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A-level Economics Micro Yr 12 > Micro Pack 3 > Flashcards

Micro Pack 3 Flashcards

1
Q

What is Price elasticity of Demand?

A

Measures the responsiveness of quantity demanded of a product to changes in its price

PED= %change in qty demanded/%change in price

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2
Q

What factors influence PED?

A

Number of substitutes: more substitutes available, more elastic good will be
Percentage of income spent: higher the percentage of income spent on a good, the more price elastic demand will be
Habit forming good: habit forming = more price inelastic good will be e.g cigarettes
Necessity or luxury: necessity more price inelastic demand than luxuries
Time: over time demand become more price elastic. E.g petrol generally price inelastic due to lack of good substitutes but if prices were high for ten years, would be time for substitutes to be developed such as electric cars
Width of market definition: wider definition the more inelastic demand will be. E.g foo has no substitutes so very price inelastic demand, whereas spaghetti has lots of substitutes

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3
Q

What is price inelastic demand?

A

When there is a less proportionate response in quantity demanded to a change in price
PED is 0 - -1

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4
Q

When is a good likely to have a price inelastic demand?

A

Few effective substitutes
Represents low percentage of income
Is habit forming
Is a necessity rather than a luxury
Has a wide market definition

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5
Q

What is a price elastic demand?

A

Where there is a more than proportionate response in quantity demanded to a change in price
PED is between -1 and infinity

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6
Q

What are the causes of a good to have price elastic demand?

A

Many effective substitutes
Represents high percentage of income
Not habit forming
Luxury rather than necessity
Narrow market definition

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7
Q

What is perfectly price inelastic demand?

A

When there is no change in the quantity demanded following a change in price

PED is equal to 0

Could be because consumers are totally addicted or an absolute necessity and there are no substitutes available to switch to

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8
Q

When does a good have perfectly price elastic demand?

A

When the quantity demanded is infinite at a given price but there is no quantity demanded at any other price

PED is equal to infinity

Likely to happen in markets that are perfectly competitive, meaning there are large number of firms producing identical products

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9
Q

What is unitary elastic demand?

A

Where a change in price is met with a proportionate change in demand
PED is equal to -1

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10
Q

What is total revenue?

A

Price x quantity

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11
Q

How does PED relate to total revenue?

A
  • if demand is price elastic, a price reduction increases total revenue (because price fall leads to more than proportionate increase in quantity demanded)
  • if demand is price inelastic, a price increase increases total revenue (because despite price rise there will be a less than proportionate decrease in quantity demanded)
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12
Q

What is YED?

A

%change in quantity demanded/%change in (real) income

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12
Q

What can YED figures tell you?

A

Type of good:
Negative YED = Inferior good
0 to +1= necessity
over +1 = Luxury
Positive YED - normal good

Income Elasticity:
More than 1 (negative or positive) = income elastic demand
Less than 1 = Income inelastic

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13
Q

What is an inferior good?

A
  • good which is demanded less as income rises - YED negative
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14
Q

What is a normal good?

A
  • good which is demanded more as income rises - YED Positive
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15
Q

What are luxury goods?

A
  • type of normal good where demand rises more than proportionally1 to a change in income YED is above +1
16
Q

What is Income Elastic demand?

A
  • when there is a more proportionate change in quantity demanded following a change in income
  • YED is above +1 or below -1
17
Q

What is income inelastic demand?

A
  • when there is a less than proportionate change in quantity demanded following a change in income
  • YED is between -1 and 1
18
Q

What is cross elasticity of demand (XED)?

A

%change in quantity demanded (Good X)/ %change in price (Good Y)

  • shows relationship between quantity of one good and the price of the other good
  • complement = - relationship
  • substitute = + relationship
19
Q

What do XED figures show you?

A

Negative XED = compelements
Positive XED = substitutes
XED = 0 = unrelated good

20
Q

What is a substitute good?

A
  • good that is demanded more, when price of related good rises
  • XED positive
  • XED value depend on if they are close substitutes or weak substitutes
21
Q

What is a complementary good?

A
  • good that is demanded less, when price of related good rises
  • XED negative
22
Q

What are unrelated goods?

A
  • when demand for one good does not change, when the price of another good changes
  • XED is zero
23
Q

What is Price elasticity of Supply (PES)?

A

%change in quantity supplied/%change in price

24
Q

What does in the short run mean?

A

Time period where at least one factor of production remains fixed

25
Q

What does in the long run mean?

A

A time period where all factors of production can be varied

26
Q

What factors influence price elasticity if supply?

A

Availability of stockpiles:
- if producers have stockpiles, they should be able to respond to changes in the price of a good

Perishability: if good perishable cannot be stockpiled, so harder for supply to respond quickly to any increases in price

State of the economy and levels of spare capacity: if firms operating at full capacity, lower ability to respond to a change in price to when they have spare capacity

Entry of firms into the market: if new firms are unable to enter market due to barriers to entry then supply likely to be less responsive ; price in elastic supply

Ease of factor substitution: if firms can easily switch their factors of production between different uses, then they can respond quickly to changes in price ; price elastic supply

27
Q

What is Price inelastic supply?

A

PES between 0 and +1
More likely:
- in short run
- perishable goods with low stockpiles
- businesses operating at full capacity
- in an industry with high barriers to entry
- when factor substitutability is low

  • when there is a less than proportionate response in quantity supplies to a change in price
  • illustrated with a steep supply curve
28
Q

What is Price elastic supply?

A
  • where there is a more than proportionate response in quantity supplied to a change in price
  • PE between +1 and infinity

More likely:
- in long run
- non-perishable goods with large stockpiles
- when businesses have spare capacity (recession)
- industry with low barriers to entry
- factor substitutability is high
- Shallow supply curve

29
Q

What is perfectly price inelastic supply?

A
  • no change in quantity supplied following a change in price
    PES = 0
  • vertical supply curve
30
Q

What is perfectly price elastic supply?

A

where the quantity supplies is unlimited at a given price, but no quantity can be supplied at any other price

PES = infinity

  • horizontal supply curve
31
Q

What is the significance for governments implementing indirect tax?

A
  • when demand is relatively price inelastic compared to supply, incidence will fall more on the consumer than the producer
  • from gov perspective, when demand is relatively price inelastic they will :
  • earn significant tax revenue, as many consumers continue to purchase good
  • be less effective at changing consumer behaviour, such as reducing alcohol consumption
32
Q

What is the significance of PED for governments implementing subsidies?

A
  • when demand is relatively price inelastic compared to supply, total benefit to consumer will be greater than to producer
  • from govs POV, when demand is relatively price inelastic, they will be less effective at increasing quantity in market but benefit consumers with a significant drop in price

A-level Economics Micro Yr 12 (8 decks)

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