microeconomics Flashcards
assumptions underlying the law of demand [2] HL
- income and substitution effects
- law of diminishing marginal utility
non-price determinants of demand [5]
- income
- tastes and preferences
- future price expectations
- price of related goods (substitutes and complements)
- change in demographic
functions of price mechanism [2]
- resource allocation
- rationing
substitution effects
change in quantity demanded of the good from its substitute when price changes
assumptions underlying the law of supply [2] HL
- law of diminishing marginal returns
- increasing marginal costs
non-price determinants of supply [6]
- change in costs of factors of productions
- changes in technology
- future price expectations
- government intervention (indirect taxes and subsidies)
- prices of related goods (joint and competitive supply)
- number of firms
2 types of indirect tax
- excise tax- imposed on particular goods and services
- taxes imposed on all (or most) goods and services
determinants of ped [4]
- number of substitutes
- closeness of substitutes
- degree of necessity
- proportion of income spent on good
ped yed / pes greater than one
elastic
normal good yed
greater than 0
luxury good yed
greater than 1
necessity yed
0-1
inferior good yed
negative
more inferior more elastic
primary commodities are more…
- demand + supply inelastic
- more price volatile
ped- necessities, no substitutes
pes- perishable and takes long time to grow
determinants of pes [5]
- length of time
- spare productive capacity of firms
- ability of store stocks
- mobility of factors of production
- costs of factors of production
purpose of indirect taxes [2]
- increase tax revenue
- correcting market failure
purpose of subsidies [5]
- increase producer revenue
- make necessities more affordable
- encourage production and consumption of socially desirable goods (correcting allocative inefficiency)
- support the growth of particular industries
- encourage exports
analysing subsidies [8]
before and after:
1. equilibrium p and q
2. consumer expenditure
3. price received by firm
4. firm’s revenue
5. subsidy’s expense
6. cs
7. ps
8. dwl
stakeholders
- consumer
- producer
- foreign producer
- workers
- government
- society
why have dwl when gov subsidises producers
producers become too complacent- reliant
- misallocation of resources
why price floor [2]
- provide support for primary products
- protect low skilled low wage workers
- resource and labour market
consequences for the economy (subsidies)
- when government buys the surplus- dumping, ppl may get upset
when MC bigger than MB at a certain quantity…
cost>benefit
- not efficient at that specific quantity
- overallocation of resources
why government imposes price ceiling [2]
- make goods and services more affordable
- protect low income households
