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BUSS1040 > Week 4 - Equilibrium + Elasticity > Flashcards

Week 4 - Equilibrium + Elasticity Flashcards

1
Q

What is Equilibrium in a Market

A

Occurs when price balances the buying plans of buyers and selling plans of sellers

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2
Q

How can we see equilibrium on a S/D graph

A

Where Quantity Demanded = Quantity Supplied

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3
Q

What is Excess Supply

A

When Market Price > Equilibrium Price
- Q supplied > Q demanded

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4
Q

Implications of Excess Supply

A

Sellers cannot find buyers for all units supplied to market

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5
Q

What is the pressure from excess supply

A

Downward pressure on prices as sellers try to bring more consumers into the market
- Q supplied falls in response to decrease in prices

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6
Q

What is Excess Demand

A

If Market Price < Equilibrium Price
- Q Demanded > Q Supplied

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7
Q

Implications of Excess Demand

A

Upward pressure on prices, as buyers compete for limited units in market
- Same time Q supplied grows in response to increasing prices

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8
Q

When does Upward/Downwards pressure continue

A

Until excess supply is eliminated (downward) or excess demand is eliminated (upward)
- Both actions will move market towards equilibrium

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9
Q

Steps to holding an economic analysis (Comparative statics)

A

1) Start with Market Equilibrium
2) Introduce a ‘shock’ holding all else constant, ceteris paribus
3) Compare before and after

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10
Q

What do we call a micro economic analysis

A

Partial Equilibrium analysis (focus on single market holding all else constant)

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11
Q

Consumer and firms will only participate in markets if

A

It is beneficial to them

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12
Q

How can we measure and observe changes in benefits to participants

A

Welfare Analysis

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13
Q

Key Questions to ask in a Welfare Analysis

A

1) How happy are you when consume a product?
2) How happy are producers when they sell it?

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14
Q

What is consumer surplus

A

Difference between what consumers are WTP and what they actually pay (MB - Market Price)

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15
Q

Consumer Surplus on a graph is given by

A

Area between demand curve and price line up to quantity consumed

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16
Q

Producer surplus is

A

The amount producers receive (market price) above the minimum price required to make them supply the goods (shown on supply curve MC)

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17
Q

Producer Surplus graphically

A

Area between the price line and the Supply Curve up to the quantity produced

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18
Q

Equation linking Producer Surplus and Profit

A

PS = Profit + FC

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19
Q

How to Calculate Total Surplus/Welfare

A

TS = CS + PS

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20
Q

At equilibrium, the marginal net benefit of producing an additional unit is (why)

A

0:
- Total net benefits of both consumers and producers
- Sum of CS and PS

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21
Q

CS and PS will be less, losses occur, when we

A

Overproduce

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22
Q

If more than Q* units are traded, we know that

A

1) MC > MB
2) Someone is worse off, either buyer paid more than his MB, or seller received a price less than her MB (or both)

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23
Q

If fewer than Q* units are traded

A

Outcome is not efficient
- Possible to increase the number of units traded in order to make the consumer and/or the producer better off, without making any one worse off

24
Q

What is Pareto Efficiency

A

No situation exists where making someone better off doesn’t make someone else worse off

25
Q

The Pareto Efficient outcome __

A

Maximises total surplus:
- Outcome is not Pareto efficient if it is possible to reallocate resources and make someone better off without making someone else worse

26
Q

Outcome in a competitive market is Pareto Efficient

A

For all the trade up to the competitive market equilibrium (Q*), MB>=MC
- Hence he consumer is willing to pay more than the extra cost required to make the item
- Trading all units until Q0 increases total surplus (increases CS, PS, or both)

27
Q

Competitive market outcome and efficiency:

A

Competitive market equilibrium, all the potential gains from trade are exhausted

28
Q

Effects of Competitive Market and Efficiency

A

1) No consumers left in market with WTP > Sellers MC to provide an additional unit
2) Importantly, price mechanism ensures that people with highest value for those product end up with the goods (WTP > Market Price) and firms with lowest costs are ones who make the product (firms MC < Market Price)
3) Competitive market manages to maximise TP (reach a Pareto Efficient outcome)

29
Q

Impacts of Pareto Efficiency

A

1) Possible that 1+ outcomes in an economy exist
2) Outcome that is Pareto Efficient is not automatically the most fair or equitable - or even desirable

