nature of the product:**if the product is addictive, then demand will tend to be inelastic. -**durability of the product:**if the product is long-lasting and hard-wearing, then demand will be fairly elastic since it is possible to postpone purchases.

Answer 5

-**length of time under consideration:**it usually takes time for consumers to adjust their expenditure patterns following a price change. Consequently, demand is usually more price elastic in the long run. -**breadth of definition of a product:**if a product is broadly defined E.g. fruit, demand is likely to be price inelastic.

Answer 6

-when demand is **inelastic**,a price change causes total revenue to change in the **same direction**. -when demand is **elastic**,a price change causes TR to change in the **opposite direction.** -when demand is **unit elastic**,a price change causes total TR to **remain unchanged**. -when demand is **perfectly inelastic**,a price change causes TR to **change in the same direction**,by the same proportion. -when demand is **perfectly elastic**,a price rise causes TR to **fall to 0**.

Answer 7

-if firms know that demand for their product is price inelastic, then they know that they can increase TR by raising price. -However, if firms know that demand is elastic, then they can increase TR by reducing price.

Answer 8

-if the government wishes to maximise its tax revenue, then it will place indirect taxes on those products whose demand is price inelastic E.g. petrol, tobacco. However, in this case, the consumer will bear most of the tax burden. -the government may therefore also tax products/services whose demand is price elastic, in which case the producers will bear a higher proportion of the tax burden.

Answer 9

-**rationing device:**market forces will ensure that the amount demanded is exactly equal to the amount supplied. -**incentive:**the prospect of making a profit acts as an incentive to firms to produce goods/services. -**signalling device:**for producers to increase/decrease the amount supplied. -**changes in wants:**change in demand will be reflected in a change in price.

Answer 10

-a market refers to all those buyers and sellers of a product/service in making exchanges with each other and who help to determine its price. These markers may be local, national or global.

Answer 11

-consumer surplus: refers to the difference between how much a person is willing to pay and how much they actually pay. Diagrammatically, the consumer surplus is the area under the demand curve and above the market price.

Answer 12

-producer surplus: refers to the difference between how much firms are willing to supply at each price and the market price. Diagrammatically, the producer surplus is the area between the supply curve and market price.

Answer 13

-gradient of the demand curve (steeper it is, the greater the consumer surplus will be) -changes in the condition of demand (increase in demand increases amount of consumer surplus)

Answer 14

-gradient of supply curve (steeper it is, greater the producer surplus). -changes in conditions of supply (increase in supply increases producer surplus).

Answer 15

-Cross elasticity of demand is a measure of the responsiveness of quantity demanded for one product (Y) to a change in the price of another product (X).

Answer 16

-XED=percentage change in QD of product Y/ percentage change in price of product X -a **positive sign** indicates that the products are substitutes. A rise in one will cause an increase in demand for another. -a **negative sign** indicates that the products are complements. A rise in price of one product will cause a decrease in demand for another.

Answer 17

-a knowledge of XED is helpful for firms to set prices for their products. E.g. if the firm is selling a product with a close substitute then it would expect demand for its product to fall considerably if it decided to increase price. -firms also know that complementary goods can command high prices.

Answer 18

-income elasticity of demand is a measure of the responsiveness of QD for a product to a change in real income.

Answer 19

-YED=percentage change in QD/ percentage change in real income -a **positive sign** indicates that the product is a normal good. E.g. a rise in real income will cause an increase in demand. UPWARD SLOPING CURVE FROM LEFT TO RIGHT. -a **negative sign**indicates that the product is an inferior good e.g. a rise in real income leads to a fall in demand for the product. DOWNWARD SLOPING DURVE FROM RIGHT TO LEFT.

Answer 20

-whenever YED is **greater than +1,**demand is **income elastic.** -whenever YED is **between 0 and +1, **demand is **income inelastic.**

Answer 21

-if firms know that demand for their product is income elastic, then they know that demand and total revenue will increase significantly during periods of economic growth and fall during recessions. -consequently, knowledge of YED may be important when making investment decisions.

Answer 22

-if the government wishes to maximise its tax revenue during an economic boom, it will place indirect taxes on those products whose demand is income elastic. -knowledge of YED might help the government in estimating tax revenues from indirect taxes of particular goods and services.

Answer 23

-indirect taxes are taxes on expenditure and includes taxes such as VAT, excise duties. Such taxes cause an increase in the cost of supply and so cause the supply curved to shift to the left.

Answer 24

-**ad valorem taxes:**percentage of the price of a product/service and so will cause the supply curve to shift to the left and become steeper than the original supply curve. **specific taxes:**set amount of taxes on each unit consumed. Therefore, the effect of a specific tax is to cause the supply curve to shift to the left, parallel to the original supply curve.

