Steeds Flashcards
Basic economic problem
There are unlimited wants but a limited amount of resources
Law of diminishing marginal utility
As consumers, the attempt to maximise the benefits of what is consumed
Satisfaction is obtained from surplus or utility
As more is consumed, the satisfaction derived decreases -
4 economic agents
Consumers
Government
Employees
Producers/firms
Demand theory
Demand- The amount customers are willing and able to pay at a given price.
Why does demand fluctuate?
Competition
State of the economy
Seasonality
Trends
shifts in the demand curve:
Confidence
Trends
Change in price
Income change
Shifts in the supply curve
Government action (taxes/subsidies)
Technology
Cost of production (wages, raw materials)
Natural factors (flood/draught)
Economic equilibrium
Found where demand and supply curve meet
Point where everything is purchased
If not met, there is a surplus or shortage
Price elasticity of demand
formula, what answer means
PED= % change in quantity demanded
% change in price
if answer 0 and -1 the price is inelastic
if answer -1 and infinity the price is elastic
Inelastic demand curve is very steep
Elastic demand curve is much flatter
Determinants of elasticity of demand
Time period- short term/long term Number and closeness of substitutes Proportion of income taken up by product Luxury or necessity Habit forming (addiction)
Price elasticity of supply
formula, what answer means
PES= % change in quantity supplied
% change in price
>1 elastic
<1 inelastic
Determinants of elasticity of supply
Availability of the 4 FOP
Time
Spare capacity
4 factors of production (FOP)
Land
Labour
Capital
Enterprise
Income elasticity of demand
Definition, formula
The responsiveness of demand due to a change in income
YED= %(change)QD Y= income
%(change)Y
Normal/Inferior/luxury good
what answer to formula of YED means
Normal good- demand rises as income rises ALWAYS +
Inferior good- demand falls as income rises ALWAYS -
Luxury good- ‘even better than normal good’. if 2+ then its luxury
Cross elasticity of demand
definition
The relative change in demand for one product as the price of the other rises or falls.
Cross elasticity of demand
formula, what answer means
%change in QD of product A
%change in price of product B
Positive CED- price for product A increases as demand for product B goes up
Negative CED- as price for product A increases, demand for product B decreases
The price mechanism
The interaction of buyers and sellers in free markets enables goods, services and resources to be allocated by prices.
The rationing function
When resources are scarce, demand exceeds supply and prices are driven up
Increase in price to discourage demand
Greater the scarcity - greater the price
E.g. Ferraris low volume, high prices
The signalling function
Price changes send messages to consumers/produces about whether to enter/leave a market
Rising prices signals to customers to reduce demand. Visa Versa 
The incentive Function
Something that motivates the producer/consumers act upon the signal
Higher prices provides an incentive to existing producers to supply more
Complete market failure
Occurs when the market simply does not supply products at all “missing markets”
Partial market failure
Occurs when the market does function but produces the wrong quantity or product at the wrong price
Public good
A good that provides for one provides for everyone
3 main characteristics of pure public goods
Non-excludability- The benefits derived from the pure public goods cannot be confined solely to those who paid for it. Nonpayers enjoy the benefits of consumption at no financial cost. “Free rider problem”
Non-rival consumption- consumption by one consumer does not restrict consumption by other consumers
Non-rejectable- The collective supply of a public good for all means that it cannot be rejected by people. E.g. flood defences
Quasi public good
Semi public good/near public good. It has some characteristics of a public good and private good. Partially rejectable, excludable etc…
Merit goods
Goods/services that the government feels people under consume
The market failure is imperfect information
The government will subsidise or provide free at the point of use
Principal agent
When one person/entity makes decisions/takes actions on behalf of another person/entity
Demerit goods
A good or service whose consumption is considered unhealthy, degrading or socially undesirable due to perceived negative effects- deemed ‘bad for you’
Asymmetric information
This type of market failure exists when one individual/party has much more information than another individual/party
