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Economics Y1 > Micro L12 - 18 > Flashcards

Micro L12 - 18 Flashcards

1
Q

Price elasticity of demand/supply

A

Measures the responsiveness of demand/supply given a change in price

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2
Q

Price elastic

A

Change in price causes a proportionately larger change in demand/supply

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3
Q

Price inelastic

A

A change in price causes a proportionately smaller change in demand/supply

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4
Q

Determinants of PED:

A
  • Number of substitutes
  • Necessity/Luxury
  • Addictiveness
  • Time
  • Proportion of income spent on product
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5
Q

How does the number of substitutes affect PED?

A

Greater the number of substitutes, greater degree of consumer switching during a price change (more elastic)

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6
Q

How does whether the product is a luxury/necessity affect PED?

A

If a product is a necessity people will buy it regardless of the price change, therefore more inelastic

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7
Q

How does addictiveness affect PED?

A

The more addictive a product is the more inelastic demand will be

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8
Q

How does time affect PED?

A

Consumers are given the opportunity to find alternatives making price more elastic

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9
Q

How does the proportion of income spent on a product affect PED?

A

Greater the proportion of income spent, the less able consumers will be to afford any further price increases, therefore more elastic

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10
Q

Determinants of PES:

A
  • Time required to produce product
  • Level of spare capacity
  • Number of stocks of finished goods/services
  • Time
  • Perishability of product
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11
Q

How does time required to produce the product affect PES?

A

Greater amount of time needed, slower firm will be able to respond to price changes therefore price inelastic

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12
Q

How does level of spare capacity affect PES?

A

Greater the spare capacity, quicker firms will be able to respond by utilising available factors of production therefore more price elastic

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13
Q

How does the number of stocks/finished goods affect PES?

A

Greater this number, quicker firms will be able to respond by releasing these stocks, therefore price elastic

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14
Q

How does time affect PES?

A

Greater time period, firms are given opportunity to expand/reduce production, more price elastic

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15
Q

How does perishability of product affect PES?

A

More perishable a product, harder it is to build stocks, therefore more price inelastic

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16
Q

Calculation for PED:

A

% change in quantity demanded/percentage change in price

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17
Q

Calculation for PES:

A

% change in quantity supplied/% change in price

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18
Q

What is PED/PES defined as at different values and what are these?

A
  • Below 1 is elastic
  • Between 0 and 1 is inelastic
  • Equal to 1 is unitary
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19
Q

Derived demand:

A

Demand for a good/service which is the consequence of demand for something else eg. Demand for Labour is derived from demand for goods + services

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20
Q

Effective demand:

A

Demand for good/service which occurs when purchasers are constrained in a different market eg. Demand for the cheaper bread brand increases due to lower disposable income preventing the purchase of the more expensive bread

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21
Q

Joint demand:

A

Demand of one good/service is directly and positively relative to another good/service eg. if demand of good X increases, demand of good Y increases

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22
Q

Composite demand:

A

Good/service has more than one use so the increase in demand for one use eg. oil for plastics leads to fall in supply for another use eg. oil for petrol

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23
Q

What law of demand do Veblen goods follow?

A
  • Veblen goods = Goods perceived to be of better quality if they cost more.
  • They are exceptions to the law of demand: as price increases, demand increases
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24
Q

Speculative goods

A

Goods which are purchased because consumers believe the price will rise after

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25
Q

Giffen goods

A

Goods where a rise in price actually leads to an increase in demand eg. basic food staples

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26
Q

Consumer surplus:

A
  • Extra amount of money consumers are prepared to pay for good/service above what they actually pay
  • Extra utility gained from good/service for amount paid for it
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27
Q

Producer surplus:

A
  • Extra amount of money consumers paid to producers above what they’re willing to accept to supply a good/service
  • Profit gained by a producer above the minimum required for them to supply the good/service
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28
Q

As price falls, what happens to consumer and producer surplus?

A
  • Consumer surplus increases
  • Producer surplus decreases
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29
Q

How is consumer surplus calculated on a supply and demand curve?

A

Area of triangle above market equilibrium

30
Q

How is producer surplus calculated on a supply and demand curve?

