Micro SL + HL terms and definitions Flashcards
Demand
Quantity of good or service that consumers are willing and able to purchase at different prices in a given time period
‘effective demand’
Actually have the means to purchase a good or service; not simply want it
Law of Demand
as the price of a product falls, the quantity demanded will increase, ceteris paribus
Non-Price determinants of demand
Income - normal and inferior
Complements and Substitutes
Tastes and Preferences
Future price expectations
Number of Consumers
NPDs of demand: income
normal goods: as income rises, demand rises
inferior: as income rises, demand falls
NPDs of demand: substitutes
increase in price of substitute, increase in demand for good
and vice versa
NPDs of demand: complements
increase in price of complement, fall in demand of product
NPDs of demand: tastes + preferences
favourable taste increases demand - can be influenced by media, advertising, peer pressure
NPDs of demand: future price expectations
expectation that prices will rise in the future, increases demand in the present
NPDs of demand: number of consumers
increase in numbers increases the demand
what is the relationship between an individual consumer’s demand and market demand?
possible to construct total demand for a whole market using horizontal summing
HL - how do economists explain the law of demand?
income + substitution effect
What is the income effect?
when the price of a product falls, people have an increase in ‘real income’, ergo more likely to buy a product
What is the substitution effect?
as the price of a product falls, the price to satisfaction ratio increases,
more attractive than substitutes so consumers are more likely to purchase
what is price elasticity of demand?
ped - measure of how much the quantity demanded of a product changes when there is a change in the price of a product
ped formula
%change of q/%change of p
ped = 0
change in price of product will have no effect on quantity demanded ( perfectly inelastic)
ped = infinity
demand curve goes on forever + qd is infinite
perfectly elastic
inelastic demand
0<ped<1
elastic demand
1<ped<infinity
what is unit elastic demand
ped = 1
determinants of ped
- number and closeness of subs
- necessity of product and how widely product is defined
- proportion of income spent on good
- time period
determinants of ped: number and closeness of subs
the more substitutes for a product, the more elastic demand
determinants of ped: necessity
more necessary = less elastic
eg food + narcotics
determinants of ped: proportion of income spent on the good
if good costs very little + constitutes a small portion of one’s budget, then demand is inelastic
determinants of ped: time period considered
takes time for consumers to change their buying
ped measured over a longer time is more elastic
income elasticity of demand
how much the demand for a product changes when there is a change in the user’s income
yed formula
% change in quantity/ % change in income
yed is positive for
normal goods
yed is negative for
negative goods
yed > 0
income-elastic
what kind of goods have high income elasticity
superior goods - demand changes greatly if income rises - people can afford non-essential goods
HL - why is knowledge of yed important?
- decision making by firms
- explaining sectoral changes in the structure of the economy
HL - why is knowledge of yed important: firms
- 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
HL - why is knowledge of yed important: economy
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
what are the three sectors in an economy:
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
What is supply?
The quantity of a good or service producers are willing and able to supply at different prices at a given period
What is the Law of Supply?
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
What are the non-price determinants of supply?
- cost of factors of production
- competitive and joint supply
- government intervention: taxes + subsidies
- expectations about future prices
- changes in technology
- weather or natural disasters
NPDs of supply: cost of FOPs
increase in price of FOP
increases the firms’ costs
less supply (inward shift)
NPDs of supply: competitive supply
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
NPDs of supply: joint supply
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
NPDs of supply: indirect taxes
increases the cost of production
less supply
NPDs of supply: subsidies
reduces costs of production
increase in supply
NPDs of supply: future price expectations
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
NPDs of supply: changes in tech
improvements in the state of technology in a firm or an industry would shift the supply curve to the right
NPDs of supply: water or natural disasters
markets vulnerable to weather conditions such as agricultural market
extremely favourable weather could lead to ‘bumper crops’
the converse could lead to poor supply
HL - How do economists explain the law of supply?
- the short run
- law of diminishing returns
- increasing marginal costs
HL - law of supply expl - short run
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
HL - law of supply expl - law of diminishing returns
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
HL - law of supply expl - increasing marginal costs
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
What is price elasticity of supply?
a measure of how much the supply of a product changes when there is a change in the price of the product
PES formula
% change in quantity/ % change in the price of product
pes = 0
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
pes = infinity
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
pes = 1
unit elasticity of supply
change in the price of the product leads to a proportional change in quantity supplied
Determinants of PES
- how much costs rise as output is decreased
- time period considered
- ability to store stock
Determinants of PES: how much costs rise as output is decreased
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
What factors prevent a significant rise in costs?
- 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 - mobility of FOPs
if FOPs are easily moved from one productive capacity to another
Determinants of PES: time period considered
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
Determinants of PES: the ability to store stock
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
Is there a difference between the price elasticity of supply for primary commodities and manufactured products?
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
Price mechanism
the forces of supply and demand
what are the three significant functions of price in a market?
- signalling information to consumers and producers
- rationing scarce resources
- providing incentives to consumers an producers
the signalling function
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
the rationing function
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
the incentive function
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
what is allocative efficiency
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
why might governments intervene in a market?
- support households
- support firms
- influence consumption
- protect consumers from problems associated with monopoly power
- promote well-being
- promote equity
- earn government revenue
indirect taxes
a tax imposed upon expenditure
the two types of indirect taxes
specific - fixed amount of tax
ad valorem tax - percentage tax
