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Economics Revision > Unit 2 - The price system and the microeconomy > Flashcards

Unit 2 - The price system and the microeconomy Flashcards

1
Q

Define effective demand

A

An individual’s desire for a product backed up with the ability to pay for it

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2
Q

What is the law of demand?

A
  • When price increases, QD falls
  • When price decreases, QD rises
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3
Q

What is the law of supply?

A
  • When price rises for goods, producers will supply more
  • When prices fall, quantity supplied by producers fall
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4
Q

Define normal good

A

When an individual’s income increases, their demand also increases and vice versa

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5
Q

Define inferior good

A

When an individual’s income increases, their demand for a good will fall and vice versa.
E.g: Goods that are considered as less desirable/low quality (cheap foods like ramen or frozen foods)

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6
Q

What are the determinants of demand?

A
  1. Income
  2. Price of other goods/substitute goods
  3. Tastes/preferences
  4. Expectation of future prices
  5. Distribution of population, size, gender, age
  6. Distribution of income
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7
Q

What are the determinants of supply?

A
  1. Cost of production
  2. Availability of resources
  3. Climate
  4. Technology
  5. Government regulation
  6. Taxes and subsidies
  7. Price of other goods producer could supply
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8
Q

What causes a shift in the demand curve?

A
  • The demand curve shifts to the right when individuals are able to purchase more
  • The demand curve shifts to the left when individuals are able to purchase less
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9
Q

Causes of shift in demand curve to the right

A
  1. Rise in income for normal good
  2. Fall in income for inferior good
  3. Rise in price of substitute
  4. Fall in price of complement
  5. Taste changes in favor of product
  6. Expectations of future prices rise
  7. Increase in population
  8. More even distribution of income
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10
Q

Causes of shift in demand curve to the left

A
  1. Fall in income for normal good
  2. Rise in income for inferior good
  3. Fall in price of substitute
  4. Rise in price of complement
  5. Taste changes away from product
  6. Expectations of future prices fall
  7. Decrease in population
  8. Less even distribution of income
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11
Q

Causes for supply curve shifting to the right

A
  1. Low COP
  2. More available resources
  3. Better climate conditions
  4. Improved tech
  5. Changes in govt regulations in reducing cost or increasing supply
  6. Fall in tax, increase subsidy
  7. Reduction in price of alternative products firm could produce
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12
Q

Causes for supply curve shifting to the left

A
  1. High COP
  2. Less available resources
  3. Worse climate conditions
  4. Setbacks in tech
  5. Changes in govt regulations where cost increases or it’s difficult to supply
  6. Increase in tax, no subsidy given
  7. Increase in price of alternative products firm could produce
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13
Q

What happens when there is a MOVEMENT along the demand curve?

A
  • Contraction: movement UP demand curve
  • Expansion: movement DOWN demand curve
  • An increase in demand means a fall in price and increase in QD (expansion)
  • A fall in demand means a rise in price and decrease in QD (contraction)
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14
Q

What happens when there is a MOVEMENT along the supply curve?

A
  • An increase in supply means a rise in price and rise in QD (expansion)
  • A decrease in supply means a fall in price and fall in QD (contraction)
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15
Q

Define elasticity?

A

It’s the responsiveness of demand or supply to a change in one of its determinants

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16
Q

Define PED, YED, and XED

A

PED = Measures the responsiveness of a change in QD of a product to a change in its price

YED = Measures the responsiveness of a change in QD of a product to a change in consumer’s income

XED = Measures the responsiveness of change in QD of one product to a change in price of another product

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17
Q

Define elastic demand

A

The percentage change in QD is more responsive than the percentage change in price

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18
Q

Define inelastic demand

A

The percentage change in QD is less responsive to the percentage change in price

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19
Q

Describe the meanings of values for PED

A
  1. PED = 0 (Perfectly inelastic demand) –> A change in P doesn’t change the QD
  2. PED < 1 (Inelastic demand) –> A % change in QD is less responsive to a % change in P
  3. PED = 1 (Unitary elasticity of demand) –> The % change in QD is equal to the % change in P
  4. PED > 1 (Elastic demand) –> A % change in QD is more responsive to a change in P
  5. PED = ∞ (Perfectly elastic demand) –> A small change in P brings about an infinite change in QD
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20
Q

Describe the meanings of values for YED

A
  1. YED < 1 (income inelastic) –> A % change in QD is less responsive to a % change in income
  2. YED > 1 (income elastic) –> A % change in QD is more responsive than a % change in income
  3. YED = 1 (unitary income elasticity) –> A % change in QD is equal to a % change in income
  4. YED = 0 (Zero income elasticity) –> A change in income doesn’t change the QD
  5. YED < 0 (Negative income elasticity of demand) –> Change in income leads to a change in QD in the opposite direction
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21
Q

Describe the relationship between substitutes and complements

A
  • Products with a positive XED are substitutes
  • Products with a negative XED are complements
22
Q

Define positive XED and give example

A
  • A change in P of one good leads to a change in QD of another in the SAME DIRECTION
  • Eg: Rise in P of tea = Fall in QD of tea = Rise in QD of coffee
23
Q

Define negative XED and give example

A
  • A change in P of one good leads to a change in QD of another in the OPPOSITE DIRECTION
  • Eg: Rise in P of cars = Fall in QD of cars = Fall in QD of fuel
24
Q

Describe elastic demand

A
  • PED > 1
  • Eg: Luxury products
  • Higher PED = more elastic demand is for product
  • Elastic demand is higher at higher prices than low
  • Elastic demand curve diagram is a flat demand slope
25
Q

Describe inelastic demand

A
  • PED < 1
  • Eg: Products that are necessities (medicine, rice)
  • The lower the PED = The more price inelastic the product will be
  • Inelastic demand diagram has a steep demand curve
26
Q

What are the factors affecting demand?

