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Description
Flashcards by Draco Maleficus, updated more than 1 year ago
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Created by Draco Maleficus
over 3 years ago
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| Question | Answer |
| Demand | The total amount of goods and services that consumers are willing and able to purchase at a given price in a given time period. |
| Supply | The quantity which sellers are willing to sell for a particular good of service at a given price at a given point of time. |
| Law of Demand | As price increases demand decreases. As demand increases price decreases. Ceteris Paribus |
| Law of Supply | As price increases supply increases. As price decreases supply decreases. Ceteris Paribus |
| Market Demand | Sum of all individual demands in a market. |
| Market Supply | Sum of all individual supplies in a market. |
| Substitute Good | A substitute for a good/service. Favoured when the original good's price increases. |
| Factors Affecting Demand | Price. Advertising. Price of complements. Price of substitutes. Interest rates. Taxes [Direct]. |
| Demand Curve | |
| Competitive Supply | Occurs if two goods compete for the same resources or factors of production. This means that the firm cannot increase supply of one without reducing supply of the other. |
| Joint Supply | Occurs if two goods are derived from the same product. In this case, it is impossible to produce more of one good without producing more of the other. |
| Factors Affecting Supply | Price. Price of other products. Costs of production. Subsidy. Tax. Supply shocks. |
| Supply Curve | |
| Equilibrium Price | The price at which the quantity demanded is equal to the price. |
| Price Mechanism | The interaction of buyers and sellers in free markets enables goods, services and resources to be allocated prices. |
| Effects of Scare Resources | Demand exceeds supply creating a shortage, thus raising the price. The high price attempts to discourage demand and conserve resources. The greater the scarcity the higher the price. |
| What is an incentive? | An incentive is something that motivates a producer or consumer to follow a course of action or to change behavior. |
| Effects of Incentives | Higher prices provide the producer with an incentive to supply more due to the possibility of higher revenue and greater profits. |
| Rising Prices | Rising prices give a signal to consumers to reduce demand or withdraw from the market completely. They give a signal to producers that a shortage exists and tell potential producers to enter the market and existing producers to increase supply. |
| Falling Prices | Falling Prices give a positive message to consumers to enter the market and increase demand. Meanwhile, they tell producers that a surplus has been created and tell them to reduce supply or to leave the market completely. |
| Price Elasticity of Demand | PED is a measure of responsiveness of the quantity demand to the change in price. |
| Factors Affecting PED | Number of close substitutes. Proportion of income. Necessity. Habits, fashions, and addictions. Advertising and brand loyalty. Costs of switching. Time period. |
| Elastic Ped and Supplier | If PED is elastic, the producer would aim to decrease price to increase total revenue, |
| What happens if supply is inelastic (PED)? | If supply is inelastic, the firm may not be able to respond to the large increase in demand. |
| What happens if the price drops below average cost (PED)? | If decreasing the price reduces it below the average cost, the firm will incur a loss. The producer may not be able to reduce price if a minimum price is set by the government. |
| Inelastic PED and Supplier | If PED is inelastic, the producer would aim to increase price to increase total revenue, however: if a maximum price is set by the government, the producer cannot increase the price. |
| Income Elasticity of Demand (YED) | Measure of the responsiveness of quantity demanded to a change in income. |
| YED < 0 | If YED < 0, the good is classified as an inferior good, as the quantity demanded decreases as income increases. |
| YED > 0 | The good is classified as a normal good, as the quantity demanded increases as income increases. |
| 0 < YED < 1 | The good is a necessity. |
| YED > 1 | The good is a luxury good. |
| What is cross-price elasticity of demand (XED)? | A measure of responsiveness of the quantity demanded of one good in the change of price in another good. |
| XED > 0 | The good are substitutes of each other. |
| XED < 0 | The goods are complements of each other. |
| XED = 0 | The goods are non-related. |
| Price Elasticity of Supply (PES) | A measure of responsiveness of the quantity supplied to a change in price. |
| Factors affecting PES | Spare production capacity. Ability to store and preserve stocks. Time taken to produce the product. Ease and cost of factor substitution. Time period. |
