Markets, Price mechanism 2B

Question 1

What is total consumer expenditure/ total producer revenue?

Answer 1

TE/TR + P*Q

Question 2

What is consumer surplus?

Answer 2

Diff betw. what consumer is willing to pay & what he actually pays for that unit of good

Question 3

What is producer surplus?

Answer 3

Diff betw. revenue producers are willing to receive from sale of unit of good & price they are willing to supply per unit of good

Question 4

What is PED

Answer 4

Degree of responsiveness of QUANTITY DEMANDED of a good to change in price of good itself c.p.

% change in Qd of good A
/ % change in price of good A
= (always neg) indirect r/s

Question 5

Explain magnitude of PED

Answer 5

PED > 1 elastic More than proportionate decrease in Qd c.p.
PED < 1 inelastic Less than proportionate decrease in Qd c.p.
PED = 0 proportionate/unitary Proportionate change in Qd c.p.

Question 6

R/s betw. PED & TE/TR

Answer 6

TR=TE=P*Q

Question 7

What are the 3 factors affecting PED?

Answer 7

1. Availability & closeness of substitutes
2. Degree of Necessity
3. Proportion of income spent on product

Question 8

Availability & closeness of substitutes

Answer 8

More broadly defined, less price elastic
More generic, more elastic
Short run fewer subst. More inelastic
Long run more subst. More elastic

Question 9

Degree of Necessity

Answer 9

Necessity PED <1 inelastic
Luxury PED >1 elastic
Addictive subst. PED <1 inelastic

Question 10

Degree of Necessity

Answer 10

High % of income spent PED >1, elastic
Low % of income spent PED <1 inelastc

Question 11

What is PES

Answer 11

Degree of responsiveness of QUANTITY SUPPLIED to a change in price of good c.p.

% change in QUANTITY SUPPLIED of good A
/ % change in price of good A
= (always +ve), direct r/s

Question 12

Explain magnitude of PES

Answer 12

PES > 1 elastic More than proportionate decrease in Qs c.p.
PES < 1 inelastic Less than proportionate decrease in Qs c.p.
PES = 0 proportionate/unitary Proportionate change in Qs c.p.

Question 13

4 Factors affecting PES

Answer 13

Time, short run inelastic, long run elastic
Existence of spare capacity
Availability of stocks
Ease of factor sustainability & factor mobility

Question 14

Time (PES)

Answer 14

Short run, less price elastic
fixed factors, limiting output
Long run, more price elastic
vary all factors of production

Question 15

Existence of spare capacity (PES)

Answer 15

Spare productive capacity, higher PES
Higher ability to expand production

Question 16

Availability of stocks (PES)

Answer 16

Product that stored cheaply w min. loss of quality, draw on inventory to increase output

Question 17

Ease of factor substitutability & factor mobility (PES)

Answer 17

Substitutability
- ability to replace factor of production with another (capital for labour) ->more elastic

Mobility
- ability of resources to move from one place to another/to another industry -> more elastic

Question 18

What is YED

Answer 18

degree of responsiveness of DEMAND of good to a change in income, c.p.

-ve: Income increases, demand for good falls, inferior good
+ve: Income increases, demand for good increases, normal good

YED>1 luxury goods, MTP increase in demand given increase in income, income elastic

0<YED<1 necessities, LTP increase in demand given increase income, income inelastic

Question 19

Factors affecting YED

Answer 19

1.Nature of good
2.Level of consumer income

Question 20

What is XED

Answer 20

XED of good A with respect to the price of good B measures the degree of responsiveness of demand for good A to a change in the price of good B