AB13120, UNDERSTANDING THE ECONOMY. Flashcards
(170 cards)
1
Q
What is the relationship between money and economics, and why is money considered an essential aspect of economics?
A
Money is indeed a crucial element in economics, as it plays a significant role in determining various economic aspects. It’s involved in how much people earn, how much they spend, the cost of goods and services, firms’ revenue, and the overall money supply in an economy. However, economics is not solely about money; it’s also concerned with understanding economic activities’ broader implications and consequences.
2
Q
How does economics go beyond the mere study of money, and what broader aspects does it encompass?
A
Economics extends beyond the study of money because it encompasses a wide range of topics and issues. Money is just a tool within the economic framework. Economics is primarily concerned with:
The production of goods and services, which involves assessing the total economic output, the production of specific items, the techniques employed in production, and employment levels.
The consumption of goods and services, entails analyzing how much people spend, their saving habits, their preferences in terms of what they buy, and how various factors like prices, advertising, fashion, and income levels influence consumption patterns.
3
Q
What are some key factors that economics is concerned with regarding the production of goods and services?
A
Economics analyzes the production of goods and services by examining the quantity of output an economy generates, both in terms of the overall production and individual items. It also investigates the techniques used in production, such as labor-intensive vs. capital-intensive methods, and the extent of employment within different sectors of the economy.
4
Q
Can you provide examples of how economics evaluates the production within an economy, both in terms of total production and individual items?
A
Examples of economic evaluation of production include assessing the annual GDP (Gross Domestic Product) of a country, which measures the total value of all goods and services produced within its borders. On a smaller scale, economics might examine the production levels of specific industries or products, such as the automotive industry’s annual vehicle output.
5
Q
In what ways does economics analyze consumption patterns, and what are the factors that influence people’s consumption of goods and services?
A
Economics studies consumption patterns by analyzing how people allocate their income to spending and saving. It investigates what goods and services individuals choose to purchase, how price changes impact buying decisions, and how factors like advertising, fashion trends, and income levels influence consumption behavior.
6
Q
How does the concept of savings relate to economics, and why is it important to study in the field of economics?
A
Savings are a critical aspect of economics because they reflect the portion of income that is not immediately spent on consumption. Economics examines savings patterns to understand how households and individuals plan for the future and how their saving habits impact overall economic stability and investment.
7
Q
Explain how prices, advertising, fashion, and individuals’ incomes can impact consumption and play a role in economic analysis.
A
Prices, advertising, fashion trends, and income levels have a significant impact on consumption patterns. Prices affect the affordability of goods, advertising influences consumer preferences, fashion trends drive demand for specific products, and income levels determine how much people can spend on various items. These factors are essential in understanding and predicting consumer behavior.
8
Q
What role does employment play in the study of economics, and how does it relate to the production of goods and services?
A
Employment is closely linked to production in economics. The number of people employed in an economy is a key indicator of its economic health. High employment levels are generally associated with economic growth and prosperity, while unemployment can lead to economic challenges and social issues.
9
Q
Can you provide examples of the techniques of production that economics examines and their significance in economic analysis?
A
Economics examines various techniques of production, including labor-intensive methods that rely on human workforce and capital-intensive methods that utilize machinery and technology. For instance, in agriculture, traditional farming techniques involve more manual labor, while modern farming relies on machinery and automation.
10
Q
How does economics study the choices individuals and firms make in the production and consumption of goods and services?
A
Economics studies the choices made by individuals and firms in both production and consumption. Individuals decide what to buy based on their preferences, needs, and budget constraints. Firms choose production methods and pricing strategies to maximize profit. These choices are fundamental in understanding how resources are allocated in an economy.
11
Q
How does the limited availability of human resources, both in terms of the workforce size and skills, impact the overall productivity of labor in economic activities?
A
The limited availability of human resources has a direct impact on the productivity of labour in economic activities. First, the size of the labour force is finite, meaning there is a maximum number of people available for work in any given economy. Second, the skills and abilities of the workforce vary, which further influences productivity. Skilled workers are often more productive than unskilled ones. Therefore, the scarcity of labour, coupled with variations in skills, shapes the overall productivity of labour in an economy.
