micro 5 Flashcards
What are the two ways of allocating resources
market mechanism
planning
What is market mechanism
Allocating resources by bring suppliers and buyers together who agree on a price for the product or service being sold
what is planning
allocating resources through administrative decisions
What are the three types of economy
command economy
mixed economy
free market economy
What is a command economy
Resources are allocated by the state, little market mechanism
What is a mixed economy
More resources are allocated by the state in comparison to a free market. The difference is mainly in healthcare and welfare
What is a free economy
Resources are allocated by market mechanism - however there are no pure free market economies
What is an example of a command economy
USSR
What is an example of a mixed economy
UK
What is an example of a free market economy
USA
What is market equilibrium
The point at which demand is equal to supply
What is equilibrium price
The price at which supply meets demand. AKA market clearing price
Where is market equilibrium seen on a curve
When the demand curve intersects the supply curve
What is disequilibrium
When there is an imbalance in the quantity supplied and the quantity demanded of a product
What is PED
measures the sensitivity of changes in customer demand to a given change in price
How do you calculate PED
%change in demand/%change in price
What does it mean if PED is greater than 1
Demand is price elastic so customers are sensitive to price
What does it mean if PED is less than 1
Demand is price inelastic so customers aren’t sensitive to price
What is unitary demand
when PED is 1
What does it mean when PED is 0
Perfectly inelastic demand
What does it mean when PED is infinity
Perfectly elastic demand
When does elastic demand exist
In competitive markets where lots of substitutes exist
What type of products seem to be inelastic
necessities
What factors influence PED value
- Availabiltiy of similar products
- Time
- Type of product
- The proportion of income spent on a product
What is PES (Price elasticity of supply)
Measures the responsiveness of supply to a change in price
How is PES calculated
%change in quantity supplied/%change in price
What is elastic PES
A change in price will lead to a more than proportional change in quantity demanded
What is inelastic PES
A change in price will lead to a less than proportional change in quantity demanded
When is PES inelastic
When PES is between 0 and 1
When is PES elastic
When PES is greater than 1
What factors influence PES
- Time scale: price becomes more elastic in long run
- Spare capacity
- Level of stocks
- Barriers to entry to the market
