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Economics 9708 > Unit 2 - The price mechanism and the microeconomy > Flashcards

Unit 2 - The price mechanism and the microeconomy Flashcards

1
Q

Define

Market

A

where buyers and seller meet with the intention of either buying or selling

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2
Q

Define

Product market

A

manufactured good

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3
Q

Define

Labour market

A

market for workers

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4
Q

Foreign Exchange Market

A

Market for currencies

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5
Q

Commodity market

A

Agricultural goods

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6
Q

Stock Market

A

market for financial securities

shares/bills/bonds

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7
Q

Who are buyers?

A

consumers whose main aim is to maximise utility

also reffered to as households

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8
Q

Define

Utility

A

Satisfaction derived from consuming a good or service

measures in utils

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9
Q

What is the aim of the seller?

A

to maximise profits

profits are the yard stick for success

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10
Q

Define

Demand

A

The amount of goods and services that buyers are willing to buy, at a given price, per period of time, ceteris paribus

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11
Q

What ways can the definition of demand be broken into?

A
  • Quantity
  • Products
  • Buyers
  • Willing to buy
  • Able to buy
  • Various/given prices
  • Ceteris paribus
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12
Q

Define

Notional demand

A

want is not backed by purchasing power

buyer can’t afford

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13
Q

Effective Demand

A

Wanting is backed by purchasing power

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14
Q

Why is ceteris paribus part of the definition of demand?

A

The market is very turbulent for the price mechanism theory to work

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15
Q

Define

Demand Schedule

A

a table showing the levels of demand for a product at different prices per period of time, ceteris paribus

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16
Q

Define

Demand Curve

A

A curve showing the levels of demand at different prices, per period of time ceteris paribus

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17
Q

Explain the relationship show by the demand curve

A

The demand curve is downward sloping, showing an inverse relationship between price and
quantity demanded

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18
Q

What are the factors affecting demand

for a product or service

A
  1. Price of a good Itself
  2. Price of Complements
  3. Price of substitutes
  4. Consumers’ disposable income
  5. Advertising and promotion
  6. Availability of credit facilities
  7. Fashion taste and preferences
  8. Population
  9. Seasonal demand
  10. Changes in legislation
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19
Q

What causes movement of the demand curve?

Change of quantity demanded

A

This is caused by the price of the good itself and no other factor

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20
Q

What causes Expansion of the demand curve?

extenstion

A

Increase in demand caused by decrease in price of a good

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21
Q

What causes contraction of the demand curve?

A

A decrease in demand caused by an increase in the price of a good

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22
Q

What causes a shift in the demand curve?

Change in demand

A

All other factors affecting demand except the price of the good itself

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23
Q

Individual demand curve

A

The demand curve of an individual buyer.
This can be a consumer firm or government

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24
Q

Horizontal summing for the individual demand curves

A

The sum of the x axis of individual demand curves are added up to put on the market demand curve for the entire market.

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25
Q

Individual Demand

A

The amount an individual or single firm will buy at each price

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26
Q

Supply

A

The amount of goods or services that producers are willing and able to bring onto the market and sell at different prices per period of time Ceteris paribus

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27
Q

Describe the relationship between supply and price

A

Price and Quantity demaned have a direct relationship

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28
Q

What factors affect movement of the supply curve?

A

Only the price of the good itself

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29
Q

What factors affect shifts in the supply curve?

change in supply

A

all factors except the price of the good itself

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30
Q

What causes expansion of the supply curve?

A

Increase in the price of the good

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31
Q

What causes contraction of the supply curve?

A

Decrease in the price of the good itself

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32
Q

Define

Equilibrium

A

State of rest with no tendency to change

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33
Q

State

Law of supply

A

ceteris paribus more goods will be supplied onto the market at a higher price than at a lower price

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34
Q

State

Law of demand

A

More goods will be demanded at a lower price

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35
Q

What is excess supply?

A

Any price above the equilibrium price

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36
Q

What is excess demand?

A

Any price below the equilibrium price

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37
Q

What is equilibrium price?