12
Q
What are the implications of finite natural resources, such as land and raw materials, on the global economy, and how does this scarcity influence resource allocation decisions?
A
The finite supply of natural resources, including land and raw materials, has several implications for the global economy. It means that there is a limit to how much land can be used for agriculture, housing, and other purposes. It also means that there is a finite quantity of raw materials like minerals and timber available for various industries. This scarcity drives competition for these resources and influences resource allocation decisions. Economies must make choices about how to best use and distribute these limited resources, which can impact prices, production processes, and trade relationships.
13
Q
In what ways does the finite supply of manufactured resources, including factories, machinery, and transportation infrastructure, affect the productivity of these capital inputs in economic production processes?
A
The finite supply of manufactured resources places constraints on their availability for economic production. For example, there is a limit to the number of factories and machines that can be used in a given economy. The productivity of these capital inputs is influenced by their quantity and quality. Additionally, the state of technology plays a critical role in enhancing the productivity of manufactured resources. Technological advances can make existing capital more efficient or lead to the creation of new and more productive capital.
14
Q
How does technological advancement relate to the productivity of manufactured resources, and what role does technology play in mitigating resource limitations?
A
Technological advancement is closely tied to the productivity of manufactured resources. It plays a vital role in mitigating resource limitations by allowing economies to do more with less. Improved technology can enhance the efficiency and output of factories, machinery, and other capital inputs, thereby offsetting some of the constraints posed by their finite supply. In this way, technology helps economies overcome resource scarcity to some extent.
15
Q
Why is the concept of resource scarcity a fundamental consideration in economics, and how does it influence economic decision-making at both individual and societal levels?
A
Resource scarcity is fundamental in economics because it underpins the concept of scarcity itself. Economics is the study of how societies allocate limited resources to fulfill unlimited wants and needs. The recognition of resource scarcity is a driving force behind economic decision-making. Individuals and societies must make choices about what to produce, how to produce, and for whom to produce due to resource constraints. These decisions influence production methods, prices, consumption patterns, and overall economic well-being. Therefore, understanding and managing resource scarcity is central to the field of economics.
16
Q
What is scarcity?
A
the excess of human wants over what can actually be produced. Because of scarcity, various choices have to be made between alternatives
17
Q
What is ‘production’?
A
The transformation of inputs into outputs by firms in order to earn profit (or to meet some other objective).
18
Q
What is ‘consumption’?
A
The act of using goods and services to satisfy wants. This will normally involve purchasing the goods and services.
19
Q
What is Factors of production (or resources)?
A
The inputs into the production of goods and services: labour, land and raw materials, and capital.
20
Q
What is labour?
A
All forms of human input, both physical and mental, into current production.
21
Q
Define Land and raw materials
A
Inputs into production that are provided by nature: e.g. unimproved land and mineral deposits in the ground.
22
Q
Define Capital
A
All inputs into production that have themselves been produced: e.g. factories, machines and tools.
23
Q
Define Macroeconomics
A
The branch of economics that studies economic aggregates (grand totals): e.g. the overall level of prices, output and employment in the economy.
24
Q
Define aggregate command
A
The total level of spending in the economy.
25
Define aggregate supply.
The total amount of output in the economy.
26
What is the connection between macroeconomic problems and the balance between aggregate demand and aggregate supply, and why is this balance important in economic analysis?
The connection between macroeconomic problems and the balance between aggregate demand and aggregate supply lies in their impact on key economic indicators. When aggregate demand exceeds aggregate supply, it can lead to inflation and trade deficits. This balance is crucial because it reflects the overall health of an economy and influences policy decisions to maintain stability.
27
Explain the concept of inflation in macroeconomics and how it is influenced by changes in aggregate demand. What happens to prices when aggregate demand rises significantly?
Inflation in macroeconomics refers to a general increase in the level of prices throughout the economy. When aggregate demand rises significantly, firms often respond by raising their prices. This is because, with high demand, they can sell their products at higher prices while maintaining sales volume. When many firms increase prices simultaneously, it results in inflation, which erodes the purchasing power of money.
