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IB Econ HL > Micro: Supply + Demand + Elasticities > Flashcards

Micro: Supply + Demand + Elasticities Flashcards

1
Q

What is Demand?

A

The quantity of a good/service that a consumer is willing and able to purchase at a given price during a particular time period.

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2
Q

What is the Law of Demand?

A

The Law of Demand states ceteris parabis, there is an inverse relationship between a good’s price and the quantity demanded by consumers.

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3
Q

What factors explain the Law of Demand?

A

The income effect: As the price of a good decreases, consumers have greater real income to spend/greater buying power- resulting in greater quantities to demanded
Substitution Effect: When the price of a product falls, the ratio of consumer utility to price will improve, as consumers are paying less for the same price. This makes it more attractive as a substitute to other products with a poorer utility to price ratio.

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4
Q

What is scarcity?

A

The basic economic problem, which occurs due to the infinite wants and needs of humans which is conflicted by the limited availability and scarcity of resources on Earth.

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5
Q

What is an opportunity cost?

A

The tradeoff which occurs when one good/service is given up in order to obtain another. This occurs due to scarcity, as consumers, producers and governments must make choices on allocation of finite resources available. (value of the next best alternative that is sacrificied)

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6
Q

What is the difference between a free good and an economic good?

A

Free goods are those which are abundant, with no scarcity - however economic goods involve an opportunity cost and are scarce.

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7
Q

What is efficiency?

A

The ratio of useful output to the total output - the best possible allocation of scarce resources to produce optimum combinations of goods/services for society.

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8
Q

What is equity?

A

Fairness in distribution of income, wealth/economic opportunity, etc.

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9
Q

What is Economic well-being?

A

The prosperity and quality of living standards such as a person’s financial security, their ability to meet basic needs and make economic choices which allow for personal satisfaction, as well as the maintenance of adequate income over a long-term.

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10
Q

What is sustainability?

A

The ability of the current generation to meet their needs without depleting/compromising this ability for future generations.

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11
Q

What is Interdependance?

A

The interactions between consumers, producers, households, workers and governments to achieve economic goals.

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12
Q

What is Intervention?

A

Government Intervention occurs in the working of markets in order to ensure specific social goals.

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13
Q

What is change?

A

The constant state of flux of the economic world.

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14
Q

What are the Factors of Production?

A

The Factors of Production include Land (resources provided by nature), Labour (Physical/mental contribution of workforce ), Capital (infrastructure, investment and tech) and and Enterprise (organization + risk-taking involved in producing new goods/services to make unguaranteed profit)

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15
Q

What does the PPC curve show?

A

The maximum productive potential of an economy, thus the maximum combinations of two types of good/service that can be produced by an economy in a given time period, if all resources are being used efficiently and the state of technology is fixed.

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16
Q

Why is the PPC concave?

A

The PPC is concave due to the increase in opportunity cost. This is as not all factors of production used to produce one product will be suitable to produce another.
A straight line PPC indicates constant opportunity costs whereas a concave PPC indicates increasing opportunity costs.

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17
Q

What does a movement along the PPC curve indicate, and points beyond and below it?

A

A movement up & down the curve, results in an opportunity cost/tradeoff.
Any points beyond the PPC are impossible with the current capacity of the economy. (X)
Any points below the PPC indicate the economy is not utilizing its resources at full efficiency. (A)
However, a movement from the point towards the PPC indicates actual economic growth(greater output).

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18
Q

Why would the PPC shift inwards or outwards?

A

A growth in production possibilities such as an improvement/increase in the factors of production or technological advancements (increased education, new forms of energy) would result in a shift of the PPC outwards.
The PPC can also shift inwards if the factors of production/technology are negatively impacted(war, natural disasters).

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19
Q

Why would a shift along the PPC eventually result in higher opportunity costs of reallocation?

A

Initial reallocation of the factors would not cause a significant decrease in the output of guns - however, later resources reallocated from gun production would become less suitable for butter production.
Therefore, resulting in higher opportunity costs of reallocation.

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19
Q

How can an economy produce on the PPC?

A

The economy must produce using all its resources fully; full employment of resources.
Must be using all of resources efficiently

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20
Q

What is a shift along the Demand curve?

A

A shift along the demand curve is “a change in the quantity demanded due to price changes” Contraction of demand occurs when price is increased.
Extension/Expansion of demand occurs when price is decreased.

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21
Q

How does a shift in demand occur?

A

A shift in demand to the left/right occurs due to a change in non-price determinants of demand.

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22
Q

What are the non-price determinants of demand?

A

Income:
The price of related goods: Complements + substitutes
Tastes and Preferences:
Future Price Expectations:
Number of consumers:

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23
Q

What is the elasticity of demand?

A

A measure of the responsiveness of the quantity demanded of a good/service to changes in its determinants.

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24
Q

When is demand price-elastic and what are the types of PED?

