Intro to economics Flashcards
Which are the determinants of PED?
- Number and closeness of substitutes
- Proportion of income spent on the good
- Time period between measurements
- Nature of the good
What is the basic economic problem?
Humans have unlimited wants and needs but limited resources
Define opportunity cost
The next best alternative sacrifice
Define consumer goods
Everything that we buy
Define capital goods
Equipment necessary to produce consumer goods
Describe a production possibility curve
A PPC shows us the largest amount of capital goods (x) and consumer goods (y) a system could possibly produce if it correctly utilised all its resources
Define actual growth
Using all the resources available to you
Define free market
No control from the government (Hong Kong)
Define central planning
State funded and controlled (N. Korea)
Define mixed economy
A mixture of government decisions and a market economy
Define the invisible hand
The hand that pushes us all towards a common goal
Which are the key determinants of demand?
Price Preference/ Taste Price and availability of substitutes Income Price and availability of compliments Population size
Define Market
A place, institution or structure that allows buyers and sellers to sell any type of goods, services or information
Define Ceteris Paribus
To keep all other conditions the same
Define Demand
The quantity of a good/service consumers are willing and able to buy at a given price in a given time period
What is the Law of Demand?
There is an inverse relationship between price and quantity demanded (assuming ceteris paribus)
Which two effects affect the demand curve?
Income effect
Substitution effect
Describe the income effect
As price increases, the cost represents and increasing proportion of the consumer’s income and thus they become less able to afford it
Describe the substitution effect
As price increases, other goods/services become more competitive relatively
What are the two types of determinants?
Price determinants
Non-price determinants
What happens to a demand curve if there is a change in the price of goods?
Movement occurs along the demand curve
What happens to a demand curve is there is a change in any non-price determinants of goods?
A shift in the curve
What would happen to the curve if the cost of producing increased?
The demand would move along the curve towards the y axis
What would happen to the curve if the population size increased?
The demand curve would move towards the right in the direction of the x axis
Define price mechanism
The manner in which the profits of goods or services effect the supply and demand of goods and services
Define a shortage
Excess demand
Define supply
Willingness and ability of producers to provide/sell goods and services at a given price in a given time period
Define a supply curve
Shows what producers are able to supply at different prices, ceteris paribus
Law of supply
There is a positive relationship between quantity supply and price
What may a producer do if there is excess demand?
Increase price
What may a producer do if there is excess supply?
Decrease price
Define elasticity of demand
How responsive demand is to changes in price
How do we get the coefficient of PED?
PED = %ΔQd / %ΔP
Define PED
Price elasticity of demand
This measures the responsiveness of the quantity demanded following a change in price
What is the coefficient of PED telling us?
The degree of responsiveness between two specific points on a demand curve
What does -1 < PED < 0 mean?
The price is inelastic (not very responsive to changes in price)
What does -∞ < PED < -1 mean?
The price is elastic (responsive to changes in price)
What does PED = 0 mean?
Perfectly inelastic demand
Price has no impact on demand
What does PED -> -∞ mean?
Perfectly elastic demand
What does an elastic demand curve look like?
Light gradient
What does an inelastic demand curve look like?
Steep gradient
Define Revenue
The amount of money coming in
How can we calculate the revenue for a specific point on the demand curve?
Use the point to draw a rectangle which reaches both axes
The area of this is equal to the revenue
To increase revenue, what should a firm do if they have an elastic demand?
Decrease the price
To increase revenue, what should a firm do if they have an inelastic demand?
Increase the price
Which are the determinants of elasticity?
Nature of goods
Number and availability of substitutes
Time period between measurements
Proportion of income spent on the good
What happens to the elasticity of a product as time passes?
It becomes more elastic
Are essential goods more likely to be elastic or inelastic? Why?
Inelastic as people have to buy it no matter the price
Are addictive goods more likely to be elastic or inelastic? Why?
Inelastic as people have to buy it no matter the price
Are non-essential and luxury goods more likely to be elastic or inelastic? Why?
Elastic as people can find substitutes or do without if they feel the pricing is unfair
Who pays most tax on an inelastic product?
The consumer
Who pays most tax on an elastic product?
The producer
What happens to the elasticity of a single product at different points along its’ demand curve?
The more expensive it is, the more elastic the price. This is due to the income effect
Define YED
Income elasticity of demand
The responsiveness in quantity demanded following a change in income
How do we calculate YED?
YED=%ΔQd / %ΔY
What does it mean if the coefficient of YED is positive?
This is a normal good
As income increases, quantity demanded increases
What does it mean if the coefficient of YED is negative?
This is an inferior good
As price increases, quantity demanded decreases
What does it mean if YED = 0?
The quantity demanded is unaffected by income
What does it mean if we have a YED > 1?
It is a normal good and the product is income elastic (such as luxuries)
What does it mean that YED < 1 (assuming YED is positive)?
It is a normal good and the product is income inelastic
Define a superior good
When YED > 1
These are usually luxuries
Define PES
Price elasticity of supply
Between which values is supply inelastic?
0 < PES < 1
inclusive of 1
Between which values is supply elastic?
PES > 1
What is the primary sector?
Agriculture
What is the secondary sector?
Manufacturing
What is the tertiary sector?
Services
What is a primary commodity?
Any good from the agricultural sector
What is a secondary commodity?
Any good from the manufacturing sector
What is a tertiary commodity?
Any good from the services sector
What is the equation for PES?
PES = %ΔQs / %ΔP
What are the determinants of PES?
Time between measurements Unused capacity Quality of labour Ability to store stocks Number and closeness of supplier substitutes
Define supplier substitute
An alternative that a supplier could produce
Define consumer substitute
An alternative a consumer could buy
With which commodities may a minimum price be useful?
Those where the goods are not perishable
What are the problems with minimum price?
- Perishable goods surplus becomes money loss
- Secondary markets may be created
- Pass the problem off to some other sector/ area
Define indirect tax
Tax charged to a specific type of good or service
Define direct tax
Tax charged to income
Specified tax
Tax of a specified quantity to a specific product
