Theme 1 RST Flashcards
The basic economic problem
Unlimited needs and wants
Problem of scarcity
Limited resources
3 economies ?
Centralised economy- full government intervention
Mixed economy- government intervenes slightly
Free market economy- based on supply and demand with little or no government control
4 economic agents and their functions:
Consumers - wish to maximise satisfaction
Producers/firms- wish to maximise profits by producing at Lower costs
Government- wishes to improve economic and social welfare of citizens
Workers- want to maximise income and benefits of work
Law of diminishing marginal utility
As you increase the amount you consume, the satisfaction off of the consumer decreases. ( marginal utility decreases)
Total utility
The total satisfaction from a given level of consumption
Marginal utility
The change in satisfaction from consuming an extra unit
When the price of a good changes…
We move along the curve
Factors that shift demand
Income Population Government control Advertising Change in price of substitute or complements
Supply factors shifting supply
Costs(wages, raw materials)
Natural factors(drought,flood)
Technology
Government(taxes,subsidies)
Price elasticity of demand
The responsiveness of demand to a change in price
Price elasticity of demand
What is elastic?
Where percentage change in quantity demanded is more than quantity change in price
-1 to infinity
Price elasticity of demand
What is price inelastic?
Where percentage change in quantity demanded is less than percentage change in percentage change in price.
Between 0 and -1
Price elasticity of demand =
Percentage change in quantity demanded / percentage change in price
Percentage change =
(Difference /original) X 100
Price elasticity of supply
The responsiveness of supply to a change in price
Price elasticity of supply formula=
Percentage change in quantity supplied / percentage change in price
Supply elasticity percentages are all positive.
What are the percentages for elastic, inelastic, unit elastic
Elastic- more than 1% (%change in QS is > %change in price)
Inelastic- less than 1%(%change in QS is < %change in price)
Unit elastic = 1%(%change in QS = %change in price)
Perfectly elastic supply means…
An increase in demand can be met without any change in market price
Perfectly inelastic supply means…
Supply is fixed and cannot respond to a change in market demand
Simply-Firms have an inelastic supply when they don’t have enough supply to meet demand. It takes time to reach it
*****Income elasticity of demand ** ONLY
Normal good is what?
Demand rises as income rises and vise versa
+figure
*****Income elasticity of demand ** ONLY
Inferior good?
Demand falls as income rises and vise versa
Income elasticity of demand percentages
Income elastic is more than 1% or -1 to infinity
Income inelastic is less than 1%. -1% to 1%
Cross elasticity substitutes and complements
Substitutes are positive percentages. E.g. if the price of rice falls the demand for pasta is reduced.
Complements are negative percentages. E.g if the price for PlayStations rise than the PlayStation games’ demand will decrease.
Cross elasticity formula
Percentage change of good A / % change in good B
The price mechanism meaning
The interaction of buyers and sellers in free markets enabling goods, services, resources to be allocated by prices
Rationing function
Rationing- when resources are particularly scarce, demand exceeds supply so the price is driven up in order to discourage demand and conserve resources. As a result the greater the scarcity, the higher the price and the more the resource is rationed.
Signalling
Price changes send contrasting messages to consumers and producers about whether to enter or leave the market
Incentive
Higher prices provide an incentive to existing producers to supply more and maximise their profits