28
How is the rate of inflation typically measured in economic analysis, and why is the annual rate of inflation often used as a reference point?
The rate of inflation is typically measured by comparing price levels between different periods. The annual rate of inflation is commonly used, representing the percentage increase in prices over a 12-month period. This measurement provides a standardized way to track and communicate changes in price levels, making it easier to understand and analyze inflation's impact on the economy.
29
What are balance of trade deficits, and how do changes in aggregate demand affect a country's balance of trade? How does increased demand impact imports and exports?
A balance of trade deficit occurs when a country's imports exceed its exports. Changes in aggregate demand can influence this deficit. When aggregate demand rises, people tend to buy more imports, increasing the demand for foreign goods. This results in more spending on overseas products like Japanese TVs, Chinese computers, or German cars. Additionally, if a country experiences a high rate of inflation, its domestically produced goods may become less competitive in the international market, leading to reduced exports and a larger trade deficit.
30
Define Inflation.
A general rise in the level of prices throughout the economy.
31
Define (Annual) Rate of inflation.
The percentage increase in the level of prices over a 12-month period.
32
Why might a high rate of inflation lead to a trade deficit? What are the mechanisms through which inflation can affect a country's competitiveness in international trade, and what goods are likely to be affected by this phenomenon?
A high rate of inflation can lead to a trade deficit because it can make a country's domestically produced goods less competitive in the global market. As prices rise due to inflation, these products become relatively more expensive compared to similar goods from countries with lower inflation rates. Consumers are then more likely to buy cheaper foreign imports, leading to a trade imbalance. Goods most affected by this phenomenon often include non-essential consumer items, as consumers are more price-sensitive when it comes to discretionary spending.
33
Define Balance of Trade.
Exports of goods and services minus imports of goods and services. If exports exceed imports, there is a ‘balance of trade surplus’ (a positive figure). If imports exceed exports, there is a ‘balance of trade deficit’ (a negative figure).
34
Define recession.
A period where national output falls for two or more successive quarters.
35
Define unemployment.
The number of people of working age who are actively looking for work but are currently without a job. (Note that there is much debate as to who should officially be counted as unemployed.)
36
Define demand-side policy
Government policy designed to alter the level of aggregate demand, and thereby the level of output, employment and prices.
37
Define supply-side policy
Government policy that attempts to alter the level of aggregate supply directly.
38
Define Opportunity cost.
The cost of any activity measured in terms of the best alternative forgone.
39
Define rational choices.
Choices that involve weighing up the benefit of any activity against its opportunity cost so that the decision maker successfully maximises their objective: i.e. happiness or profits.
40
Define Marginal costs.
The additional cost of doing a little bit more (or 1 unit more if a unit can be measured) of an activity.
41
Define Marginal benefits.
The additional benefits of doing a little bit more (or 1 unit more if a unit can be measured) of an activity.
42
Define Rational Decision Making.
Doing more of an activity if its marginal benefit exceeds its marginal cost and doing less if its marginal cost exceeds its marginal benefit.
43
Define Economic efficiency.
A situation where each good is produced at the minimum cost and where individual people and firms get the maximum benefit from their resources.
44
Define productive efficiency.
A situation where firms are producing the maximum output for a given amount of inputs, or producing a given output at the least cost.
45
Define allocative efficiency
A situation where the current combination of goods produced and sold gives the maximum satisfaction for each consumer at their current levels of income. Note that a redistribution of income would lead to a different combination of goods that was allocatively efficient.
46
When is economic efficiency achieved?
achieved when each good is produced at the minimum cost and where individual people and firms get the maximum benefit from their resources.
47
Define equity.
A distribution of income that is considered to be fair or just. Note that an equitable distribution is not the same as an equal distribution and that different people have different views on what is equitable.
48
Define production possibility curve.
A curve showing all the possible combinations of two goods that a country can produce within a specified time period with all its resources fully and efficiently employed.
49
What is the production possibility curve?
