Topic 2 Flashcards
what is the 1. law of demand and 2. the law of supply
demand: price and quantity have a linear/negative relationship
supply: a positive relationship between price and quantity supplied
what is the 1. marginal benefit curve and 2. the marginal cost curve
marginal benefit: the additional benefit (real or perceived) gained by consumers from the last unit procured
marginal cost:
movements along demand curve: what is the INCOME effect and the SUBSTITUTION effect
INCOME EFFECT: as price decreases, purchasing power (real income) increases, quantity demanded increases
SUBSTITUTION EFFECT: as price decreases relative to other goods, quantity demanded for the cheaper goods increases
what are the 5 non price factors causing a shift of the supply curve
- income of consumers (Y)
- tastes of consumers (t)
- number of consumers (N)
- Price of related goods (Pr)
- Expectations of future prices (Pe)
income of consumers: what is the difference between NORMAL and INFERIOR goods
normal = as income increases, demand increases (luxury brand/expensive goods) inferior = as income increases, demand decreases (home brand/cheap)
price of related goods: what is the differences between SUBSTITUTE and COMPLIMENT goods
substitute: positive relationships (if sub A price increases, sub B demand increases)
compliment: negative relationship between price of good and demand for compliment
what are the 5 factors resulting in a shift of the supply curve
- price of inputs (pF) {inverse}
- Tech changes (T)
- Price of alternative/substitute goods
- Expected Future prices {inverse}
- Change in number of sellers {positive}
explain what is meant by technology and how tech improvement can effect supply
tech = stock of knowledge about how to combine resources most efficiently
tech improvement = fall in production cost = supply increases (right)
how can the price of alternative/substitute goods effect supply
goods that require similar inputs (eg paddocks can be used for feeding milk cows or growing corn). If corn price increases and milk decreases farmers may switch to corn not milk
what are markets
markets provide a mechanism whereby RESOURCES ARE ALLOCATED AMONG COMPETING CLAIMS (reflecting needs/wants of buyers/sellers)
define the role of 1. buyers and 2. sellers
buyers: only buy if they perceive marginal benefit of buying as greater than or equal to marginal cost
sellers: only sell if the price they receive is greater than or equal to the marginal cost
what is equilibrium and define what FLUID market and STICKY market equilibrium means
equilibrium means there is no excess supply or demand. plans of buyers match plans of sellers (Qd = Qs)
fluid: disequilibrium is short and rare so market is always clear (stock market)
sticky: disequilibrium lasts long before buyers/sellers have time to adjust (housing market)
when does a surplus occur - draw the diagram
when quantity demanded is less than quantity supplied there is downward pressure on prices, as price falls, quantity demand increases until equilibrium is reached
when does shortage occur - draw the graph
when quantity demand is greater than quantity supplied there is upward pressure on prices meaning as price rises, quantity demanded falls until equilibrium is reached
what is consumer surplus and where is it represented on the d/s graph
consumer surplus = marginal benefit (maix price willing to be paid) - marginal cost (price actually paid).
CS is the are between the demand curve (=MB) and equilibrium (=market price line)
what is producer surplus and where is it represented on the d/s graph
producer surplus = marginal benefit (selling price ) - marginal cost (actual cost)
PS is area between supply curve (=MC) and equilibrium (=market price line)
when does allocative efficiency occur and define
what is productive efficiency
what is dynamic efficiency
- when MB = MC: number of resources allocated to produce a good reflects the value society places on the goods and the benefit consumers recieve from buying it
- firms cost minimised
- innovation to improve production
when does DWL occur
loss of potential surplus not transferred to any other party - when marginal benefit (value of goods to consumer) IS NOT EQUAL TO Marginal cost (resources allocated to produce the goods)
what is the linear function for demand or supply
quantity demanded or quantity supplied = Quantity (0) - Price(x)
equilibrium is when demand equation = supply equation
when does a country export (draw graph going through PS,CS etc)
if domestic price of producing a goods is less than world price a country is relatively more efficient, it has a lower opportunity cost or a comparative advantage in producing it
when does a country import (draw graph going through PS,CS etc)
if domestic price is less than world price a country doesnt have a comparative advantage of producing a good, the world is more cost efficient
what are the 5 arguments for protectionist policies
- protect local job
- infant industry (new industries need protection so over time they become internationally competitive and develop a comparative advantage)
- national security
- unfair competition
- protection as a bargaining chip: use trade to punish people eg China to aus wine and sanction with russia
what are tariffs (draw graph etc)
a tax on an import designed to increase the price of foreign goods and services so that competing domestic good receives a price benefit (cheaper) and gov gets revenue: increasing world price for consumers
what is a subsidy (draw graph etc)
a grant or payment made by the gov to domestic producers which directly lowers a producers cost of production
