The Role of Markets 2.4-2.7 Flashcards
What is consumer surplus
The difference between the price consumers are willing and able to pay and the price that they actually pay.
What is producer surplus?
the difference between the price a producer is willing to accept for a supply and the amount they actually receive
What is marginal cost
the cost of producing an additional unit of output
What is market equilibrium?
When the quantity demanded by consumers is exactly balanced with the quantity supplied by firms
What is disequilibrium ?
any position in the market where demand and supply are not equal
When will a firm choose to stop supplying goods?
When the cost of producing their final pizza is higher than the price they can sell it for
What is price elasticity of demand?
Ped measures the responsivenes of quantity demanded given a change in price
How do you calculate PED?
% change in qd / % change in price
Why is PED always negative
Because of the law of demand.
What does price elastic mean?
The proportional change in demand is greater than the related proportional change in price
- the figure is greater then 1
What does price in elastic mean?
The proportional change in demand will be less than the relative proportional change in price
- less than 1 but more than 0
What does perfectly price inelastic mean?
Regardless of price change quantity demanded won’t change
- the value would be 0
What does perfectly price elastic mean?
quantity demanded changes by an infinite amount in response to any change in price
When is demand for a good or service price elastic or inelastic
SPLAT
substitutes - the more there are the price elastic demand will be
percentage of income - greater the percentage of income it takes from consumers = more elastic
Luxury/ Necessity- luxury is elastic and necessity is inelastic
Addictive/ Habit forming - demand is inelastic
Time period - short inelastic due to less substitutes but long run elastic as there is more choice
Why is ped important to businesses/firms
Because it helps them make pricing decisions to help them increase total revenue
What should a firm do with price to increase total revenue if demand is elastic or inelastic
EOIS - ELASTIC ONLY IRRITATES SKIN
Elastic Opposite, Inelastic Same
price elastic - the opposite will happen
price inelastic- the same will happen
What does unitary elasticity mean
a percent change in price will lead to an exact and opposite change in demand
- the value is 1
What is income elasticity of demand
YED measures the responsiveness of quantity demanded given a change in income
How do you calculate income elasticity of demand ?
% change in qd/ % change in y
Why is YED important?
It tells us if we are working with normal goods or inferior goods
What is a normal good ?
A positive relationship between income and demand
- as income goes up demand will go up
What is an inferior good?
They have an inverse relationship between income and demand
- as income goes up demand goes down
Difference between Normal and inferior good
If the figure is positive it is a normal good
If the figure is negative it is an inferior
Normal good YED figures
more than 1 demand = income elastic normal luxury
less than 1 = income inelastic normal necessity
Inferior good YED figures
more than 1 = income elasticity
less than 1 = income inelastic
What is XED ?
XED measures the responsiveness of quantity demanded of a good or service given a change in price of another
What does XED tell us ?
Whether the goods are substitute goods or complimentary goods and whether they are strongly or weakly related
How do you calculate XED
% change in qd of product A / % change in price of product B
What does market equilibrium show?
It represents allocative efficiency
- at equilibrium, the resources that firms use to make goods and services are perfectly following consumer demand
What are the functions of price
ARSI
A - allocate scarce resources efficiently
R - ration scarce resources by encouraging/discouraging consumption
S - signals excess demand/supply and need for more or less resources
I - incentivise producers to produce more or less to maximise profit
EXCESS DEMAND = PRICES RISE
EXCESS SUPPLY = PRICES FALL
What are the symbol YED figures
+ = normal good
- = inferior good
What are the symbol XED figures
+ = substitutes
- = compliments
What are the symbols of XED?
More than 1 = price elastic (strongly related)
Less than 1 = price inelastic
0 = perfectly inelastic
What is PES?
Measures the responsiveness of quantity supplied given a change in the market price
How do you calculate PES?
% change in quantity supplied / % change in price
What are the values of PES
More than 1 = price elastic
Less than 1 = price inelastic
1 = unitary elastic
0 = perfectly inelastic
Infinity. = perfectly elastic
What are the determinants of supply
PSSST
- Production lag (longer the lag means more inelastic
- stocks ( more stock means more elastic , easier to respond to inc in price
- spare capacity (more means more elastic)
- substitutability of fops ( more substitutes means more elastic supply is) - e.g could move workers from making cars to making vans
- time (short run one fixed factor of production , difficult to inc production making supply inelastic, long run no fops are fixed