A

The price at which supply is equal to demand because the market is always in equilibrium

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38
Q

When is the market in disequilibrium?

A

Excess supply (Any point above equilibrium price)
Excess Demand ( any price below equilibrium)

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39
Q

What roles does price play in the market?

A

Rationing
Incentive
Signalling and the transmission of preferences

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40
Q

What is the invisible hand?

A

The price mechanism working automatically

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41
Q

How does the price system lead to Rationing

A

If demand is high and supply is low then prices will be high.
to combat this then suppliers increase the prices to to limit the buyers to only those who can afford to pay high prices
Supply can also be limited to allow goods to remain exclusive allowing them to sell the goods for high prices

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42
Q

How does the price system create Incentive

A

Low prices, discounts and deals encourage customers to buy more goods, because utility increases when consumers thing they are getting a good deal
Higher prices lead to less demand but can encourage supply to increase as suppliers aim to profit more from expensive goods

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43
Q

How does the price system lead to Signalling and transmission of preferences

A

Price reflects market conditions
An increase in price signals suppliers to produce more, and if demand falls so does the price of the good, signalling to supplier they need to lower prices, improve the product or produce less

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44
Q

Define

Complement

Joint Demand

A

A good which is purchased with other goods to satisfy a want

pen + ink

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45
Q

Economic Theory

Complement

A

A rise in quantity demanded of one good, will lead to an increase in demand for it complements, resulting in an increase in price and quantity bought of the complement

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46
Q

Define

Subsitute

Competitive Demand

A

A good that can be replaced by another

they satisfy the same want

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47
Q

Economic Theory

Substitute

A

A rise in price of one good will lead to an increase demand and rise in price of its substitute

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48
Q

Define

Derived demand

A

when the demand of a good is the result of the demand for another good

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49
Q

Economic Theory

Derived Demand

A

An increase in demand for a good, will lead to an increase in price and quantity of goods that are in derived demand from it

50
Q

Define

Joint Demand

Composite Demand

A

When a good is demanded for two distinct uses

Crude oil and its fractions

51
Q

Economic Theory

Joint Demand

A

An increase in demand of a good will lead to a fall in supply, rise in price therefore a fall in quantity demanded of another good in joint demand

52
Q

Define

Joint Supply

A

When two or more goods are produced together so that a change in supply of one good, will lead to the same change to the other good in joint suppy

53
Q

Economic Theory

Joint Supply

A

An increase in demand for one good in joint supply will lead to an increase in its price. This will lead to an increase in the quantity supplied of the good.
Hence an increase in supply of the other good, and a fall in its price

54
Q

Define

Elasticity

A

The measure of the extent to which quantity demanded or supplied responds to a change in the variable which affects it

55
Q

State

The variables of Elasticity

A

Price Elasticity of:
PED & PES - supply and demand
XED - complements and substitutes
YED - Consumer’s Income

56
Q

Define

PED

A

The responsivness of demand to changes in the price of a good

57
Q

State

The types of PED

A

Elastic
Inelastic
Perfectly Elastic
Perfecly Inelastic
Unitary Elastic

58
Q

Equation

PED

A

%ΔQ / %ΔP
or
ΔQ|Q / ΔP|P

59
Q

Describe

Elastic Demand

A

When a small change in price leads to a large change in quantity demand or when the elasticity ratio >1

60
Q

What does line abc represent?

A

The total tax per unit

61
Q

What does line bc represent?

A

Tax for producer per unit

62
Q

What does line ab represent ?

A

Tax for consumer per unit

63
Q

What does area ac P0 P2 represents

A

Total tax paid to the government

64
Q

Define

Inelastic Demand

A

When demand is not very responsive to changes in price or when the elasticity ratio 0<x<1

65
Q

Define

Perfectly inelastic demand

A

Demand does not vary with change, consumers are willing to pay any price for the good eg. Necessities
Elasticity ration = 0

66
Q

Define

Perfectly Elastic Demand

A

There is one price that consumers are willing to pay eg. price controlled goods
Elasticity ratio = infinity

67
Q

Define

Unitary Elasticity

A

Change in price is met with a proportional change in demand (revenue remains constant)
Elasticity ratio = 1

68
Q

State

Factors affecting PED

A
  1. Habit forming goods
  2. Time period
  3. Percentage of income spent on a good
  4. Number and availability of substitutes
  5. Neccessities and Luxuries
  6. Width of definition (branding)
69
Q

How do habit forming goods affect PED?

