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Economics HL +SL > Micro SL + HL terms and definitions > Flashcards

Micro SL + HL terms and definitions Flashcards

1
Q

Demand

A

Quantity of good or service that consumers are willing and able to purchase at different prices in a given time period

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2
Q

‘effective demand’

A

Actually have the means to purchase a good or service; not simply want it

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3
Q

Law of Demand

A

as the price of a product falls, the quantity demanded will increase, ceteris paribus

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4
Q

Non-Price determinants of demand

A

Income - normal and inferior
Complements and Substitutes
Tastes and Preferences
Future price expectations
Number of Consumers

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5
Q

NPDs of demand: income

A

normal goods: as income rises, demand rises
inferior: as income rises, demand falls

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6
Q

NPDs of demand: substitutes

A

increase in price of substitute, increase in demand for good
and vice versa

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7
Q

NPDs of demand: complements

A

increase in price of complement, fall in demand of product

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8
Q

NPDs of demand: tastes + preferences

A

favourable taste increases demand - can be influenced by media, advertising, peer pressure

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9
Q

NPDs of demand: future price expectations

A

expectation that prices will rise in the future, increases demand in the present

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10
Q

NPDs of demand: number of consumers

A

increase in numbers increases the demand

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11
Q

what is the relationship between an individual consumer’s demand and market demand?

A

possible to construct total demand for a whole market using horizontal summing

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12
Q

HL - how do economists explain the law of demand?

A

income + substitution effect

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13
Q

What is the income effect?

A

when the price of a product falls, people have an increase in ‘real income’, ergo more likely to buy a product

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14
Q

What is the substitution effect?

A

as the price of a product falls, the price to satisfaction ratio increases,
more attractive than substitutes so consumers are more likely to purchase

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15
Q

what is price elasticity of demand?

A

ped - measure of how much the quantity demanded of a product changes when there is a change in the price of a product

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16
Q

ped formula

A

%change of q/%change of p

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17
Q

ped = 0

A

change in price of product will have no effect on quantity demanded ( perfectly inelastic)

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18
Q

ped = infinity

A

demand curve goes on forever + qd is infinite
perfectly elastic

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19
Q

inelastic demand

A

0<ped<1

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20
Q

elastic demand

A

1<ped<infinity

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21
Q

what is unit elastic demand

A

ped = 1

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22
Q

determinants of ped

A
  1. number and closeness of subs
  2. necessity of product and how widely product is defined
  3. proportion of income spent on good
  4. time period
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23
Q

determinants of ped: number and closeness of subs

A

the more substitutes for a product, the more elastic demand

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24
Q

determinants of ped: necessity

A

more necessary = less elastic
eg food + narcotics

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25
Q

determinants of ped: proportion of income spent on the good

A

if good costs very little + constitutes a small portion of one’s budget, then demand is inelastic

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26
Q

determinants of ped: time period considered

A

takes time for consumers to change their buying
ped measured over a longer time is more elastic

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27
Q

income elasticity of demand

A

how much the demand for a product changes when there is a change in the user’s income

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28
Q

yed formula

A

% change in quantity/ % change in income

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29
Q

yed is positive for

A

normal goods

30
Q

yed is negative for

A

negative goods

31
Q

yed > 0

A

income-elastic

32
Q

what kind of goods have high income elasticity

A

superior goods - demand changes greatly if income rises - people can afford non-essential goods

33
Q

HL - why is knowledge of yed important?

A
  1. decision making by firms
  2. explaining sectoral changes in the structure of the economy
34
Q

HL - why is knowledge of yed important: firms

A
  • planning which markets to enter
  • products with large YEDs will see large increases in demand as income levels in a country rise and so their markets grow quickly
  • manufacturing diff products at diff price ranges to cater to everyone
35
Q

HL - why is knowledge of yed important: economy

A

sectoral shift refers to the shift in the relative share of national output and employment that is attributed to each of the production sectors

as countries grow and living standards improve, there is a change in proportion of the economy that is produced in each sector

tertiary and secondary sectors tend to grow faster because they have an income elastic demand

could also be to do with global economies with ever-increasing globalisation

36
Q

what are the three sectors in an economy:

A

primary - agriculture + fishing
secondary - manufacturing - takes raw materials from primary sector and uses them to manufacture producer goods
tertiary - service sector - produce services or intangible products, financial services, education, IT

37
Q

What is supply?

A

The quantity of a good or service producers are willing and able to supply at different prices at a given period

38
Q

What is the Law of Supply?

A

As the price of a product rises, the quantity supplied of the product also rises, ceteris paribus

in neoclassical model, it is assumed that producers are rational ‘maximisers’ i.e want to increase profits

39
Q

What are the non-price determinants of supply?

