Theme 1: How do Markets Work Flashcards
1
Q
What is demand?
A
When people are willing and able to buy a good/service
2
Q
Describe the relationship between the price and quantity demanded
A
Quantity demanded increases when price goes down
3
Q
What do all demand curves have in common?
A
They all slope downwards
4
Q
Draw a demand curve
A
5
Q
What is a contraction in demand?
A
When price increases and quantity demanded decreases
6
Q
What is an extension in demand?
A
When price decreases but the quantity demanded increases
7
Q
What is PED?
A
PED measures how much quantity demanded will respond to a change in price
8
Q
What is the PED equation
A
% change in quantity demanded increases / % change in price
9
Q
Why would PED be negative
A
Because there is an negative relationship between price and quantity demanded
10
Q
What makes demand elastic?
A
If its larger than 1
11
Q
What makes demand inelastic?
A
If its smaller than 1
12
Q
What is the term for saying PED = -1
A
Unitary elastic
13
Q
Draw an elastic demand curve
A
14
Q
Draw an inelastic demand curve
A
15
Q
How would consumers react to a price change in the inelastic demand?
A
They would be less responsive to the change
16
Q
Draw a perfectly inelastic curve
A
17
Q
How would consumers react to a price change in an elastic demand?
A
They would be more responsive to the changes in price
18
Q
Draw a perfectly elastic curve
A
19
Q
Draw a unitary elastic demand curve
A
20
Q
What are the 6 factors which influence PED
A
1) necessity
2) addiction & habit
3) availability of substitutes
4) brand loyalty
5) proportion of income
6) time period
21
Q
What is a luxury good?
A
Something that we don’t need but its nice to own it
22
Q
What would be a PED of a necessity good
A
Inelastic
23
Q
What would be a PED of a luxury good
A
Elastic
24
Q
What would an addictive good’s PED be?
A
Inelastic
25
What would be a non-addictive good’s PED?
Elastic
26
What is a substitute good?
A good which can replace another good
27
How would the availability of substitutes effect a PED?
If there are less substitutes = inelastic
If there are more substitutes = elastic
28
How does brand loyalty affect the PED?
More brand loyalty = inelastic
Less brand loyalty = elastic
29
How does a proportion of income affect PED?
Large proportion = elastic
Small proportion = inelastic
30
How does time affect PED?
Short run = inelastic
Long run = elastic
31
What is total revenue formula?
Price x quantity
32
What would total revenue look like in an elastic demand curve if price increases?
If price increases, quantity will decrease by a larger %, so overall total revenue will decrease
33
What would total revenue look like in an inelastic demand curve if price increases?
If price increases, quantity will decrease but by a smaller %, so overall total revenue will increase
34
What would total revenue look like in a unitary elastic curve if price increases?
Total revenue wont change at all
35
What are the factors which affect demand?
1) advertising
2) fashion and trends
3) population and age structure
4) seasons
5) income
6) price of other goods
36
What is YED?
YED measures how much quantity demanded will respond to a change in income
37
What is the YED equation?
% change in quantity demanded / % change in income
38
Why is income elasticity demand important to a business?
It helps them understand how consumers will change their spending during recessions
39
What do you call when the YED of a good is negative
Inferior goods
40
What do you call when a YED of a good is positive?
Normal good
41
What is XED?
XED measures how the quantity demanded of good A will respond to a change in price of another good B
42
How does cross elasticity of demand help businesses?
It helps to calculate how competing firms’ prices will affect demand for their products
43
Give the formula for XED
% change in Qd of A / % change in price of B
44
What’s the term for a negative XED?
A complementary goods (since an increase in price for one good will decrease the demand for the other complement)
45
What’s the term for a positive XED?
Substitute goods (since a decrease in price of one good will decrease demand for a substitute)
46
What if 2 goods have an XED = 0?
This means they are unrelated goods
47
What do all supply curves have one thing in common?
That they slope upwards
48
What does supply mean?
When producers are willing and able to supply goods/services
49
Draw a supply curve
50
Give the formula for PES
% change in quantity supplied / % change in price
51
What is PES?
Measures how much quantity supplied changes in response to a change in price
52
What do all of PES have in common?
The value is always positive
53
Draw an elastic supply curve
54
Draw an inelastic supply curve?
55
What are the 5 factors which influence PES?
1) spare capacity
2) Availability of factors of production
3) State of economy
4) stockpiles and Perishability
5) Time period
56
What does spare capacity mean?