A
  1. Time
    - Longer time period = more elastic
    - Less time period = more inelastic
  2. The number of substitutes
    - More substitutes = more price elastic
    - Less substitutes = more price inelastic
  3. Degree of necessity
    - More essential = more inelastic
    - Less essential = more elastic
  4. Durability and perishability
    - More durable = elastic
    - More perishable = inelastic
  5. Proportion of income taken by the product
    - High proportion of income = elastic
    - Low proportion of income = inelastic
27
Q

What are the major factors determining YED?

A
  • If a product is a luxury or necessity
  • How broadly or narrowly a product is defined
    (broader = more inelastic, narrower = more elastic)
  • assuming that the only variable affecting demand that is changing is household income and all other determinants are held constant
28
Q

What are the major factors determining XED?

A
  • The closeness of the relationship between complements and substitutes
  • Higher the value of the XED coefficient = Greater the effect of a change in price of complements/substitutes have on demand for product
  • Value of XED coefficient can also be 0
    (Means that products are independent or unrelated with each other, e.g.: strawberries and coal)
  • assuming that the only variable affecting demand that is changing is:
    –> household income
    –> substitutes and complements
    –> all other determinants of demand are held constant
29
Q

Define indirect tax

A

A tax on expenditure that’s imposed on the producer but can be passed onto the consumer through an increase in price

  • Ad valorem tax
  • Specific tax
30
Q

Define ad valorem tax

A

A tax (according to value) that’s a percentage tax which is based on the value of an item

31
Q

Define specific tax

A

A fixed amount of tax placed on a particular good

32
Q

Define price elasticity of supply

A

It’s the responsiveness of the quantity supplied of a product to a change in its price

33
Q

Explain the meaning values of PES

A
  1. Perfectly inelastic = 0
    - A change in price leads QS being unchanged
  2. Price inelastic = PES < 1
    - A % change in QS leads to a less proportionate or less responsive % change in price
  3. Price elastic = PES > 1
    - A % change in QS is more proportionate or more responsive to a % change in price
  4. Unitary elasticity = 1
    - A % change in QS leads to an equal % change in price
  5. Perfectly elastic = ∞
    - A small change in QS leads to an infinite change in price
34
Q

What are the factors and impact affecting PES?

A
  1. Time
    - longer time period = more elastic
  2. Availability of resources
    - greater resources and less specialized = more elastic
  3. Spare capacity
    - more spare capacity = more elastic
  4. Stocks
    - more stocks available = more elastic
  5. Number of firms in market
    - more firms in market = elastic
  6. Possibility of switching FOP between uses
    - if factors can easily be switched between uses = more elastic
35
Q

What are the time periods considered for PES and explain?

A
  1. Immediate/market period
    - QS is completely fixed and supply is perfectly inelastic
  2. Short period
    - where one or more FOP are fixed
    - supply can only be increased when making greater use of the variable factors
    - elasticity of supply can increase but may still be inelastic
  3. Long period
    - all FOP are variable
    - producer can increase QS by increasing scale of production
    - supply is relatively inelastic
36
Q

Define impact of tax

A

It’s where the initial burden of paying the tax falls

37
Q

Define incidence of tax

A

It’s where the final burden of paying the tax falls

38
Q

Define direct tax

A

These are taxes that are paid by individuals or organizations directly to a tax authority or government

39
Q

Define income tax

A

Tax that is levied on a worker’s weekly or monthly pay/income

40
Q

Define equilibrium price

A
  • There is no tendency for change in the market price
  • QD = QS
41
Q

Define market equilibrium

A
  • Price for where there will be no tendency for change based on the existing conditions of demand and supply
  • Demand = supply (equilibrium)
42
Q

Define market disequilibrium

A
  • Demand does NOT equal supply
  • Tendency for price to change
  • If price increases, demand is greater than supply
  • If price falls, supply is greater than demand
43
Q

Define joint/complementary demand

A

Where two goods are normally demanded together (cars and fuel)

44
Q

Define alternative demand

A

Where two goods are considered alternatives for one another (butter and margarine)

45
Q

Define derived demand

A

When the demand for a good or service arises as a result for the demand of another good or service, eg: like labor being demanded so that the demand for clothing products can be met

46
Q

Define composite demand

A

When a product is demanded for more than one purpose

47
Q

Define joint supply

A

The production of one good brings an increase in supply of another good

48
Q

Define competitive supply

A

An increase in supply for one product brings about a decrease in supply for another product

49
Q

Define signaling, rationing, and incentive function

A

Signaling = This indicates shortages and surpluses in the market

Rationing = The allocation of scarce resources among competing individuals/groups

Incentive = Encourages producers to supply more/less of a good/service

50
Q

Define consumer surplus

A

The difference between the price the consumer is willing to pay, and the actual price paid

51
Q

Define producer surplus

A

The difference between the minimum price the supplier is willing to accept for a good and the price actually received

Economics Revision (12 decks)

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