Week 6A Flashcards
What is a free market economy ?
Resources allocated by supply and demand
What is a mixed economy ?
Part free market and part planned
What is a command(planned) economy?
Resources allocated by government
Diff between planned and free markets
Planned- social objectives(government decides what is best for society)
Free- firm aims to maximise profits
One type of economics
- positive vs normative
- micro vs macro economics
Economic agents
Public sector
Private sector
Business that produce goods and services using factors of production
Effective demand
What consumers are willing and able to purchase at each price, all other things unchanged
Demand curve
=downwards sloping
Change in price
Movement along the demand curve= change in quantity demanded= an extension and contraction of demand
Normal products
Demand increases as income increases
Inferior products
Demand falls as income increases
Upward sloping demand curve
Giffen or veblen good ( quantity demand increases as price increases)
Example of veblen good
Toilet paper in Covid
Elasticity of demand
Refers to sensitivity of demand to changes in variables
When is a price is elastic
Value (ignoring signs) is greater than 1
Revenue increases (price falls)
When is a price inelastic
Value (ignoring signs) is less then 1
Revenue decreases( price fall)
When is a price unitary elastic
When value =1
Revenue stays the same (price fall)
Elasticity of demand calculation
%🔺Q/ %🔺P
Income elasticity of demand calculation
%🔺Q/ %🔺I
Positive sign= normal good
Negative sign= inferior or giffen good
Cross elasticity of demand calculation
%🔺Q(of product A)/ %🔺P(of product B)
Positive sign= substitutes
Negative sign= compliments(AirPods to phone)
Supply curve shows ?
The amount the producers are willing and able to produce
What is marginal utility
Extra satisfaction from additional goods
When does market occur ?
When buyers and sellers interact to exchange goods and services
When does equilibrium occur ?
Quantity supplied = quantity demanded at the given price and there is no incentive for the position to change
When is equilibrium reached in free markets
By changes in price
An outward shift in demand ?
Increases equilibrium price and quantity
An inward shift in demand?
Decreases equilibrium price and quantity
An outward and inward shift in supply ?
Decreases equilibrium price and increases quantity
Inward shift exactly opposite
What is marginal revenue ?
Change in total revenue when an additional unit is sold
Price cut on total revenue
Elastic~ increases revenue
Unit elastic~ revenue doesn’t change
In elastic~ revenue falls
Abnormal profits
When revenue is greater than total costs
Normal profits
Occur when revenue = total costs
Shutdown point
Revenue = variable costs
Price= average variable costs
When a company no longer benefits from running their operations
Break even point
Revenue = total cost
Why pursue profits
Source of internal finance
Common benchmark of success
Higher profits may increase share price
Sales revenue maximisation
Produce where marginal revenue = 0
Market penetration
Existing products in existing markets
Market development
Existing products in new markets
New product development
New products to existing markets
Diversification
New products in new markets
What might shift the demand curve for a product left or right
Could be a fall in income if normal good
Increase in price complements
Fall in price of substitutes
The difference between a change in quantity demanded and a change in demand
A change in qty demanded
-is a result of a change of price
A change in demand
- is a result of non price determinants
Elasticity formula
Ed=%🔺(quantity sold)/ %🔺price
How does price elasticity of demand vary along a demand curve
When price is high, demand is price elastic;the change in quantity demanded is greater in % than the price change
Opposite for inelastic
What might shift a supply curve for a product inwards
Increase in costs, less prouducers, tax