A
  1. cost of factors of production
  2. competitive and joint supply
  3. government intervention: taxes + subsidies
  4. expectations about future prices
  5. changes in technology
  6. weather or natural disasters
40
Q

NPDs of supply: cost of FOPs

A

increase in price of FOP
increases the firms’ costs
less supply (inward shift)

41
Q

NPDs of supply: competitive supply

A

if producers have a choice about what they want to produce, will be attracted to the profit incentive/higher prices of one product and neglect the production of another

the supply of that other product decreases

42
Q

NPDs of supply: joint supply

A

when one good is produced, another good is produced at the same time e.g. sugar and molasses

when the supply of one increases; the supply of the other also increases

43
Q

NPDs of supply: indirect taxes

A

increases the cost of production
less supply

44
Q

NPDs of supply: subsidies

A

reduces costs of production
increase in supply

45
Q

NPDs of supply: future price expectations

A

if the producer expects the demand of a product to rise in the future, might hold of on production rn in hopes of higher prices, thus profits
and vice versa

46
Q

NPDs of supply: changes in tech

A

improvements in the state of technology in a firm or an industry would shift the supply curve to the right

47
Q

NPDs of supply: water or natural disasters

A

markets vulnerable to weather conditions such as agricultural market
extremely favourable weather could lead to ‘bumper crops’
the converse could lead to poor supply

48
Q

HL - How do economists explain the law of supply?

A
  1. the short run
  2. law of diminishing returns
  3. increasing marginal costs
49
Q

HL - law of supply expl - short run

A

if a firm wishes to increase output in the short run, it may only do so by applying more units of its variable factors to the fixed factors that it possesses, while it plans ahead to change the number of fixed factors that it has

short run is defined by: period of time in which at least one factor of production is fixed

50
Q

HL - law of supply expl - law of diminishing returns

A

in the short run, if a firm increases output by adding more and more units of a variable factor to its fixed factors, one can assume that the output added from each unit with eventually fall

inefficiency begins to occur

51
Q

HL - law of supply expl - increasing marginal costs

A

related to diminishing marginal returns

if the output produced by each additionl worker begins to fall and each worker costs the same, then the cost of producing each extra unit beacons to increase

as output increases, marginal costs also increases

52
Q

What is price elasticity of supply?

A

a measure of how much the supply of a product changes when there is a change in the price of the product

53
Q

PES formula

A

% change in quantity/ % change in the price of product

54
Q

pes = 0

A

change in the price of the product will have no effect on quantity supplied ( perfectly inelastic)

(possible in the very short-run where firms can increase their supply straight away, no matter what happens to price)

vertical S curve

55
Q

pes = infinity

A

horizontal S curve
supply curve goes on forever and quantity supplied is infinite
however if the price falls below P1, even by the smallest amount, the supply will fall to 0 ( infinite change)
in international trade, it is often assumed that the supply of commodities, such as wheat, is infinite

56
Q

pes = 1

A

unit elasticity of supply
change in the price of the product leads to a proportional change in quantity supplied

57
Q

Determinants of PES

A
  1. how much costs rise as output is decreased
  2. time period considered
  3. ability to store stock
58
Q

Determinants of PES: how much costs rise as output is decreased

A

if total costs rise significantly, likely that producer will not increase supply so pes is relatively inelastic

if total costs do not rise significantly, producer will take advantage of low increase in costs to benefit from higher prices

59
Q

What factors prevent a significant rise in costs?

A
  1. the existence of unused capacity - significant productive resources not being used
    firm will be able to increase output easily without great cost increases
    pes is relatively elastic
  2. mobility of FOPs
    if FOPs are easily moved from one productive capacity to another
60
Q

Determinants of PES: time period considered

A

the longer the time period considered, the greater the pes will be
immediate time period, firms are not really able to increase their supply very much

61
Q

Determinants of PES: the ability to store stock

A

if a firm is able to store high levels of stock (inventories) of their product, then they will be able to react to price increases and so the PES for the product will be relatively elastic

62
Q

Is there a difference between the price elasticity of supply for primary commodities and manufactured products?

A

commodities have inelastic supply as a change in a price cannot lead to a proportionally large increase in quantity supplied

supply of manufactured goods tends to be more elastic as it is easier to increase or decrease quantity supplied in response to a change in price
may be unused capacity in industry of FOPs are mobile etc
supply tends to be relatively elastics

63
Q

Price mechanism

A

the forces of supply and demand

64
Q

what are the three significant functions of price in a market?

A
  1. signalling information to consumers and producers
  2. rationing scarce resources
  3. providing incentives to consumers an producers
65
Q

the signalling function

A

prices are set by the actions of consumers and producers in a market
reflect the changing circumstances
acting a signal to those in the market to act in a certain way

66
Q

the rationing function

A

prices help to ration scare resources
if demand is higher than supply, prices are higher
low supply is rationed to consumers willing to pay a higher price

67
Q

the incentive function

A

lower prices give consumers an incentive to buy more of a good
because they will receive more utility (satisfaction) from the good for their money spent
higher prices will act as a disincentive

vice versa for producers
increase in price, signals more producers want to buy goods
would want to maximise profits

68
Q

what is allocative efficiency

A

resources are allocated in the most efficient way from society’s point of view

when the market is in equilibrium, with no external influences and no external effects, it is said to be socially effecient or in a state of allocative efficienc y

69
Q

why might governments intervene in a market?

A
  • support households
  • support firms
  • influence consumption
  • protect consumers from problems associated with monopoly power
  • promote well-being
  • promote equity
  • earn government revenue
70
Q

indirect taxes

A

a tax imposed upon expenditure

71
Q

the two types of indirect taxes

A

specific - fixed amount of tax
ad valorem tax - percentage tax

Economics HL +SL (6 decks)

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