saturday- third hour of AS revision Flashcards
what is excess supply?
what is excess demand
draw excess supply and demand on a diagram
recall the main functions of the price mechanism
rationing
signalling
allocating
incentives
how does the rationing function of the price mechanism work
how does the signalling function of the price mechanism work
how does the incentives function work
what does it mean if PED is between 0 and -1?
price inelastic good
what does it mean if PED is less than -1?
elastic
what does it meant if PED is exactly -1
perfectly inelastic
what does it mean if PED is - infinity
perfectly elastic
what is price elasticity of supply?
how responsive supply is to a change in price
what does it mean is PES is between 0 and 1?
inelastic
what does it mean if PES is greater than 1?
elastic
what are the factors affecting PES
if supplier has spare capacity
high stock levels
long time period
ease of factor mobility
explain the factors that effect elasticity of supply
what is YED
measure of responsiveness of demand to a change in income
what does it mean if:
YED is positive
YED is negative
YED is greater than 1
+ normal good
- inferior good -> income inc, demand dec
>1 luxury good -> income inc, demand inc
what is XED
responsiveness of demand for good A to a change in the price of good
what is the formula of XED
what does a positive XED value mean
the two goods are substitutes
as price of one good increases, demand for rival product inc
what does a negative XED value mean
the two goods are complements
as price of one good dec, demand for complementary good inc
what is govt failure?
why may govt failure occur
what are the four reasons for govt failure
law of unintended consequences
excessive admin costs
price signal distortion
imperfect info
how does the law of unintended consequences cause govt failure
how does the excessive admin costs cause govt failure
how does the imperfect info cause govt failure
how does the distortion of price signals cause govt failure
what is aggregate supply
the potential output of all goods and services that are produced within an economy over a period of time
why is SRAS upward sloping
how can firms shift the SRAS curve
what may cause a contraction or extension in SRAR
what are imports and exports
recall the factors affecting x-m
exchange rates
cost of p
relative inflation rates
MPM
what is exchange rates and how can it affect x-m
what is relative inflation rates and how can it affect x-m
how can cost of production affect x-m
what are some non price factors that impact demand for exports
how does MPM affect x-m
how would a recession affect UK exports of normal goods?
how would a recession affect UK exports of inferior goods?
what is a trade surplus and trade deficit
what does the elastic part of the LRAS curve mean
economy isnt fully utilising all of the factors of sUpply in the LR
what does the perfectly elastic section of the LRAS curve mean
economy is approaching full capacity in the LR
what hapens if AD increases when the economy is not close to full capacity
output change is large but price level change is proportionally small
what happens if AD increases when the economy is approaching full capacity
larger change in price level and small change in output
what is the major assumption of the classical LRAS model
economy is always at full employment
believes economy is self correcting
therefore a fall in AD means that the economy fixes itself and output remains at full employment
what does a rightwards shift in LRAS mean
overall productive capacity inc
known as potential growth
economy can now produce a larger output when operating at full capacity
what is actual and potential economic growth
what is an output gap and how can it be illustrated
what is a negative output gap and show this on a keynesian LRAS diagram
actual real GDP is less than potential output
also known as deflationary gap or recessionary gap
all available factors of p arent being utilised
show a negative output gap on a classical LRAS diagram
what is a positive output gap
actual real GDP is greater than the estimated potential output of the economy
why is a positive output gap only possible on a temporary basis
draw a positive output gap on a classical LRAS diagram
always show positive output gap on this diagram
what are the keynesian ideas on positive output gaps
actual GDP cant be greater than potential growth in the LR
so the best illustration would be to draw AD very high up on the perfectly elastic section
therefore the economy experiences no further real GDP but high levels of inflation