A

Area of triangle below market equilibrium

31
Q

Income effect

A

Assuming a fixed level of income, income effect means that as price falls, amount consumers can afford increases, so demand increases

32
Q

Marginal utility

A

Utility obtained from consuming one extra unit of good/service

33
Q

Diminishing marginal utility

A

As successive units of a good are consumed, marginal utility gained from each extra unit (the difference) will fall

34
Q

Cross price elasticity of demand (XED):

A

Measures the responsiveness of demand for one good to changes in the price of another good

35
Q

XED of substitute goods

A

Positive

36
Q

XED of complement goods

A

Negative

37
Q

XED of unrelated goods

A

Zero

38
Q

Calculation for XED:

A

% change in quantity demanded of product A/ % change in price of product B

39
Q

Is the value higher or lower if the substitute/complement is strong?

A

Higher

40
Q

Income elasticity of demand: (YED)

A

% change in quantity demanded/ % change in income

41
Q

Normal goods:

A

When income increases demand increases

42
Q

Inferior goods: (give an example)

A

When income rises, demand decreases eg. value brand products

43
Q

Is the value positive or negative for a normal and inferior good?

A

Normal good: Positive
Inferior good: Negative

44
Q

What are normal goods that have a YED between 0 and 1 classed as?

A
  • Income inelastic
  • Necessity
45
Q

What are normal goods that have a YED between above 1 classed as?

A
  • Income elastic
  • Luxury
46
Q

What are normal goods that have a YED equal to 1 classed as?

A
  • Unitary elastic
47
Q

Functions of Price Mechanism:

A

1) Signalling
2) Incentive
3) Rationing

48
Q

Describe the signalling function:

A

Changes in price provides info to both producers and consumers about changes in market conditions

49
Q

Describe the incentive function:

A
  • Increase in demand
  • Leads to a rise in prices
  • Encourage firms to increase production
50
Q

Describe the rationing function:

A
  • Shortage of product
  • Causes prices to rise
  • Deters some consumers from purchasing products
51
Q

When demand is price elastic, what happens to total revenue when price increases and decreases?

A

Opposite always happens:
- Price increase causes decrease in total revenue
- Price decrease causes increase in total revenue

52
Q

When demand is price inelastic, what happens to total revenue when price increases and decreases?

A

Same thing happens:
- Price increase causes increase in total revenue
- Price decrease causes decrease in total revenue

53
Q

Market failure:

A
  • Too much/too little of a good is produced/consumed compared w/ socially optimal level of output
  • Price mechanism leads to inefficient allocation of resources
54
Q

Negative externality (external cost):

A

Cost to a third party that is not involved in making, buying/selling and consumption of specific good/service

55
Q

Positive externality (external benefit):

A

Benefit to a third party that is not involved in making, buying/selling and consumption of specific good/service

56
Q

Non-rival w/ example:

A

Consumption of a product doesn’t prevent another person from consuming that product eg. radio programme because one listening to it doesn’t stop anyone else from doing so

57
Q

Rival w/ example:

A

Consumption of a product prevents another person from consuming that product eg. radio, as when one person is using it, another can’t

58
Q

Non-excludable w/ example:

A

Once a good is provided, it is impossible to stop people from using it eg. Lighthouse

59
Q

Excludable w/ example:

A

Once a good is provided, people can stop themselves from using it if they wish eg. people can be excluded from purchasing a new model of car if they cannot afford it

60
Q

Merit goods:

A

Beneficial to individuals and society but are often under-consumed in the economy

61
Q

Features of public good:

A
  • Non-excludable
  • Non-rival
62
Q

Features of private good:

A
  • Rival
  • Excludable
63
Q

Give one type of market failure, why it occurs, why it’s a problem and what it results in.

A
  • Free rider problem
  • Everyone is able to benefit from the use of public goods despite not paying for it
  • Results in good being underprovided/ not provided at all (merit good)
64
Q

Social benefits:

A

External benefits + Private benefits

65
Q

Social costs:

A

External costs + Private costs

66
Q

Positive externality:

A

Social benefit ≠ Private benefit, as external benefits are present

67
Q

Negative externality:

A

Social costs ≠ Private costs, since external costs are present

68
Q

Social optimal level of output:

A

All external benefits and external costs accounted for

69
Q

In a free market, what will there be if external benefits are present?

A

Underconsumption/Underproduction

70
Q

In a free market, what will there be if external costs are present?

A

Overproduction/Overconsumption

71
Q

Check costs and benefits diagram for social welfare loss w/ external costs & benefits

A

Economics Y1 (12 decks)

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