Answer 25

-relates to how the burden of tax is distributed between different groups (producers and consumers)

Answer 26

-a rise in indirect taxes causes supply to shift inwards and demand will be inelastic so a large increase in price will only cause a small decrease in quantity. -a rise in indirect taxes causes supply to shift inwards and demand will be elastic. A small increase in price will cause a large decrease in quantity.

Answer 27

-a subsidy is the grant from the government which has the effect of reducing costs of production. -subsidy increase will cause on outward shift in supply.

Answer 28

-makes the assumption that people act rationally and aim to maximise utility.

Answer 29

-consideration of the influence of other people's behaviour -the importance of habitual behaviour --> habits are difficult to change if repeated frequently. Incentives (financial or non financial) may be required to change such habits. -inertia (consumers may not make an active effort to change their behaviour for several reasons including info overload, the complexity of the info available and too much choice available). -consumer weakness at computation --> people tend to pay more attention to recent events that to distant events when they make decisions. Linked with this, consumers find considerable difficulty in calculating the probability of something happening.

Answer 30

-those goods that have two key characteristics, they are non-rivalrous and non -excludable. -non rivalrous is consumption by one person does not limit consumption by others. -non-excludability is if a good is available for one person, then its available for everyone. -examples of public goods are street lighting, nuclear defence systems and national parks.

Answer 31

-the problem that once a product is provided, it is impossible to prevent people from using it and, therefore, impossible to charge for it.

Answer 32

-occurs when the force of supply and demand do not result in the efficient allocation of resources. -it arises because the price mechanism has not taken into account all the costs/benefits in the production/consumption of the product/service.

Answer 33

-**partial market failure:** when a market still exists, but the goods/service is being produced or consumed inefficiently. (private healthcare is available, but many cannot afford it --> leads to under consumption of healthcare relative to the socially optimum level) -**complete market failure:**occurs when a market does not exist at all, meaning that a necessary good or service is not provided by the market. (street lights)

Answer 34

-externalities -public goods -information gaps

Answer 35

-for resources to be allocated efficiently, it is necessary for social marginal costs (SMC) to be equal to social marginal benefits (SMB). -SMC= addition to total cost of producing an extra unit of output. -SMB=addition to total benefits of consuming an extra unit.

Answer 36

-these are costs and benefits to third parties who are not directly part of a transaction between producers and consumers. -externalities are therefore a form of market failure because market forces will not result in an efficient allocation of resources. -external costs: negative externalities -external benefits: positive externalities

Answer 37

-private costs are costs paid directly by the producer and consumer in a transaction. -producer: wages, raw materials, energy -consumer: price paid for the product/service

Answer 38

-external costs are costs to third-parties. -production: air pollution, noise pollution -consumption: passive smoking, overeating by individuals (obesity may strain NHS and tax payers)

Answer 39

-sum of private costs and external costs.

Answer 40

-private marginal costs (PMC) is the supply curve and indicates that costs rise as output rises therefore free market output is where PMB=PMC. -negative externality of production will show SMC higher than PMC, triangle points to socially optimum. TRIANGLE IS WELFARE LOSS.

Answer 41

-PMB is higher than SMB (shift outwards) -triangle points towards socially optimum output (WELFARE LOSS)

Answer 42

-MSB is higher than MPB. -triangle points to socially optimum level (WELFARE LOSS)

Answer 43

-MPC is higher than MSC. -triangle points towards socially optimum level (WELFARE LOSS)

Answer 44

-this is when people have inaccurate, incomplete uncertain or misunderstood data and so make potentially wrong choices in markets (addiction to painkillers/drugs, uncertain quality of secondhand products)

Answer 45

-this occurs when somebody knows more than somebody else in the market. -used vehicles, pharmacy,private tutoring

Answer 46

-market for health insurance (risk of adverse selection effects) -market for secured and unsecured loans ('credit worthiness')

Answer 47

-asymmetric info can lead to an inefficient allocation of resources (health insurance --> healthier people might not get insurance due to high premium) -buyers may overpay/ under consume leading to allocative efficiency.

Answer 48

-fake news and misleading advertising damages consumer sovereignty and can lead to a loss of allocative efficiency. -info gaps can affect equity such as students from poorer backgrounds finding it hard to access the best universities.

Answer 49

-bounded rationality is the idea that humans have limited cognitive resources and are unable to make completely rational decisions. -they must rely on heuristics or rule-of-thumb to simplify complex-decision making processes.

Answer 50

-price quality heuristic -familiarity heuristic -brand loyalty heuristic -availability heuristic

AS Microeconomics: C2-3 Flashcards

(74 cards)