A

When PED > 1, Demand is price elastic - the demand of consumers are sensitive to price changes and a change in price leads to a proportionately greater change in quantity demanded.
When PED = 1, demand is unitary elastic as changes in price lead to proportionately equal changes in quantity demanded.
When PED = infinity, demand is perfectly elastic and any change in price leads to an infinite change in quantity demanded.

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25
Q

When is demand price-inelastic and what are the types of inelastic demand?

A

When 0 < PED < 1, demand is price inelastic as consumer’s demand is relatively unresponsive to changes in price.
When PED = 0, demand is perfectly inelastic as changes in price lead to no changes in demand.

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26
Q

What is the formula for PED?

A

percentage change in quantity demanded / percentage change in price

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27
Q

What are the determinants of PED?

A

Number + closeness of substitutes
Proportion of Income spent on product
Degree of Necessity
Time: short run it is inelastic whereas in the long run elastic as markets take time to respond.

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28
Q

What is supply?

A

The quantity of a good/service that producers that are willing and able to produce at a given price in a given time period.

29
Q

What does the Law of Supply state?

A

As the price of a product rises, the quantity supplied will usually increase, ceteris parabis.

30
Q

What is a shift in the supply curve in comparison to a movement along it?

A

A movement along the existing supply curve is an “increase in the quantity supplied due to a change in price,” whereas a shift occurs due to a change in the non-price determinants of supply.

31
Q

What are the determinants of supply?

A

Changes in costs of Factors of Production
Prices of related goods; Joint supply: i.e goods that are produced and supplied together, supply increases together
Competitive Supply: Producers allocate more resources if price of good A increases, therefore decreasing supply of good B.
Future Price Expectations: price will increase later, supply less now
Indirect taxes + subsidies
Number of firms: with increased competition, supply increases
Changes in technology: efficient + Lowers costs of production - increases supply

32
Q

What is PES?

A

The price-elasticity of supply is the responsiveness of quantity supplied to the price changes along a given supply curve.

33
Q

What is the formula for PES?

A

percentage change in quantity supplied/ percentage change in price

34
Q

What are the determinants of PES?

A

Time: PES varies - short run: inelastic whereas in the long run it is elastic (adjust Production plans)
Mobility of FOPS: difficulty to switch between production –> elastic/inelastic
Unused Capacity: More; elastic and less: inelastic
Ability to store inventory: yes- elastic and no-inelastic

35
Q

When is supply price-inelastic and what are the types?

A

Supply is perfectly inelastic when PES = 0 as supply is unresponsive to changes in price (fixed supply)
Supply is relatively inelastic when PES < 1

36
Q

When is supply price elastic and what are the types?

A

Supply is perfectly price elastic when PES = infinity, as supply in infinitely responsive (hypersensitive) to price changes
Supply can also be relatively elastic when PES > 1
Supply is unit elastic when PES = 1

37
Q

What are some of the applications of PED?

A

Government decisions regarding indirect taxes
- goods/services with inelastic demand can be taxed as the taxation will not affect demand as much as an elastic good and thus raise tax revenue
-however elastic goods will experience significant decreases in demand with a tax leading to unemployment and insubstantial tax revenue.
Pricing decisons: calculating PED to see effects of a change in price on total revenue. ie if a good is price inelastic, TR increases as price increases.
Primary Commodities & Luxury goods: elastic vs inelastic

38
Q

What is YED?

A

Income elasticity of Demand is the responsiveness of demand to changes in consumer incomes

39
Q

What is the formula for YED?

A

percentage change in quantity demanded/ percentage change in income

40
Q

How does YED change for normal goods in comparison to inferior goods?

A

YED is positive for normal goods as income increases, demand increases however, for inferior goods YED is negative as income increases, demand decreases

41
Q

When is YED income-elastic and income-inelastic?

A

Demand is income-elastic when YED>1 and income-inelastic when YED < 1

42
Q

What goods and services have high and low YEDs?

A

Primary products have a relatively low YED as compared to manufactured products which are slightly higher, however services have an even higher YED due to rising incomes

43
Q

What is allocative efficiency?

A

When the extra benefit of producing 1 additional unit (MSB) is equal to the extra cost to society of producing this additional unit (MSC)
total marginal benefit of consumption = total marginal cost of producing the good.
MSC = MSB

44
Q

When is social/community surplus maximized?

A

When scarce resources are allocated to produce the goods and services that society wants and desires.

45
Q

What is consumer surplus?

A

The additional satisfaction of consuming a product for lower prices than a consumer is originally willing to pay for.

46
Q

What is producer surplus?

A

The difference between what producers are willing and able to sell goods at versus the prices they actually receive

47
Q

What is the role of a price mechanism in a market?