A production possibility curve illustrates the microeconomic issues of choice and opportunity cost. It also illustrates the phenomenon of increasing opportunity costs
50
Define increasing opportunity costs.
When additional production of one good involves ever- increasing sacrifices of another.
51
Define investment.
The production of items that are not for immediate consumption.
52
Explain the twin demand supply between firms and households.
households demand goods and services, and firms supply goods and services. In the process, exchange takes place. In a money economy (as opposed to a barter economy), firms exchange goods and services for money. In other words, money flows from households to firms in the form of consumer expenditure, while goods and services flow the other way – from firms to households. Second, firms and households come together in the market for factors of production. This time the demand and supply roles are reversed. Firms demand the use of factors of production owned by households – labour, land and capital. Households supply them. Thus the services of labour and other factors flow from households to firms, and in exchange firms pay households money – namely, wages, rent, dividends and interest. Just as we referred to particular goods markets, so we can also refer to particular factor markets – the market for bricklayers, for footballers, for land, and so on.
So there is a circular flow of incomes.
53
Define barter economy.
An economy where people exchange goods and services directly with one another without any payment of money. Workers would be paid with bundles of goods.
54
Define market.
The interaction between buyers and sellers.
55
Define Centrally planned or command economy.
An economy where all economic decisions are taken by the central authorities.
56
define free-market company .
An economy where all economic decisions are taken by individual households and firms and with no government intervention.
57
define Mixed economy
An economy where economic deci- sions are made partly by the government and partly through the market. In practice all economies are mixed.
58
Define informal sector.
The parts of the economy that involve production and/or exchange, but where there are no money payments.
59
define subsistence production
Where people produce things for their own consumption.
60
Define economic system.
A mechanism that allocates scarce resources among competing users.
61
Describe the operating system of an economic system.
Households, firms, government.
62
what are co-ordination mechanisms
mechanisms to make resource allocation decision
63
Describe factors of a command economy.
Planned, state-orientated, attempts to solve the economic problem, state allocates resources through a planning mechanism, Characterised by choice and productivity problems, Economy controlled
64
Define factors of a mixed economy.
Market dominated limited state involvement, Individual economic freedom, Market forces set prices, Government involvement -provision of public goods and services, Address issue of equality, Economy Managed
65
Define free market economy.
Little or no government interference, Market mechanism allocates resources, An unregulated market.
66
define informal sector
The parts of the economy that involve production and/or exchange, but where there are no money payments.
67
define subsistence production
Where people produce things for their own consumption.
68
define input-output analysis
This involves dividing the economy into sectors, where each sector is a user of inputs from and a supplier of outputs to other sectors. The technique examines how these inputs and outputs can be matched to the total resources available in the economy
69
define price mechanism
The system in a market economy whereby changes in price in response to changes in demand and supply have the effect of making demand equal to supply.
70
define equilibrium price
The price where the quantity demanded equals the quantity supplied: the price where there is no shortage or surplus.
71
define equilibrium
A position of balance. A position from which there is no inherent tendency to move away.
72
what does change in demand or supply cause?
This causes markets to adjust. Whenever such changes occur, the resulting ‘disequilibrium’ will bring an automatic change in prices, thereby restoring equilibrium (i.e. a balance of demand and supply).
73
define mixed market economy
A market economy where there is some government intervention.
74
define relative price
The price of one good compared with another (e.g. good X is twice the price of good Y).
75
define economic model
formal presentation of an economic theory.
76
define induction.
Constructing general theories on the basis of specific observations
77
define deduction.
using a theory to draw conclusions about certain circumstances.
78
define ceteris paribus
Latin for ‘other things being equal’. This assumption has to be made when making deductions from theories.
79
define positive statment
A value-free statement which can be tested by an appeal to the facts.
80
define normative statement.
a value judgement.
81
define Perfect competition (preliminary definition)
A situation where the consumers and producers of a product are price takers.
82
define price taker.
A person or firm with no power to be able to influence the market price.
83
define law of demand.
The quantity of a good demanded per period of time will fall as price rises and will rise as price falls, other things being equal (ceteris paribus).
