Theme 1 - How do markets work Flashcards
Factors that shift the demand curve
Population
Income
Related goods
Advertising
Tastes and Fashions
Expectations
Seasons
Derived demand
Demand for one good is linked to the demand for a related good.
Composite demand
When the good demanded has more than one use so assuming supply stays the same an increase in one good leads to a decrease in supply of another.
Joint demand
When goods are bought together.
Diminishing marginal utility
Decreasing satisfaction or usefulness as additional units of a product are acquired
Equation for price elasticity of demand
% change in quantity demanded / % change in price
Unitary elastic
describes demand whose elasticity is exactly equal to 1
Inelastic demand
A situation in which an increase or a decrease in price will not significantly affect demand for the product
Elastic demand
A situation in which consumer demand is sensitive to changes in price
Perfectly inelastic
Quantity does not respond at all to changes in price (E=0)
Perfectly elastic
Demand which falls to zero when price changes
Factors effecting PED
Necessity
Substitutes
Addictiveness
Proportion of income
Durability
Peak and off peak
If a firm sells a good with an inelastic demand, they are likely to put most of the tax burden on ……………
The consumer
If a firm sells a good with an elastic demand, they are likely to put most of the tax burden on ……………
Themsleves (The firm)
Equation for income elasticity of demand
% change in quantity demanded / % change in income
Luxury goods have a PED of YED ……
> 1 as income increases this causes an even bigger increase in demand/
Normal goods have a PED of YED ……
> 0 as demand increases as income increases
Inferior goods have a PED of YED ……
<0 as they see a fall in demand as income rises.
Equation for cross elasticity of demand
% change in quantity demanded of good X / % change in price of good Y
Complementary goods have a ………. XED
negative
Substitute goods have a ………. XED
Positive
Unrelated goods have a ………. XED
0
Factors that cause a shift in the supply curve
Productivity
Indirect taxes
Number of firms
Technology
Subsidies
Weather
Costs of production
Equation for price elasticity of supply
% change in quantity supplied / % change in price
What are the 3 main functions the price mechanism uses to allocate resources
Rationing
Incentive
Signalling
Consumer surplus
The difference between what a firm is willing to pay and the price they actually pay.
Producer surplus
The difference between the price the producer is willing to charge and the price they actually charge.
Economic welfare
The total benefit society receives from an economic transaction.
How is economic welfare calculated
Producer Surplus + Consumer Surplus
Two types of indirect taxes
specific tax and ad valorem tax
Consumer subsidies affect demand and do/do not shift the ………. curve.
do not supply
Producer subsidies lower the cost of production and do/do not shift the ………… curve.
do supply
