Theme 1 Flashcards
What are the four economic agents?
Government, consumers, firms, employees
What are the three economic questions?
What to produce? How to produce? For whom to produce?
What’s total utility?
Total satisfaction from a given level of consumption
What do suppliers pass onto consumers from the government?
VAT
What happens when tax reduces supply?
Subsidies increase
What does the supply curve show?
how much of a product producers will supply onto the market at each price
What does change in price do on a supply curve?
A movement along the curve
What’s equilibrium?
The price at which the supply and demand curve meets, this is when the product that’s supplied onto the market will be bought
What’s the price elasticity of demand equation?
Ped = % change in quantity demanded / % change in price
Price Elasticity of demand definition
the responsiveness of demand to changes in price
Inelastic and elastic definitions
if the answers between 0 and +1 the relationship is inelastic
if the answers between -1 and infinity the relationship is elastic
Elasticity equation
difference/ original x 100 (to find the percentage)
What does the number or closeness of substitutes do to the elasticity of a product?
the greater the number of substitutes the more elastic the product is
How does the proportion of income taken up by the product affect elasticity
The smaller the proportion of income taken up the more inelastic the product is
What are the determinants of elasticity of supply?
Land, labour, capital and enterprise
What’s the income elasticity of demand?
How much demand changes when income does
What’s a normal good?
Demand rises as income rises and vice versa (positive)
What’s an inferior good?
a good whose demand drops when people’s incomes rise
What make something a luxury good?
When it’s got an elasticity of 2+
What values do substitutes and complements have?
Substitute is positive
Complement is negative
What can the value tell you about the relationship of a product?
The higher the value the stronger the relationship
What’s the definition of capital?
The financial or physical resources used to produce value in an economy
What’s price mechanism?
The interaction of buyers and sellers in free markers
What are the three functions of price mechanism?
Rationing, signalling and incentive
What’s a rationing function?
When price rises the amount of people who can afford the product is rationed so rations the materials used for the product as less are made
What’s a signalling function?
price change sends contrasting messages to producers and consumers, price decrease leads to consumers buying more and when demand increases when price increases it gives other producers a chance to enter the market