| What is Opportunity Cost? | Opportunity cost is the next best alternative given up when making a descision. |
| What are the three main forms of government intervention? | Indirect tax Subsidy Price controls: Maximum price (price ceiling) Minimum price (price floor) |
| Indirect Tax | An indirect tax is a tax imposed on the expenditure of goods and services. |
| Specific Tax | Tax amount per unit. Does not change with changes in the price of the product. |
| Ad Valorem/Percentage. Tax | Tax per unit. Changes with changes in the price of a product. |
| Why would a government impose an indirect tax? | To reduce the consumption of a demerit good. To earn revenue. |
| What does imposing an indirect tax do? | Costs of production increase. Price increases, as supply curve shifts to the left. |
| What is a subsidy? | A subsidy is a form of financial aid/assistance provided by the government to the producer to reduce the costs of production. |
| Why might a government impose a subsidy? | Increase the consumption of a merit good. Increase the consumption of exports. Increase the growth of small industries. |
| Effect of the imposition of a subsidy | Costs of production decrease. Supply curve shifts to the right. |
| Price Ceiling | A price ceiling is the maximum price that a good/service can be sold for in the market, determined by the government. |
| Why a price ceiling? | To make goods affordable for everyone. Example Rental housing. |
| Consequences of Price Ceilings 1 | Shortage of Supply Black market created, as there is an excess of demand there exist people who are willing to pay for the good at higher than the price ceiling. Welfare loss created. |
| Consequences of Price Ceilings 2 | Governments starts to subsidise the producer. Government becomes a producer itself. Leads to non-price rationing |
| Cause of Non-price rationing | Price does not determine who are able to purchase a good/service, as there is a shortage. Therefore not evryone who is willing and able to purchase the good is able to leading to non-price rationting. |
| Non-price rationing methods | First-come-first-served basis: Those who come first will get a chance to purchase the good/service. Distribution of coupons: Consumers with coupons can purchase a fixed amount of the good in a given time period. Favouritism: The producer may choose to provide the good to preffered customers. |
| Consequences on Stakeholders Price Ceiling Consumers | Partly gain partly lose They gain as they are able to purchase the good at a price lower than the equilibrium They lose as there is a shortage of supply and therefore not everyone who is willing and able to can pruchase the good/service. |
| Consequences on Stakeholders Price Ceiling Producers | Lose. They are forced to sell the good/service at a lower price than the equilibrium and at a lower quantity. Thus their revenue falls. |
| Consequences on Stakeholders Price Ceiling Governments | The government may start to subsidise and produce this good. This may lead to an increase in direct taxes, therefore, affecting the standards of living negatively in the long term. |
| Price Floor | A price floor is the lowest price that a good can be sold in a market, imposed by the government. |
| Why a price floor? | To increase the revenue of a certain good/service. |
| Consequences of a Price Floor | Excess supply, surplus. Welfare loss is created because the decrease in consumer surplus is greater than the increase in producer surplus. May lead to positive advertising of the good/service by the government. The government can become a buyer to remove the surplus of a good/service. |
| Consequences on Stakeholders Price Floor Consumers | Lose. They have to pay a higher price for the good/service and get to purchase a smaller quantity of it. |
| Consequences on Stakeholders Price Floor Producers | Gain. They get to sell their good/service at a higher equilibrium price and can sell a higher quantity, increasing their revenue. |
| Consequences on Stakeholders Price Floor Governments | The government may begin to purchase the excess supply of the good/service increasing government expenditure. This may lead to an increase in direct taxes, therefore, affecting the standards of living negatively in the long term. |
| Market Failure | When the market does not operate at equilibrium. Resources are not allocated efficiently, the market is said to have failed. |
| Private Cost | A cost incurred by an individual, government or firm who is producing or consuming a good/service. |
| External Cost | The negative spillover effects/externalities on a third party as a result of an economic transaction. |
| Social Cost | The sum of private and external costs. |
| Private Benefit | The benefit obtained by the individiual, firm or government as a result of consuming or supplying a good/service. |
