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Economics - Micro > Test 2 > Flashcards

Test 2 Flashcards

1
Q

PED formula

A

% change in Q demanded

/ % change in price

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2
Q

Demand curve for price elastic good

A

Flatter

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3
Q

Demand curve for price inelastic good

A

Steeper

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4
Q

Demand curve for unitary good

A

Proportional

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5
Q

> (-) 1 PED means

A
  • Demand for good is relatively elastic (i.e. if price increases by 10%, quantity demanded would price decrease by more than 10%)
  • So a decrease in price leads to an increase in revenue, and an increase in price leads to a decrease in revenue
  • More of a luxury e.g. holidays
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6
Q

< (-) 1 PED means

A
  • Demand for good is relatively inelastic (i.e for a 10% increase in price, quantity demanded would decrease less than 10%)
  • So a decrease in price leads to a fall in total revenue, and an increase in price leads to a rise in total revenue
  • More of a necessity e.g. toothpaste
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7
Q

0 PED means

A
  • Demand for good is perfectly price inelastic (i.e. however much the price is increased by, quantity demanded will remain the same)
  • Absolute necessity e.g. water
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8
Q

(-) 1 PED means

A
  • Demand for good is unitary (i.e. if there is a 10% increase in price, there will be a 10% decrease in quantity demanded - so Q changes proportional to P)
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9
Q

{ (-) infinity PED means ) }

A

{ - Demand for good is perfectly price elastic (i.e. the firm can sell any quantity at a given price, but any rise in price will cause demand to fall to zero) }

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10
Q

Total revenue and Quantity demanded graph

A
  • Starts and ends at 0 (as when P is so high no Q is demanded, PQ = 0, and when P is 0, PQ = 0, so no revenue created)
  • Curve in between that reaches a peak at the point PED is unitary (middle point of demand curve)
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11
Q

Conditions of demand

A

= Factors that could cause an inwards/outwards shift in the demand curve for a particular good/service

  • Income of consumers
  • Population
  • If the good/service provides credit
  • Tastes (and therefore things which affect these such as advertising)
  • Price of complements
  • Price of substitutes
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12
Q

The law of diminishing marginal utility

A

As the amount consumed of a commodity increases, the marginal utility received by the consumer decreases. (This explains downward sloping demand curve)

E.g. Percy and Minstrels

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13
Q

Assumptions for law of diminishing rational utility

A
  • All units of good must be the same in all respects
  • Unit of good must be standard
  • Must be continuity in consumption, no change in price of substitutes or in taste during process of consumption
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14
Q

Total Utility / Quantity Graph

A
  • Upwards sloping curve which levels off as Q increases until max. TU and 0 MU is reached, then begins to slope downwards
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15
Q

Marginal Utility Graph

A
  • Downwards sloping line, which continues just the same after crossing the x axis at 0 MU and max. TU
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16
Q

Reasons for consumers not acting rationally

A
  • Cognitive limitations (can only process a limited level of information / number of options at a given time)
  • Defaults/habits (people tend to stick to what they currently do, the status quo)
  • Present bias (people overvalue immediate effects and undervalue future ones)
  • Loss aversion (people feel losses more keenly than they feel equal gains - e.g. resentment towards paying taxes)
  • Herd behaviour (people are both consciously and subconsciously subconsciously affected by others, which creates social norms that can be both positive and negative)
  • Anchoring (arbitrary reference points can influence people e.g. reduced prices)
17
Q

Effective demand

A
  • How much of a good/service consumers are willing and able to buy at a given price
  • Illustrated by the demand curve
18
Q

Law of demand

A

As the price of a good/service decreases, the quantity of it demanded will increase.

19
Q

Exceptions to the law of demand

A
  • Veblen goods

- Giffen goods

20
Q

Change in conditions of demand on demand curve

A

Shift in the demand curve either:

In > DECREASE in Qd
Out > INCREASE in Qd

21
Q

Change of price on demand curve

A

Movement along the demand curve either:

Left (i.e. from increase in price) > CONTRACTION in Qd
Right (i.e. from decrease in price) > EXTENSION in Qd

22
Q

Change in conditions of supply on supply curve

A

Shift in the supply curve either:

In > DECREASE in Qs
Out > INCREASE in Qs

23
Q

Change of price on supply curve

A

Movement along the supply curve either:

Left (i.e. from decrease in price) > CONTRACTION in Qs
Right (i.e. from increase in price) > EXTENSION in Qs

24
Q

Conditions of supply

A

= Factors that could cause an inwards/outwards shift in the supply curve for a particular good/service

  • Costs of production
  • Technology available
  • If subsidies are provided
  • Taxes
  • Government legislation
  • Weather (only affects agricultural commodities)
25
Q

When price is above the equilibrium

A

Surplus of the difference between Q at equilibrium and Q at new price

26
Q

When price is below that of the equilibrium

A

Shortage of the difference between Q at equilibrium and Q at new price

27
Q

Changes in equilibrium occur when

A

There is a change in one of the factors of demand or supply, causing the curves to shift

28
Q

Consumer surplus represented by

A

Area of right angled triangle between top of demand curve and equilibrium price
- Inwards shift of D curve will decrease this, outwards shift increase it

29
Q

Produced surplus represented by

A

Area of right angled triangle between bottom of supply curve and equilibrium price
- Inwards shift of supply curve will decrease this, outwards shift increase it

30
Q

Total revenue =

A

= Price x Quantity

- Represented by area underneath demand curve

31
Q

Elasticities along demand curve

A

First half - Elastic (i.e. > (-) 1 ) because as you move along the 1st half of the D curve, price falls creating an INCREASE in revenue as the area under the curve is getting bigger

Middle point - Unitary (i.e. 1)

Second half - Inelastic (i.e. (< (-) 1) because as you move along the 2nd half of the D curve, price falls creating a DECREASE in revenue as the (marginal?) area under the curve is getting smaller.

32
Q

Factors affecting PED

A
  • Number and closeness of substitutes (as increases, PED becomes more elastic)
  • Proportion of income for which good accounts (as increases, PED becomes more inelastic)
  • Influence of habit (if good is addictive, PED becomes more inelastic)
33
Q

Firms use PED to predict

A
  • Effect of change in price on TR and expenditure of a product
  • Whether / How best to use price discrimination (where supplier charges different segments of market different prices for same product e.g. peak + off peak rail travel)
  • Price volatility in a market following changes in supply

Economics - Micro (8 decks)

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