A

Habit forming goods like addictive substances have inelastic demand as they cant be forgone

Non habit forming goods have elastic demand as they can be forgone

70
Q

How do time periods affect PED?

A

In the Short run demand is inelastic as there is no time to look for alternatives
In the Long run demand is elastic as there is more time to deliberate

71
Q

How does percentage of income affect PED?

A

If a larger portion of income is spent on a good then demand is elastic

if a smaller percentage of income is spent on a good then demand is inelastic

72
Q

How does the availability of substitutes affect PED?

A

If many substitutes are available, then demand is elastic
If substitutes are few, then demand is inelastic

73
Q

How do necessities and luxuries affect PED?

A

Necessities have inelastic demand as they are needs
Luxuries have elastic demand as they are wants

74
Q

How does width of definition affect PED?

branding

A

Branded goods have inelastic demand
Unbranded goods have elastic demand

75
Q

State

Economic relevance of PED

A
  1. Price determination
  2. Production planning
  3. Price discrimination
  4. Government and Taxes
76
Q

How is PED used to determine the price of a good?

A

If demand is elastic, then a lower price will yield a larger revenue
If deman is inelastic, then a higher price will yield a larger revenue
if demand is unitary mantaining price will be the best option as revenue is constant

77
Q

How does PED help in production planning?

A

Used to estimate the effect of changes in price,allowing the company to plan on what goods to produce, how many people to hire and the impact on cash flow

78
Q

How is PED used for price discrimination?

A
79
Q

How is PED used by governments and taxes?

A

Taxes reduce supply and increase prices.
If demand is elastic or supply is inelastic then the tax burden falls on producers
if demand is inelastic or supply is elastic then the tax burden falls on the consumer

80
Q

Problems with PED

A
  • Hard to draw this graph
  • Data collection problems
  • Price is affected by numerous factors
81
Q

Define

YED

A

Income elasticity of demand
measures the reponsivness of demand to changes in income

82
Q

When is YED elastic?

A

When it is highly reposive to changes in income

83
Q

When is YED inelastic?

A

When demand is unreposive to changes in income

84
Q

Describe

Normal goods

A

These are goods with positive YEDs, showing a positive relationship
As income increases so does demand

85
Q

Describe

Necessity goods

A

Type of normal good
YED is positive but 0> x>+1
quantity demanded is unlikely to change even with changes in income

86
Q

Describe

Superior goods

luxury

A

Type of normal good
PED ratio of >+1
Income rises, more proportionate increase in demand

87
Q

Describe

Inferior goods

A

YED ratio is negative
As income increases demand decreases

88
Q

Graph

Elastic YED

A

Small change in income big change in demand

YED>1

89
Q

Graph

Inelastic YED

A

Big change in income small change in demand

YED 0>x>1

90
Q

Graph

Perfectly Elastic YED

A

Demand can vary at the same income

YED = infinity

91
Q

Graph

Perfectly Inelastic YED

A

Demand is constant irrespective of changes in income

YED = 0

92
Q

Graphy

Unitary YED

A

Change in demand is proportionate to change in income

YED = 1

93
Q

Relevance YED

A

Determine what types of goods to stock
Normal goods during economic booms and inferior goods during hardships to ensure money is always being made.
Products in the primary sector have inelastic YED in the secondary sector they have elastic YED
Used so that the government knows when to make changes for income tax

94
Q

Define

XED

A

Cross elasticity of demand
A numerical measure of the responsiveness of demand of one product to changes in price of another related product

95
Q

What does a negative XED represent?