84
define income effect.
The effect of a change in price on quantity demanded arising from the consumer becoming better or worse off as a result of the price change.
85
describe substitution effect
The effect of a change in price on quantity demanded arising from the consumer switching to or from alternative (substitute) products.
86
define quantity demanded
The amount of a good that a consumer is willing and able to buy at a given price over a given period of time.
87
define demand schedule for an individual
A table showing the different quantities of a good that a person is willing and able to buy at various prices over a given period of time.
88
define market demand schedule.
A table showing the different total quantities of a good that consumers are willing and able to buy at various prices over a given period of time.
89
define demand curve.
A graph showing the relationship between the price of a good and the quantity of the good demanded
over a given time period. Price is measured on the vertical axis; quantity demanded is measured on the horizontal axis. A demand curve can be for an individual consumer or group of consumers, or more usually for the whole market.
90
define substitute goods
A pair of goods which are considered by consumers to be alternatives to each other. As the price of one goes up, the demand for the other rises.
91
define complementary goods.
A pair of goods consumed together. As the price of one goes up, the demand for both goods will fall.
92
define normal good
A good whose demand rises as people’s incomes rise.
93
define inferior good.
A good whose demand falls as people’s incomes rise.
94
define change in demand
The term used for a shift in the demand curve. It occurs when a determinant of demand other than price changes.
95
define change in the quantity demanded
The term used for a movement along the demand curve to a new point. It occurs when there is a change in price.
96
define demand function.
An equation which shows the mathematical relationship between the quantity demanded of a good and the values of the various determinants of demand.
97
define regression analysis
A statistical technique which allows a functional relationship between two or more variables to be estimated.
98
define econometrics
The science of applying statistical techniques to economic data in order to identify and test economic relationships.
99
define supply schedule
A table showing the different quantities of a good that producers are willing and able to supply at various prices over a given time period. A supply schedule can be for an individual producer or group of producers, or for all producers (the market supply schedule).
100
define supply curve
A graph showing the relationship between the price of a good and the quantity of the good supplied over a given period of time
101
define substitutes in supply
These are two goods where an increased production of one means diverting resources away from producing the other.
102
define joint supply goods
These are two goods where the production of more of one leads to the production of more of the other.
103
define change in the quantity supplied
The term used for a movement along the supply curve to a new point. It occurs when there is a change in price.
104
define change in supply.
The term used for a shift in the supply curve. It occurs when a determinant other than price changes.
105
what is equilibrium in terms of conflicting interests?
where conflicting interests are balanced. Only at this point is the amount that demanders are willing to purchase the same as the amount that suppliers are willing to supply. It is a point that will be automatically reached in a free market through the operation of the price mechanism.
106
define market clearing
A market clears when supply matches demand, leaving no shortage or surplus.
107
what happens to equilibrium when either the supply or demand curve shifts
The equilibrium price will remain unchanged only so long as the demand and supply curves remain unchanged. If either of the curves shifts, a new equilibrium will be formed.
108
define identification problem
The problem of identifying the relationship between two variables (e.g. price and quantity demanded) from the evidence when it is not known whether or how the variables have been affected by other determinants. For example, it is difficult to identify the shape of a demand curve simply by observing price and quantity when it is not known whether changes in other determinants have shifted the demand curve.
109
define price elasticity of demand
The responsiveness of quantity demanded to a change in price.
110
what is the formula for price elasticity of demand?
The percentage (or proportionate) change in quantity demanded divided by the percentage (or proportionate) change in price: %∆Q divided by %∆P.
111
what is elastic demand
Where quantity demanded changes by a larger percentage than price. Ignoring the negative sign, it will have a value greater than 1.
112
define inelastic demand
Where quantity demanded changes by a smaller percentage than price. Ignoring the negative sign, it will have a value less than 1.
113
what is unit elasticity of demand
Where quantity demanded changes by the same percentage as price. Ignoring the negative sign, it will have a value equal to 1.
114
define total consumer expenditure on a product
The price of the product multiplied by the quantity purchased: TE = P * Q.
