Unit 2 (2.7-2.11) Flashcards
What is Price Elasticity of Demand
measures the percentage change in quantity demanded in relation to percentage change in price
Formula for PED
%change in quantity demanded/%change in price
what happens when the PED is infinity
product is completely price elastic( a change in price leads to an infinite change in quantity demanded)
what happens when the PED is >1
its is price elastic. a change in price leads to a greater change in quantity demanded
what happens when the PED =1
it is unit elastic. A change in price leads to the same change in quantity demanded
what happens when the PED is <1
it is price inelastic. a change in price leads to a smaller change in quantity demanded
what happens when the PED is 0
completely price inelastic. a change in price leads to no change in quantity demanded
what is the nature of a demand curve if PED=<1
it is a steeper curve
what is the nature of the PED if PED>1
it is a gentle curve
What will the producer do if product is price inelastic(demand)
will increase the price to increase revenue
what will the producer do if demand if price elastic
producer will lower the price to increase revenue
What factors affect the PED
number of substitutes available
Branding(consumers arent sensitive to price)
percentage of income spent on product
time
significance of PED for firms
allows them to calculate impact of price changes
this allows them to plan stock and staff levels
forecast sales,cash flow,profit
what is Price elasticity of supply
measures the percentage change in quantity supplied in response to a percentage change in price
how to calculate PES
percentage change in quantity supplied/percentage change in price
factors of PES
capacity available
factor substitution(easy for factors from one production switch to another)
time
stocks
What is the private sector
refers to businesses owned by private individuals
what is the public sector
refers to businesses owned by the government.They can have social objectives
In a free market economy, who answers the basic economic questions
decisions are made by firms and households in the private sector
In a command or planned economy, who answers the basic eco questions
answers by the government allocating resources
what is a mixed economy
when there is both a public and private sector.Questions are solved by both
what is nationalisation
when a government takes over a private sector business
what is privatisation
when a business is handed over to private ownership from the government
Advantages of planned economies
can pursue social objectives and take account of social costs
can overcome market failure( monopoly power and provide public goods)
disadvantages of planned economies
removes profit incentive which can lead to lack of innovation and enterprise
government has to make many decisions and may not make the right ones
advantages of free market economies
incentive to be profitable means firms innovate
doesnt need a government to decide what to do so costs are reduced
disadvantages of free market economies
may only focus on private costs and benefits
price can fluctuate as supply and demand change which can cause instability
what is market failure
the inefficient distribution of goods and services within the free market
What are public goods
they are non-diminishable(if someone consumes more of a product it does not reduce the amount available for others)
non-excludable(you cannot prevent someone from consuming the product)
what is the free rider problem
where people use a public good or resource without paying their share of the cost
what are merit goods
they are better for the individual than the individual may realise
what are demerit goods
they are worse for the individual than the individual may realise
what are private benefits and private costs
they are benefits and costs that are generated by businesses. They do not reflect the full costs and benefits to society
what is social costs
private costs+external costs
what is social benefit
private benefit+external benefit
What is a monopoly
when one firm dominates the market. Monopolies can b price makers
how can government overcome market failures
by intervening in the economy
what is a maximum price
set by the government to limit the price that can be charged in the market
what happens if the maximum price is set below the equilibrium price
it will create a shortage
what is a minimum price
set by the government to limit how low the price can go in a market( wages)
a minimum price set about the equilibrium price will create a surplus
What is indirect taxation
they may be imposed on producers to make them take account of the external costs of their production or to make consumers aware
what are subsidies
they may be used to pay producers to reduce their costs if there are social benefits to production or they may be paid to consumers to encourage consumption
what are regulations
forces businesses to act in certain ways( for example take account of health and safety measures)
what are regulations
forces businesses to act in certain ways( for example take account of health and safety measures)
