Microeconomics 2.1-2.9 Flashcards
Define demand.
The quantity of goods and services consumers are willing and able to buy at a given price
Define the law of demand.
The negative causal relationship between price and quantity demanded - within a period of time, when the price of a good increases, the quantity demanded decreases, ceteris paribus
Outline non-price determinants that affect demand.
HIS AGE
- Habits, tastes, and preferences
- Income
- Substitutes and complements
- Advertising
- Government policies
- Economy
Define supply.
The quantity of goods or services a firm is willing and able to produce and supply to the market at different price points, ceteris paribus.
Outline the law of supply.
The positive causal relationship between price and quantity supplied - within a period of time, when the price of a good increases, the quantity supplied increases, ceteris paribus
Outline the non-price determinants that shift the supply curve.
SWITCH
- Subsidies
- Weather
- ICT (Technology)
- Taxes
- Competitive supply
- Hurdles (barriers to entry)
Define equilibrium
When quantity demanded is equal to quantity supplied
Explain the price mechanism/invisible hand.
Producer Signaling
- Producers see the signal shortage
- Producers have incentive to increase price from P1 to P2
- Producers are more willing and able to supply at P2/Q2
Consumer Signaling
- Consumers observe the price increases from P1 to P2
- Consumers have the incentive to consume less from Q3 to Q2
Conclusion: equilibrium price is reached at P2, Q2
Define consumer surplus.
- benefits to buyers who are able to purchase a product for less than they are willing to do so
- The highest price consumers are willing to pay for a good minus the price actually paid
Define producer surplus.
The price received by firms for selling their good minus the lowest price producers are willing to accept to produce the good
Outline allocative efficiency.
when resources are distributed so that consumers and producers get the maximum possible benefit
Define price elasticity of demand.
- The responsiveness of the quantity demanded of a good to change in its price
- Formula = % change in Qd / % change in P
- elastic if PED > 1, inelastic if PED < 1
Outline the determinants of PED.
THIS
- Time
- Habits, addictions, tastes
- Incomes
- Substitutes (availability and price of)
Define price elasticity of supply.
- The responsiveness of the quantity supplied of a good to its change in price
- Formula = % change in QS / % change in P
- elastic if PES > 1, inelastic if PES < 1
Define income elasticity.
- The responsiveness of quantity demanded to changes in income for a good or service
- Formula = % change in QD / % change in income
Outline the interpretation of the value of YED.
YED > 0
- demand and income changes in the same direction -> normal goods
YED < 0
- demand and income change in opposite directions -> inferior goods
0 < YED < 1
- income inelastic: people buy a little more if income increases -> necessities
YED > 1
- income elastic: people buy a lot more if income increases -> luxuries
Define direct tax.
Tax imposed on income, profits, and wealth
Define indirect tax
Tax imposed on spending (goods and services)
Define excise tax
- indirect tax on a specific good or service
- specific tax: fixed amount of tax per unit of good or service sold
- ad valorem tax: tax calculated as a fixed percentage of the price of the good or service
Outline the benefits of taxation.
- government revenue earned
- redistributes income
- corrects negative externalities to improve allocative efficiencies
Define subsidy
- financial support to individuals or groups for reducing costs of production
- focuses only on cash payments to firms