The space/capacity that’s not used
57
How does spare capacity affect PES?
Little spare capacity = inelastic PES
More spare capacity = elastic PES
58
How does availability of factors of production effect PES?
More availability of factors of production = elastic PES
Less availability of factors of production = Inelastic PES
59
How does the state of the economy affect PES
Bad state of economy = elastic
Good state of economy = inelastic
60
How does stockpiles & perishability affect PES
Easily stockpiled/not perishable = elastic
Hard to stockpile/perishable = inelastic
61
How does time affect PES?
Short run (when at least one factor of production is fixed) = inelastic PES
Long run (all factors of production can be changed) = elastic PES
62
What are the 5 main factors of the shift in supply? (Conditions of supply)
1) Technology
2) Weather
3) Costs
4) Number of Suppliers
5) Productivity
63
How does technology affect supply?
Advanced technology = shifts right
Terrible technology = shifts left
64
How does weather affect supply?
Good weather = rightward shift
Hurricane/tropical storm = leftward shift
65
How does costs affect supply?
Higher costs = leftward shift
Lower costs = rightward shift
66
How does number of suppliers affect supply?
Higher number = rightward shift
Lower number = leftward shift
67
How does productivity affect supply?
High productivity = rightward shift
Low productivity = leftward shift
68
What is the Price Mechanism?
Describes the interaction of supply and demand to determine prices
69
What are the 3 functions of the price mechanism?
1) signalling
2) incentivising
3) rationing
70
How does signalling help producers? (Give 3 chains)
- higher prices signal to producers that consumers want more goods
- lower prices signal to producers that consumers want fewer goods
71
How does incentivising help producers? (Give 2 ways)
- higher prices means more profit, increasing incentive to sell more
- lower prices reduce profits, reducing incentive to sell
72
How does rationing help producers?
Higher prices limit or ration the quantity demanded by consumers
73
What is equilibrium?
When supply = demand in a market
74
What does excess supply (surplus) mean?
When the price is above the equilibrium price, the quantity supplied will exceed the quantity demanded leading to excess supply (or a surplus).
75
What does excess demand (shortage) mean?
When the price is below the equilibrium price, the quantity demanded will exceed the quantity supplied, leading to excess demand (or a shortage).
76
Draw a diagram to show how the functions of the price mechanism eliminate excess supply in a market.
77
Draw a diagram to show how the functions of the price mechanism eliminate excess demand in a market.
78
What is the demand curve also known as?
The marginal benefit curve
79
What is the law of diminishing marginal utility?
As you consumer more of a good, the marginal utility you get from an extra unit will decrease
80
What does marginal utility mean?
The additional benefit from consuming an extra unit
81
What is total utility?
The total benefit
82
Can you draw and annotate a consumer surplus graph?
- Blue line: what consumers are willing and able to pay
- Green line: what consumers actually pay
- Orange shaded triangle: consumer surplus
83
What is consumer surplus?
The difference between what consumers actually pay and what they are willing to pay
84
What is another name for the supply curve?
The marginal cost curve
85
What is producer surplus?
The difference between what producers are willing to sell for and what they actually sell for
86
Draw a producer surplus diagram
87
Can you give 2 examples of direct tax?
Corporation tax and income tax
88
What is an indirect tax?
A tax on goods and services
89
Can you give 2 examples of an indirect tax?
Ad valorem tax and specific tax
90
What is a specific tax?
A fixed amount of tax paid on each unit sold
91
Draw a specific tax affect on a good
92
What does the top rectangle represent?
The incidence of tax on consumers
93
What does the bottom rectangle represent?
The incidence of tax on producers
94
How does inelastic demand affect specific tax?
It causes consumer burden to be bigger than producer burden
95
How does elastic demand affect specific tax?
It causes producer burden to be bigger than consumer burden
96
What is Ad Valorem tax? (VAT)
A tax charged as a percentage of the price of a good
97
Draw an Ad valorem tax being implemented in a good/service:
98
How would an inelastic demand effect Ad Valorem Tax?
It would make consumer burden larger than producer burden
99
How would an elastic demand affect Ad Valorem Tax?
It would make producer burden larger than consumer burden
100
Why do we implement taxes? (Give 2 reasons)
To discourage harmful goods and raise tax revenue
101
What is a subsidy?
A grant from the government to a firm to increase supply
102
Draw a subsidy graph