30
Q

How do we measure how a change in variable affects another

A

Through Elasticity studies

31
Q

What is Elasticity

A

Measures the responsiveness of one variable to another holding all others constant, ceteris paribus

32
Q

What is elasticity with respect to equilibrium

A

How does the equilibrium quantity traded responds to a change in the market price, or how does demand respond to changes in a consumers income

33
Q

Elasticity of y with respect to x is given by

A

Point = %Change in Y/%Change in X
Midpoint = (without%)Point *(Average of X points)/(Average of Y Points)

34
Q

2 Ways of Determining Elasticity of 2 variables

A

1) Point Method (using initial methods)
2) Midpoint Arc Method (Average of initial and final points)

35
Q

Interpretation of Elasticity in General

A

At this price, if price of __ (increases/decreases) by 1%, then ___ of __ (increases/decreases) by __%

36
Q

Negative signs mean in elasticity calculations

A

Follows the law of demand (take the absolute value)

37
Q

Elasticity depends on

A

Slope of Demand Curve, steeper = lower own price of elasticity (ceteris paribus)

38
Q

Interpretation of Elasticity (abs values)

A

> 1, demand is elastic
<1, demand is inelastic
=1, demand in unitary elastic
=0, demand is perfectly inelastic
=infinity, demand is perfectly elastic

39
Q

Why do we use elasticity

A

Useful to have an understanding because business might be interested in effect of price change on quantity sold, revenue and profits

40
Q

Price elasticity depends on

A

Slope of the line and reference point on curve used to calculate elasticity

41
Q

If slop of demand curve = constant

A

Elasticity varies because proportional change in quantity (and price) varies depending on size of quantity (or price) @ particular point

42
Q

Points in every linear demand curve

A

1) Inelastic section (Q high and P low)
2) Unit elastic (middle of demand curve)
3) Elastic section (Q low and P high)

43
Q

How to determine elasticity of demand with TR as price changes

A

TR(P) = P * q(P)

44
Q

What do we get if we differentiate TR(P) function

A

Q(1+elasticity(Demand))

45
Q

What does q(1+elasticity(demand)) show

A

1) Direct link between price elasticity of demand and change in TR
2) In order for TR to increase with a price increase, RHS > 0
- True iff e>-1, if demand in inelastic
- On other hand, if demand in elastic, e<-1, TR falls if MP rises
3) TR is maximised when demand in unit-elastic, middle of demand curve

46
Q

Determinants of Price Elasticity of Demand

A

1) Sustainability with other goods
2) Luxuries vs Necessities
3) Proportion of Income spent on goods
4) Timeframe

47
Q

Income Elasticity measures __

A

Responsiveness of change in quantity demanded as change in income, ceteris paribus

48
Q

Income Elasticity Equations

A

Point = %Change in Q Demanded/%Change in Income
Midpoint = (No %)Point * (Y0 + Y1)/(Q0 + Q1)

49
Q

Income Elasticity Interpretation

A

> 1, income elastic - luxury goods
0-1, income inelastic - Normal goods
<0, negative - inferior good
=0, invariant to changes in income - Neutral good
(Sign tells us about the nature of the good)

50
Q

Cross-Price Elasticity __

A

Measures the responsiveness of change in quantity demanded for good X with respect to price of good Y change - ceteris paribus

51
Q

Cross-Price Elasticity Equations

A

Point = %Change in Q of X/%Change in P of Y
Midpoint = (without%)Point * (PY0 + PY1)/(QX0 + QX1)

52
Q

Interpretation of Cross-Price Elasticity

A

<0 for complementary goods
=0 for independent goods
>0 for substitute goods

53
Q

Importance of Cross-Price Elasticity

A

Governments as it plays an impact of taxes on consumer behaviour and important in business for multi-brand product management

54
Q

What is Price-Elasticity of Supply

A

Measures the responsiveness of quantity to a change in price of a product, ceteris paribus

55
Q

Equations of Price-Elasticity of Supply

A

Point = %Change in Q Supplied/%Change in Price

56
Q

Implication of Price-Elasticity of Supply

A

> 0 (follows the law of supply)
1 - Implies Elastic Supply
<1 - Implies Inelastic Supply
=0 - Implies perfectly inelastic supply
=infinity - Implies Perfectly Elastic Supply

BUSS1040 (6 decks)

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