A

Acts to signal information to consumers and producers- and a signal to act
To ration scarce resources; are resources are more scarce, prices will increase
To give incentives to consumers + producers, lower prices give consumers incentives to buy more
increases in prices of a good, signal to consumers to increase supply to produce more profits

48
Q

How does the PPC showcase scarcity, choice and opportunity costs?

A

Due to scarcity, it is impossible to produce outside the PPC and necessary to make choices on one specific point of production which consists of a specific combination of the two goods an economy must produce. Furthermore, these choices give rise to an economy cost as it is not possible to produce more of one good, without sacrificing the other.

49
Q

What is the a market and a competitive market?

A

A market is any arrangement that allows for buyers and sellers to come together and willing make an exchange whereas a competitive market involves many small buyers and sellers, therefore their interactions determining the price of a good/service/FOP.

50
Q

What is the Law of Diminishing Marginal Utility and how does it explain the law of demand?

A

As a person consumes more of a good/service, the extra utility(satisfaction) from consuming 1 more unit of the good shall decrease, therefore consumers shall only purchase higher quantities of the good is prices increase thus causing the demand curve to be downward sloping.

51
Q

Why is the supply curve upward sloping?

A

The Law of supply shows a positive relationship between price and quantity supplied, due to increases in price resulting in an increase in revenue of a firm, thus allowing for production of the good to become more profitable and in the firm’s interests to increase the quantities supplied. Furthermore, as revenues increase it becomes easier for firms to cover higher costs of production with the increased quantities.

52
Q

What is the market equilibrium?

A

The market equilibrium is where the supply and demand curves intersect, and occurs when the Qd = Qs. It occurs at Pe and Qe. At any other price/quantity- there is market disequilibrium

53
Q

How do shortages and surpluses occur?

A

At any other prices than Pe
Due to changes in the non-price determinants of demand and supply, the D/S will shift to the right or left - resulting in excess demand which will result in an upward pressure on prices to reduce the excess demand to Pe,Qe
If there is excess supply, a downward pressure will be exerted on prices to decrease the quantities supplied to Pe, Qe

54
Q

What is the social surplus?

A

the sum of the consumer and producer surplus

55
Q

What are indirect taxes in comparison to direct?

A

Indirect taxes are imposed on expenditure, thus affecting supply as they raise costs of production whereas direct taxes are imposed on income, decreasing a consumer’s income and thus, their demand.

56
Q

What are types of excise/indirect taxes?

A

Indirect taxes include AD Valorem taxes which is a percentage tax of the selling price.
Specific taxes are a fixed amount of tax.

57
Q

What can indirect taxes be used as a tool for?

A

Generating government revenue to finance government spending
Correct market failure by discouraging the consumption of demerit goods.

58
Q

What are the effects of indirect taxes on producers/consumers? (tax incidence)

A

If PED = PES, consumers & producers share the burden equally.
If PED > PES, producers share greater of the tax burden.
If PED < PES, consumers share greater of the tax burden.

59
Q

What are subsidies and why are they imposed?

A

Subsidies are an amount of money paid by the government to the producers, lowering costs of production and thus helps
Lower the prices of essential goods.
Guarantee supply of necessary products
Enable local producers to compete with foreign production.

60
Q

What are specific subsidies?

A

specific amounts of subsidies given per unit, not a percentage

61
Q

Considerations to take before granting subsidies?

A

Opportunity costs
May lead to overproduction + inequity as some producers are able to charge lower prices while others cannot afford to do so.

62
Q

What are price ceilings?

A

A price ceiling is a form of gov intervention where a “maximum” price ceiling below the equilibrium price is imposed to protect consumers.

63
Q

What are some goods price ceilings may cover?

A

Necessity goods, essential food items or merit goods

64
Q

What are some consequences of price ceilings?

A

Creates shortages as quantity demanded > quantity supplied
Leads to underground parrallel markets
Non-price rationing mecahnisms: first come, first serve
Allocative inefficincy due to deadweight loss where market is not operating freely (underallocation)

65
Q

What are some steps Governments could take to alleviate some of the consequences of price ceilings?

A

Direct provision: produce good themselves to increase supply
Subsidize good to incentivize supply
If gov holds reserves, release supply of their product.

66
Q

What are price floors and why are they implemented?

A

Form of gov intervention where minimum prices are set above the equilibrium price in order to raise the incomes of producers of important goods/services.
Protect workers by setting a minimum wage
Restrict consumption of demerit goods

67
Q

What are some consequences of price floors?

A

Excessive supply
overallocation of resources
deadweight loss; opportunity cost if gov is buying surplus production
firm inefficiency

68
Q

What is a market failure?

A

Failure of the market to allocate resources efficiently, resulting in an under/over provision of a good/service.
Occurs when the production/consumption of a good has an effect on a third party. (externality)
Community surplus is not maximized.

69
Q

Where do externalities exist?

A

Where MSB does not equal MSC

70
Q

When do negative externalities exist?

A

When MSC > MPC

IB Econ HL (2 decks)

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