Micro 1.1 Flashcards
4 Determinants of demand
RDI
Other products
Fashion
Expectations
Law of demand
Ceteris paribus, qd rises as price falls
Demand definition
The quantity of a product that consumers are able and willing to purchase at various prices over a period of time
Supply definition
The quantity that producers are willing and able to supply at any given price in a specific time period
Law of supply
Ceteris paribus, firms will be prepared to supply more goods at a high price
6 Determinants of supply
Costs of production Subsidies Substitute prices No. of producers in market Expected price
Define Price mechanism
The phenomena of the interaction of the market forces of demand and supply to reach an equilibrium price and quantity in a market. Best allocation of limited resources is achieved
Reasons for irrationality
Addiction
Altruism
Information failure
What is consumer surplus
The difference between the total amount that consumers are willing and able to pay for a good or service and the total amount that they actually do pay
Where is consumer surplus on the diagram
The top triangle
What is producer surplus
The extra amount that a consumer is paid compared to what they would have accepted
Where is producer surplus on the diagram
The bottom triangle
An increase in supply -> __________ in consumer surplus
Increase supply
Increase in consumer surplus as price falls
Increase in demand -> _________ in producer surplus
Increase demand
Increase producer surplus
How do indirect taxes work
They internalise the external cost -> supply decreases -> negative externality is reduced
Example of an indirect tax
VAT
Hypothecation
When the tax revenue is spent on resolving the negative externality
Problems of taxes
- Setting the right tax
- Inelastic demand = Negative externalities will not decrease
- Producers may take tax and keep prices high
Define subsidy
A grant given by the government to producers to encourage production of a good or service
Burden of tax is only equally shared when ___________
PED = PES
When is the tax burden greater for producer
When PES is greater than PED
When is the tax burden greater for the consumer
When PED is greater than PES
Define Ad Valorem tax
A tax that is not a constant amount per unit, but a % of the price. So as tax becomes larger, higher price is charged
How does an ad valorem tax look different
Supply curve is steeper
