prelim 2 Flashcards
theory of price inelasticity of demand (5)
- occurs where the changes in the price of goods or services lead to a proportionally small change in the quantity demanded.
- consumers are unresponsive to changes in price
- e.g. insulin
- necessary goods are considered inelastic
- when consumers make habitual purchases it tends to be price inelastic
importance of price elasticity for governments (2)
- governments need to know about the elasticity to determine what to tax and whether to increase or decrease tax to bring in more revenue
- the government will pose higher taxes on items with price inelastic demand.
weak exchange rates (5)
UK exports will appear cheaper which will increase demand therefore UK firms will find the value of their profits have increased
Uk firms should see a rise in sales as foreign goods become more expensive for UK citizens and UK goods become more competative in the domestic market
UK firms who earn profits aboard will find the value of their profits have increased
Foreign investors will find it cheaper to invest in UK firms which may help them expand.
Foreign tourists will gain more £s for their currency so UK firms in particular sectors e.g. tourism and transport may see a boost to business.
the stages of the business cycle (4)
boom
recession
depression
recovery
characteristics of the boom
GDP will be high and unemployment will be low
characteristsics of a recession
reduced output and significant increase in unemployment rate
characteristics of depression
very weak consumer spending and business investment. business failure increases. deflation. high unemployment
characteristics of a recovery
sustained period of improving business activity. GDP grows, incomes rise, and unemployment falls
what is scarcity (4)
- the basic economic problem is scarcity
- it is a universal problem
- scarcity exists because there are unlimited wants due to human greed and limited resources due to scarce raw materials
- it cannot be eradicated but can be controlled
choices made by firms due to scarcity
Resource allocation - opportunity cost of allocating more resources for a car is a motorbike
choice made by governments due to scarcity
the opportunity cost of spending more on healthcare is the educational system
Why the demand curve for some goods slopes upwards from left to right (2)
- Veblen goods - luxury products. e.g. expensive watches become more desirable as the price increases
- speculative goods - products that are purchased even if price increases e.g. bread because they are a necessity.
Perfect competition characteristic’s (7)
- no barriers to entry
- large number of buyers and sellers
- no individual business can influence price
- demand for each firms goods is perfectly elastic
- perfect knowledge of the market
- homogeneous products
- normal profits
Monopoly characteristics (8)
- high barriers to entry
- no competitors
- only one business
- one unique product
- price makers
- abnormal profits
- imperfect knowledge
- non homogenous products
Economic and free goods (4)
- economic goods are scarce whereas free goods are not
- economics goods carry a price whereas free goods do not
- free goods use up no scarce resources in production whereas economic goods do use up scarce resources
- free goods create no opportunity cost whereas economic goods do incur an opportunity cost
