Supply, Markets, Elasticity and Taxes Flashcards
What is a market?
A place where items are sold
- buyers and sellers
- goods, services, resources, inputs and more
- varying in intensity of competition
- physical or virtual
- use a price mechanism to balance competing demands of buyers and sellers
What are the conditions when you demand?
Want it
Can afford it
Plan to buy it
What is quantity demanded?
The amount of a good that all consumers in total are willing and able to buy at a given price over given time period
What is the assumption behind the Law of Demand?
other things remaining the same, the higher the price of the good, the lower the quantity demanded and vice versa
What is the demand curve a relationship between?
The pice of a good and quantity demanded of the good
What are the conditions for supply?
Has the resources and technology to produce it
Thinks it can profit from producing it
Plans to produce and sell it
What is quantity supplied?
The amount of good that producers make available to sell at a given price over a given time period
What is the Law of Supply?
Other things remaining the same the higher the price, the greater the quantity supplied and vice versa
Higher price = more profit potential
What does ceteris paribus mean?
Other things remaining the same
What factors influence selling plans?
Price Price of factors of production Prices of related goods produced Expected future prices The number of suppliers Technology
What is the market equilibrium?
The situation where opposite market forces balance each other
Price where QD=QS
What is price elasticity of demand?
The proportionate change in quantity demanded divided by the proportionate change in price - the responsiveness of QD to a change in price when “ceteris paribus”
How is Price elasticity of demand calculated?
(%change in QD/QD) / (%change in P/P)
What point is used when calculating PED?
the mid point of the change - gives average elasticity at the point mid-way between original and new point
How does PED represent:
- Elastic Demand
- Inelastic Demand
- Unitary Elasticity
Elastic - PED > 1 (QD responds substantially)
Inelastic - PED < 1 (only responds slightly)
Unitary - PED = 1 (responds proportionally the same)
How are perfect elastic and perfect inelastic demand shown?
Perfect elastic is infinity - horizontal
Perfect inelastic is 0 - vertical
How does a cheap product effect sensitivity to price? And therefore where on the demand curve is price most inelastic?
Demand is less and less sensitive to changes in price the cheaper the product
Demand is more inelastic lower down the curve
When will maximum total revenue be generated?
When price has elasticity of 1 - is unitary elastic
How is TR related to elasticity?
Elastic: increase price = decrease quantity (more) = decrease TR
Inelastic: increase price = decrease quantity (less) = increase TR
Unitary: TR unaffected by increase in price
How is a more inelastic demand curve shown?
Steeper, less change in quantity demanded, much less like infinity (perfect elastic)
What determines PED?
Number and closeness of substitutes
- more and close = more price elastic, increase sub. effect
Nature
- if it is addictive
Proportion of income spent on a good
- higher proportional of income spent larger income effect (increase price elastic)
The time period
- longer periods demand increase price elastic as there is more time to adjust to potential alternatives e.g. insulation on house should price of heating increase
What are other types of elasticity?
CrossED - Cross Elasticity, responsiveness of demand for one product to a change in price of another complements, substitutes
YED - Income Elasticity, responsiveness of demand to consumer income, normal goods, inferior goods
PES - Price Elasticity of Supply, responsiveness of supply to a change in price
Why are taxes imposed by the government?
As a tool of government policy to change consumer behaviour and thus have a big influence on firm’s profitability
How do taxes effect quantity produced?
Higher tax causes quantity produced to decrease from Q* - Qt
How is the amount of tax shown on a lump sum graph?
The different between Pc and Pp
Who pays the tax in lump sum tax?
Producers pay the tax not the consumer, they make the payment on the consumer’s behalf as they deduct the tax from their increase profit
Explain who faces the burden of tax
Consumers burden is the difference between P* and Pc
Producer burden is the difference between P* and Pp
What does the burden of tax depend on?
Elasticity of demand and supply (could fall entirely on one in sum cases) Steeper demand (inelastic) causes greater consumer burden, elastic = producer
What is ad valorem tax?
Tax as a percentage of the value of the product
Supply pivots inwards rather than shifts (lump-sum)
