Unit 1 Flashcards
Reasons for an increase in demand
- Income change
- population changes
- trends/ advertising
- changes in the price of other goods (complimentary, substitute goods)
Reasons for a shift in the supply curve
- Natural factors (flood, drought)
- Technology
- Government (Taxes, Drought)
- Cost of production (Wages, Raw materials)
Positive Statement
A statement which is objective and based on value judgment (based on fact)
Normative Statement
Subjective and based on opinion
Total utility
Total satisfaction from a given level, of consumption
Price elasticity of demand
PED = % △QD / % △P
Elastic value and Inelastic values
- where % change in demand is greater than % change in price = elastic ( greater than 1)
- where % change in demand is less than % change in price = inelastic ( less than 1)
Derived demand
Where the demand for a product or service is derived from the demand for another product or service. Eg. More builders because more houses are needed.
Inelastic and elastic demand curve
Inelastic = steep curve (quantity demanded is less impacted by price)
Elastic = gradual curve (quantity demanded is greatly impacted by price)
Determinants of elasticity of demand
- Time period ( longer the time under consideration the more elastic a good will be)
- Number of and closeness of substitutes ( greater no of subs more elastic)
- the proportion of income taken up by the product ( smaller proportion more Inelastic)
- luxury or necessity
- habit forming
Determinants of elasticity of supply
- Four factors of production (Land, Labour, Enterprise, Capital)
- Time
- Spare capacity
- Spare stock and components
Normal good vs inferior goods
Normal good = Demand rises as income rises and vice versa eg. Holidays (positive value)
Inferior good = Demand falls as income rises and vice versa eg. Aldi (Negative value)
Luxury goods
A value greater than 1 is a luxury good
Have a high income elasticity and see greater sales volatility than necessities.
Cross elasticity
The responsiveness of demand of one good to changes in the price of a related good.
- some goods are substitutes for each other (positive value)
- some goods are compliments of each other (negative value)
Xed = % △ QD of good A / % △P of good B
Production possibility frontiers
The maximum possible output combinations of two goods or services an economy can achieve when all resources are fully used.
Capital good vs consumer good
Capital goods are man made products used by a business to produce consumer or other capital goods.
Advantages and disadvantages of specialisation
Advantages:
- higher productivity and efficiency per worker
- lower unit costs leads to higher profits
Disadvantages:
- can ask for a higher salary if only they can complete a job
- decreased motivation as they only complete one job (repetitive)
Absolute advantages vs comparative advantage
Absolute advantage: being able to produce more of something than another country. (Assuming both have the same amount of resources / FOP available)
Comparative advantage: being able to produce something at a much lower opportunity cost than another country.
Flat tax
Imposed on firms, but can be passed through higher prices. Eg. 5p per L of fuel
Ad valorem
Unit tax (% tax) eg. VAT 20%
Consumer surplus
The difference between the total amount that consumers are willing to pay and the total amount they actually pay. (Market price)
Producer surplus
Producer surplus is the difference between the amount the producer pays and the actual amount they receive.