| External Benefit | The positive /spillover effects/externalities on a third party as a result of an economic transaction. |
| Social Benefit | The sum of private and external benefits. |
| Demerit Good | A good that has negative externalities of consumption and is over-produced. |
| Merit Good | A good that has positive externalities of consumption and is under-produced. |
| Public Good | A good that is non-rivalrous and non-excludable in consumption. |
| Positive externality of production | There is underproduction. A positive externality exists because: MPC > MSC. MEC = MSC - MPC MEC is negative. So, a positive externality exists. |
| Negative externality of production | There is overproduction. A negative externality exists because: MSC > MPC. MEC = MSC - MPC MEC is positive, meaning an external cost exists. So, a negative externality exists. |
| Positive externality of consumption | There is underconsumption.A positive externality exists MSB > MPB. MEB = MSB - MPB MEB is positive, so an external benefit exists. So, a positive externality exists. |
| Negative externality of consumption | There is overconsumption. A negative externality exists because: MPB > MSB. MEB = MSB - MPB MEB is negative. So, a negative externality exists. |
| Corrective Taxes | An indirect tax can be imposed on a demerit good. It drives up the price of the good and reduces its consumption. |
| Advantages of Corrective Taxes | Creates a source of revenue for the government. |
| Disadvantages of Corrective Taxes 1 | Demand for most demerit goods is inelastic so the percentage decrease in demand is less than that of the percentage increase in price. Higher costs for the producer. Unemployment might be created. |
| Disadvantages of Corrective Taxes 2 | Higher price for the consumer, and since the demand is inelastic, the consumer expenditure on the demerit good increases, and expenditure on other merit goods decreases, which leads to a lower standard of living. Loss of competitiveness in the global market |
| Tradeable Carbon Permits 1 | A government or a multi-national body issues or auctions off permits to polluting industries which allows them to emit only a certain amount of carbon. If firms want to pollute beyond a certain amount they will have to buy more permits or reduce emissions. |
| Tradeable Carbon Permits 2 | To acquire more permits, they need to buy them from firms in the market (which do not need their permits anymore.) The supply of permits is fixed. The demand determines the price of pollution. The more firms want to pollute, the more expensive the permits become as they require more. |
| Tradeable Carbon Permits 3 | There is a strong incentive for firms to reduce their pollution emissions because they can sell the permits they do not need, adding to the firms profit. |
| Advantages of Permits 1 | Creates a strong incentive to reduce pollution since permits can be sold off. Creates a clear price for pollution, changing the external costs into private costs for the firm. Places a clear limit on the quantity of pollution produced each year. |
| Advantages of Permits 2 | Price of permits can be increased by reducing supply. |
| Disadvantages of Permits 1 | The price of permits is determined by the free market and may be too low to create a strong incentive. The amount of permits is determined by the free market and may be too high if polluting industries are able to influence the policy. |
| Disadvantages of Permits 2 | Costly and difficult to monitor industries to make sure everyone who pollutes has permits to do so. |
| Ban | A ban can be placed on a certain good/service to reduce the negative externalities. |
| Regulations | Regulations on factors such as age can be placed to reduce consumption and reduce the negative externalities of the good. |
| Government responses to negative externalities | Corrective Taxes Tradeable Permits Bans Regulations |
| Subsidies to fix externalities | Provided to combat positive externalities. Since these goods are naturally underproduced, the subsidy helps decrease the costs of production, therefore, increasing supply as producers are willing and able to produce more. |
| Subsidies to fix externalities Advantages | It helps to increase the positive externalities caused by the good. |
| Subsidies to fix externalities Disadvantages 1 | Difficult to assess the extent of external benefit and external cost due to the provision of the subsidy. Externalities of consumption are not taken into consideration. |
| Subsidies to fix externalities Disadvantages 2 | Provision of a subsidy leads to an increase in government expenditure, which leads to an increase in budget deficit. The government may try to increase taxes to deal with the deficit, reducing families disposable income, leading to a reduction of consumption and standards of living and GDP. |
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