i detest econs (pt 1) Flashcards
fallin' fallin' fallin' fallin'
free market system
resources are allocated according to the price mechanism and market forces of demand and supply
what four characteristics are necessary for a free market system to allocate resources efficiently
- perfect competition
- rational behaviour and pursuit of self interest (huge assumption)
- freedom of choice and enterprise
- private ownership of property
perfect competition
each of the many buyers and sellers have an insignificant share of the market
rational behavior and pursuit of self-interest
driven by self-interest; prod max. profit, cons. max. utility
freedom of choice and enterprise
consumers are free to decide what to buy with their incomes (consumer sovereignty) firms can choose what to sell and how to produce
private ownership of property
indivs have rights to own control and dispose of land, capital and natural resources. owners of fop have rights to the income earned from using fop
price mechanism
changes in price cause resources to move in or out of industries (invisible hand that allocs resources)
market equilibrium
a position from which there is no inherent tendency for change; achieved when quantity demand= quantity supplied
equilibrium price
price at which the quantity demanded is equal to the quantity supplied (market clearing price)
disequilibrium
(refers to market) shortages or surpluses of goods that trigger the market adjustment process
market adjustment (price > equilibrium price)
- surplus in market
- downward pressure on price
- producers lower prices
- demand increases due to low prices + quantity decreases (profitability falls)
- fall in prices continues
- equilibrium price reached
market adjustment (price < equilibrium price)
- shortage in market
- upward pressure on price (consumers try to outbid one another)
- producers produce more (as profitability increased)
- quantity demand decreases (as price increased)
- increase in price continues
- equilibrium price reached
demand
amt consumers are willing and able to purchase at a given price over a given period of time
law of demand
quantity dd for a good or service is inversely related to its price ceteris paribus –> substitution effect and income effect
marginalist principle for dd
experiences diminishing marginal utility in consuming additional units of a good –> max. utility with given budget –> rational consumer increase qty dd as price decreases –> downward sloping dd curve
non price determinants of dd
taste and pref, expectations of future prices, income, price of related goods (substitutes and complements), derived demand, govt policies (direct tax/subsidies), population, interest rates, exchange rates
supply
qty of a good or service that producers are willing and able to offer for sale at each given price over a given period of time
law of supply
qty supplied is directly related to price of product
marginalist principle for ss
ldmr states that beyond a certain point of production, adding an additional fop results in smaller increases in output to max profits, the rational producer will increase outputs as prices increases and vice versa
non price determinants for ss
cost of production, innovation/ state of technology, natural factors (agriculture), no of firms, government policies (indirect taxes/subsidies), prices of related goods (joint supply, competitive supply), expectations of future prices
society’s welfare
sum of consumer and producer surplus
consumer surplus
difference between max amt the consumer is willing to pay and what he actually pays
producer surplus
difference between what producers are willing and able to receive and what they actually receive
price elasticity of demand
measure of degree of responsiveness of the qty dd of a good to change in its price, ceteris paribus
sign of ped
negative to reflect law of demand
magnitude
more than one –> price elastic, more than proportionate rise/fall in qd
less than one but more than zero, price inelastic, less than proportionate rise/fall in qd
applications of ped
- effect of price change on qty dd
- effect of total revenue of firm (draw diagram)
- decisions the firms can make to raise total revenue
determinants of ped
shit –> substitutes, habituality of consumption, (proportion of) income spent, time horizon
pes
measure of degree of responsiveness of the qty supplied of a good to change in its price, ceteris paribus
sign
pawsitive (law of supply)
magnitude
0<pes<1, inelastic
pes>1, elastic
applications pes
price change, qty change differently due to pes
total revenue
determinants pes
level of stock, avail of spare capacity, mobility of fop (btwn industries), time horizon (momentary perfectly price inelastic, short run restricted by at least one fop relatively price inelastic, long run all fop variable), length of production
ced
measure of degree of responsiveness of the qty dd of a good to a change in the price of another good, ceteris paribus
sign
ced>0, substitutes
ced<0, complements
ced=0, unrelated
magnitude of pes
closer relationship = larger magnitude
applications pes
fall in price of substitute: price comp and decrease price, make good less substitutable like advertising
fall in price of complement: output planning increase prod, collab
yed
degree of responsiveness of the qty demanded of a good to a change in income, ceteris paribus
sign yed
positive for normal goods (necessities –> inelastic demand and not very sensitive, luxuries –> elastic and very sensitive), negative for inferior goods
magnitude yed
the more responsive the qd is to changes in income, the larger the magnitude
determinants of yed
degree of necessity –> necessity vs luxury (depends on level of income of consumers, and stage of development of their economy)
applications of yed
firms will: (economic growth)
channel resources to sales of luxury goods, market luxury goods
recession
channel resources from sales of luxury goods to normal goods, promote inferior goods
segment consumer base
limitations of elasticity principles
ceteris paribus assumption: changes in qd can be attributed to various factors and diff to keep all other factors constant
cost concerns:
if increasing tr will also increase costs, profit will not rise
prediction issues:
calculations done from past data may not be accurate in the future
computation issues:
involves collecting price and qty data, inaccurate data = inaccurate analysis
direct subsidy
granted directly to buyers
increases buyers’ disposable income
indirect subsidy
granted indirectly through sellers, lowers sellers’ cop
direct tax
granted directly to buyers
decreases buyers’ disposable income and purchasing power
indirect tax
raises cop, paid indirectly by consumers thru sellers (ad valorem tax has pivotal shift)
price ceiling good and bad
good:
ensure affordability
bad:
inefficiencies
chronic shortage
black market
deadweight loss
price ceiling
maximum price
set below market equilibrium price
legally established
price floor good and bad
good:
protect income
minimum wage
bad:
involves g spending of buying surplus
surplus loss
deadweight loss
price floor
minimum price
legally established
set above market price
quota
limit on quantity produced, less than equilibrium qty
legally established
affects ss, at quota ss is fixed (perfectly price inelastic) (theres also deadweight loss)
labour market
buyers of labour= firms, sellers of labour= households
labour demand
depends on how much revenue each unit of labour can bring to the firm
1. dd for final good (derived dd)
2. productivity of labour
3. supply of alt and complementary fop
labour supply
- immigration
- educational attainment
- non-wage benefits of job
- alt employment opportunities
minimum wage good and bad
good:
increases income and standard of living and inclusive growth
bad:
1. higher unemployment
2. illegal employment below minimum wage
3. encourages substitution with other fop
wage differentials
- imperfect market (trade union/ monopsony)
- discrimination
- ped/pes
- minimum wage
