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H1 Economics > WA2 > Flashcards

WA2 Flashcards

1
Q

Definition of equilibrium

A

Equilibrium refers to a situation where there is no tendency for change.

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2
Q

Definition of price mechanism

A

The process whereby the demand and supply in the market interact to determine the price to allocate resources

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2
Q

Definition of market cleaning price

A

The equilibrium price at which the quantity demanded equals to quantity supplied

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3
Q

Definition of disequilibrium price

A

Any price at which the quantity demanded does not equal to the quantity supplied

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4
Q

Definition of shortage

A

Shortage is a market disequilibrium situation where the quantity demanded is greater than the quantity supplied at the equilibrium price.

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5
Q

Definition of law of demand

A

The law of demand states that there is an inverse relationship between the price and the quantity demanded of a good, ceteris paribus.

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5
Q

Definition of surplus

A

Surplus is a market disequilibrium situation where the quantity supplied is greater than the quantity demanded at the equilibrium price.

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6
Q

Definition of effective demand

A

Effective demand is the quantity of a good or service that consumers are willing and able to buy at different prices, ceteris paribus.

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7
Q

Definition of utility

A

Utility is the level of satisfaction that a consumer derives from consuming a good or undertaking an activity.

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8
Q

What does ceteris paribus mean?

A

Ceteris paribus refers to the assumption where all the other conditions remain the same.

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9
Q

What is the law of diminishing marginal utility?

A

The law of diminishing marginal utility states that beyond a certain point of consumption, as more units of a good or service are consumed, the additional utility a consumer derives from successive units decreases.

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9
Q

What are the non-price determinants of demand?

A

TYGER
Tastes and preferences of consumers
Household Income
Government policies
Consumer’s expectations
Prices of related goods

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9
Q

How does the consumers’ tastes and preferences affect demand?

A

A change in tastes and preferences towards the consumption of a certain good or service would increase its demand.

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10
Q

How does the household income affect demand?

A

When income rises, consumers’ purchasing power will rise. Consumers’ purchasing power increases. Assuming ceteris paribus, there will be an increase in the demand for the good, indicating that the quantity demanded increases at every price level. This can be illustrated by a shift in the demand curve to the right.

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11
Q

How does the consumers’ expectations of future price of good affect demand?

A

If consumers think that the price of a good is going to fall soon, they are going to hold back current purchases and purchase the good later as they will save some money by buying them in the future. Hence, demand of the good decreases.

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12
Q

How do substitute goods affect demand?

A

When price of good A increases, demand of good B increases, ceteris paribus. To enjoy the same level of satisfcation from consuming Good A, consumers will then switch over to consuming from Good B. The increase in willingness and ability to consume Good B at every price level. Demand for Good B increase and shift to the right.

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13
Q

How do complement goods affect demand?

A

When price of Good A increases, quantity demanded of good A decreases due to the law of demand. As good A and good B are consumed jointly, consumers will decrease demand for good B , decrease their willingness and ability to purchase good B at every price level. Demand for Good B decreases

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14
Q

Explain how an event affects market equilibrium(demand)

A

1) Initially P0 and Q0. TYGER, increase/decrease demand
shift to right/left
2)At original price P0, Qd >Qs, resulting in shortage of QdQs units(if demand increases, else other way round)
3)Shortage will result in upward pressure(if demand increases, else other way round)
4)As the price increases, the quantity supplied will increase/decrease according to the LOS and quantity demanded will increase/decrease according to LOD. As price rises, market shortage/surplus is reduced.
5)Prices continue to adjust until the quantity demanded will equal to the quantity supplies and a new equilibrium is established.
6) New equilibrium price increases/ decreases. New equilibrium quantity increases/decreases

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15
Q

Definition of supply

A

Supply is the quantity of a good or service that producers are willing and able to sell at different prices, over a particular period of time, ceteris paribus.

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16
Q

Non-price determinants of supply

A

CREST
Cost of production
Prices of related goods
Expectations of future prices
Size of industry
Taxes and subsidies

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17
Q

State teh LOS

A

The LOS states that there is a direct relationship between the price and the quantity supplied of a good.

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18
Q

How does the cost of production affect the supply?

A

As the unit cost of production increases, the producer make less profits at every price level. This casues firms t cut back on their production and the supply curve shifts left.
As the unit cost of production decreases, profits will increase and producers are more able and willing to supply more of a good at every price level. Thus, the supply curve shifts to the left.

19
Q

How do joint goods affect supply?

A

When there is an increase in price of good A, quantity supplied of good A will increase. This will naturally lead to an increase in supply of good B even though the price of good B is unchanged.

20
Q

How are goods that are competitive in supply affecting supply?

A

If the price of good A increases, the law of supply states that the quantity supplied of good A will increase. Resources will be diverted to the production of good A from production of good B. This will lead to fall in supply of good B, causing the production of good B to decrease.

