PPF, consumer/producer surplus + PED Flashcards
what is PPF
production possibility frontier: a curve showing the maximum amount of goods and services that can be produced with a given level of resources
what is the principle of diminishing returns
where resources are better suited to producing a particular good or service, as more resources are used to produce good X the increase in X gets smaller and the amount of Y gets larger
What is PPF for the economy
it is drawn on the basis of all resources in the economy being fully and efficiently used
the resources available to the economy - CELL
capital, enterprise, land and labour
what are capital goods
goods which are used to increase the future capacity of the economy i.e. investment (good which can be used to provide other goods) - standard of living may decrease during a period of large production of capital goods
what are consumer goods
goods which are made for consumption now (goods for current consumption)
what is consumer surplus
the difference between how much consumers are willing to pay for a product and how much they actually pay - shade in the top half of the triangle on the graph
what is producer surplus
the difference between how much a producer sells a good for and how much they would have sold it for - shade in bottom half of the triangle on the graph
define PED
the responsiveness of the quantity demanded following a change in price
what do you call it when following a change in price there will be a more proportionate change in the quantity demanded
elastic good/price sensitive
what do you call it when following a change in price there will be a less proportionate change in the quantity demanded
inelastic good/not price sensitive
PED equation is always a
negative answer
PED equation
the percentage change in the quantity demanded divided by the percentage change in price
if PED is > 1 its
elastic
if PED is +- 1 its
unit elastic
if PED is 0
inelatic
straight line parallel and vertical on a PED is
perfectly inelastic (infinity)
straight line parallel and horizontal on a PED is
perfectly elastic (0)
deep concave into both the axis on a PED is unitary elastic
PED = -1
quantity is labelled on which axis
y
price is labelled on which axis
x
where to demand and supply stand on the curve
demand slopes down, supple goes up
why is it difficult to calculate PED
never really know how to measure as markets are always changing
why does change limit the PED
external factors and products may be the same but new products come out, fashion changes
why do different ranges within a product group limit PED
ie cars are inelastic or elastic - change between brands
also discount brands are more price sensitive than big name brands
what is the key issue with PED
revenue - should a firm raise or lower price?