A

Goods that are complements

96
Q

What does a positive XED represent?

A

Goods that are substitutes

97
Q

How is the closeness between substitutes and complements observed?

A

If the two goods being compared have an Elastic XED then they are close substitutes or complements of each other as the price of Good A drastically affects demand for good B

If the XED is inelastic then they are weak complements or substitutes as the change in price of one does not highly affect demand for another.

98
Q

Economic relevance of XED

A

Allows a business to estimate the effects of changes in price of their competitors on their own goods
Allows businesses to estimate effects of changes of price of complements on their own goods
Allows the company to estimate the effects on customers expenditure using special deals and promotions (make complements cheaper to draw in customers, increase price of the goods itself)

99
Q

Define

PES

A

Price elasticity of supply
A numerical measure of the responsiveness of supply to changes in price of the product itself, ceteris paribus

100
Q

Why is PES positive?

A

Price and supply have a direct relationship

101
Q

Why does a price increase for PES always favoured?

A

Price and Quantity supplied have a positive correlation between price and quantity supplied, price increases will always lead to more revenue

102
Q

State

Factors affecting PES

A
  1. The number of producers
  2. The existence of spare capacity
  3. Ease of storing stocks
  4. The time period
  5. Factor mobility
  6. Length of the production period
103
Q

Economic relevance of PES

A

If demand increases for a good, the the good with inelastic demand will have larger increase in price than the one with elastic demand.
This knowledge informs supplier with goods with inelastic demand to raise prices more sharply in response to surges in demand

104
Q

How does the number of producers impact PES?

A

If there are many producers then the PES will be elastic as it is easier to increase output to the market
If there are few then it will be inelastic as it is difficult to supplement during shortages

105
Q

How does spare capacity affect PES?

A

If there is spare capacity then is is easy to increase output with increases in price, so it is elastic
If there is no spare capacity then PES will be inelastic

106
Q

How does ease of storing stocks affect PES ?

A

If it is easier to store stocks then PES will be elastic, as stocks can be kept and sold later
If it is difficult to store stocks then PES will be inelastic eg. Agriculture and seats in stadiums

107
Q

How does time period affect PES?

A

In the short run PES is inelastic as there is not time to increase productivity
In the long run PES is elastic as there is time to improve factors of production and be more efficient

108
Q

How does factor mobility affect PES?

A

Easy elastic
Hard inelastic

109
Q

How does length of production period affect PES?

A

If the length of production is short then PES will be elastic as it is easy to increase output eg. manufacturing
if the length of production is long then PES will be inelastic as it is difficult to increase output with changes in the market

110
Q

Define

Consumer Surplus

A

The difference between what consumers are willing to pay and what they actually pay
It is a measure of the welfare consumers receive

111
Q

What area represents consumer surplus?

A

The area below the demand curve and equilibrium price

112
Q

What is the consumer surplus when PED is perfectly elastic

A

ZERO as consumers are only willing to pay one price

113
Q

What is consumer surplus when PED is perfectly inelastic?

A

Infinity as consumers are willing to pay any price for the good

114
Q

Relate consumer surplus to PED?

A

The more elastic demand is the less the consumer surplus because buyers are only willing to pay lower prices

115
Q

Relate price and consumer surplus

A

As price increases consumer surplus decreases and the greater the change in price the greater the change in consumer surplus

116
Q

Economic relevance of Consumer surplus

A

Used to analyse the impact of government intervention in any market

117
Q

Define

Producer surplus

A

Measure of producer welfare
The difference between the price that consumers are willing and able to provide a good or service to the market, and the price they actually receive

118
Q

Relate Price and producer surplus

A

The greater the price, the greater the producer surplus as there is more incentive to supply

119
Q

What area represents producer surplus?

A

The area underneath the supply curve and equilibrium price

120
Q

Relate demand to economic welfare?

A

If demand increases both consumer and producer surplus increase

121
Q

Relate supply to economic welfare

A

If supply increases (shift right) both consumer and producer surplus increases

Economics 9708 (3 decks)

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