21
Q

How do the expected future prices of a good affect teh supply?

A

When the price of an expected good to increase, produces may temporarily reduce the supply at present to build up stocks and sell them only when the price increases in the future. This would increase the supply of the good and shift the supply curve rightwards, ceteris paribus.

22
Q

How do the size of the industry affect the supply?

A

As more producers enter the industry, the market supply increases, and the supply curve shifts to the right.

23
Q

Functions of the price mechanism

A

1)Signalling function
Prices signal producers to allocate resources
2)Incentive function
By devoting morre resources to production of good to earn profits
3)Rationing function
Ration scarce resources to those who are most willing to pay, or those who place the highest value on the goods and services

24
Q

Definition of allocative efficiency

A

Allocative efficiency is the situation where the society produces and consumes a combination of goods that maximises social welfare.(uses incentive and rationing function of prices)

25
Q

Definition of productive efficiency

A

Productive efficiency is defined as the situation where firms are producing a given output at the least cost.(uses incentive function of prices)

26
Q

Definition of PED

A

The price elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in its price, ceteris paribus.

27
Q

Why is the PED negative always?

A

LOD states the quantity demanded is inversely related to price

28
Q

How to calculate PED

A

Percentage change in qty demanded / Percentage change in price

29
Q

What does it mean to be price elastic?

A

1 < PED < 9999999
Change in price results in more than proportionate fall/rise in quantity demanded, ceteris paribus

30
Q

What does it mean to be price inelastic?

A

Change in price results in less than proportionate change in quantity demanded, ceteris paribus.
0 < PED < 1

30
Q

If its price elastic or inelastic, how does it affect the curve?

A

The demand curve is flatter if it is relatively price elastic and the demand curve is steeper if it is relatively price inelastic at the same price level.

31
Q

What does it mean to be unitary elastic?

A

PED = -1
Change in price results in proportionate change in quantity demanded.
Demand curve is slide down

31
Q

What does it mean if its perfectly price elastic?

A

PED = infinity
Minimal change in price leads to infinite change in quantity demanded.
Demand curve is straight line, gradient = 0

32
Q

What does it mean to be perfectly price inelastic?

A

PED = 0
Change in price causes no change in quantity demanded
Demand curve is straight line going up

33
Q

Determinants of PED

A

PANT
Proportion of income spent on good
Available number of substitutes
Need for a good
Time period
(Most likely they ask A or N)

33
Q

How does the number of substitutes affect the PED?

A

The more substitutes that are available and the more imilar they are to the good, the easier for people to switch to these alternatives when the price of the good rises. Hence, the greater the price elasticity of demand is.
(Less substitutes, price-inelastic)
(More substitutes, price elastic)

34
Q

How does the need for a good affect the PED?

A

The greater the need for a good, the more price inelastic the demand is.

35
Q

Definition of total revenue

A

Total revenue refers to the amount a firm earns from its sales of a product at a particular price.

36
Q

What are the 4 things to consider when seeing a graph question?

A

1)Rate of change
2)Magnitude of change
3)Reversal of trend
4)Anomally

37
Q

When demand is price inelastic, how would a rise in supply affect the total revenue?

A

A rise in supply would lead to a decrease in total revenue.

38
Q

How does the proportion of income affect the PED?

A

The larger the proportion of income spent on the good, the more price elastic the demand is.

39
Q

How does the time period affect the PED?

A

For many goods, the longer time period consumers have to adapt to a price change, the greater the price elasticity of demand.

39
Q

Definition of PES

A

The price elasticity of supply measures the responsiveness of the quantity supplied of a good to a change in its price.

40
Q

Formula of PES

A

Percentage change in qty supplied / Percentage change in price

40
Q

How does the level of unsold stocks available/inventory affect the PES?

A

If producers can keep finished goods as unsold stocks, the quantity supplied will be more responsive to changes in price as the producers can draw down on the inventories to meet the increased demand. The greater the availability and durability of unsold stocks, the more price elastic the supply of the good will be.

41
Q

What are the determinants of PES?

A

ELIFT
Existence of spare caapcity
Level of unsold stocks/ Inventory
Factor mobility
Time period

41
Q

Why is PES positive?

A

PES is always positive because of LOS

42
Q

How does the existence of spare capacity affect the PES?

A

If there is plenty of spare capacity, the producer will be able to increase output quickly in the short run in response to increase in prices given that variable factors like labour and raw materials are available. Hence, teh supply is price elastic since the increase in the price of the product will lead to a more than proportionate rise in quantity supplied.

43
Q

How does the factor mobility affect the PES?

A

The greater the factor mobility, the more price elastic the supply of the good. This is because many producers usually produce a range of products and if they can switch factor inputs from one type of production to another, the quantity supplied of the good will be more responsive to changes in price.

44
Q
A

H1 Economics (1 decks)

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