115
define total revenue
The total amount received by firms from the sale of a product, before the deduction of taxes or any other costs. The price multiplied by the quantity sold: TR = P * Q.
116
"What is the relationship between price changes, quantity demanded, and total consumer expenditure in the context of elastic demand, and how does it impact the total revenue of firms selling the product?"
In elastic demand, price changes have a significant impact on quantity demanded and total consumer expenditure. When the price rises, the quantity demanded falls proportionately more, leading to a decrease in total expenditure. Conversely, when the price falls, the quantity demanded rises proportionately more, resulting in an increase in total expenditure. Total expenditure moves in the same direction as quantity. This concept is illustrated using a diagram where the area of rectangles represents total expenditure. In the elastic range, a price increase from £4 to £5 leads to a proportionately larger decrease in quantity demanded, causing total expenditure to decrease from £80 million to £50 million. In such cases, firms experience a decrease in total revenue with a price increase and an increase in total revenue with a price reduction.
117
What happens to total consumer expenditure (TE) when the price (P) rises in a situation of inelastic demand, and how does this relate to changes in quantity demanded (Q)
When demand is inelastic, price changes have a larger impact on total consumer expenditure (TE) than changes in quantity.
When the price (P) rises, the quantity demanded (Q) falls, but the decrease in quantity is proportionately smaller, leading to an increase in total consumer expenditure (TE).
Conversely, when the price (P) falls, the quantity demanded (Q) rises, but the increase in quantity is proportionately smaller, resulting in a decrease in total consumer expenditure (TE).
Inelastic demand means that total consumer expenditure (TE) changes in the same direction as price.
118
define arc elasticity
The measurement of elasticity between two points on a curve.
119
what is the Average (or ‘midpoint’) formula for price elasticity of demand
∆QD/averageQD divided by ∆P/averageP.
120
What is the significance of the price elasticity of supply and how does it affect the responsiveness of quantity supplied to changes in price, and could you provide the formula for calculating price elasticity of supply?
Changes in price affect both the quantity demanded and the quantity supplied, and it's important to understand how responsive quantity supplied is to changes in price.
The measure used to assess this responsiveness is the price elasticity of supply.
In Figure 2.17, two supply curves, S1 and S2, are shown. S2 is more elastic between any two prices than S1, meaning it responds more to changes in price.
When the price rises from P0 to P1, there is a larger increase in quantity supplied with S2 (Q0 to Q2) compared to S1 (Q0 to Q1).
When the demand curve shifts, the change in quantity supplied and the change in price will be more significant with curve S2 than with curve S1.
The price elasticity of supply (PPs) is calculated using the formula: the percentage (or proportionate) change in quantity supplied divided by the percentage (or proportionate) change in price.
121
What is the elasticity of supply determined by? And in terms of the time period?
The elasticity of supply is determined by the extent to which costs increase as output rises. If the additional costs of producing more output are minimal, supply is more likely to be elastic.
Supply tends to be elastic when firms have spare capacity, can easily obtain more raw materials, can switch between producing different products, and can avoid introducing overtime working at higher pay rates.
In terms of the time period:
In the immediate time period, supply is highly inelastic, as firms cannot increase supply significantly.
In the short run, some inputs like raw materials can be increased, making supply somewhat elastic.
In the long run, there is ample time for all inputs to be increased and for new firms to enter the industry, making supply likely to be highly elastic in many cases. In some situations, the long-run supply curve may even slope downwards.
122
Explain the concepts of vertical and horizontal supply curves in terms of price elasticity of supply. How does the price elasticity of supply change when two supply curves intersect, and what is the surprising result illustrated in Figure 2.18 regarding supply curves starting at the origin?
the concept of price elasticity of supply. It distinguishes between vertical and horizontal supply curves, stating that a vertical supply curve has zero elasticity, indicating total unresponsiveness to price changes, while a horizontal supply curve has infinite elasticity, signifying an unlimited supply at a given price. The paragraph also highlights that when two supply curves intersect, the steeper one will have lower price elasticity. However, any straight-line supply curve starting at the origin maintains an elasticity of 1 throughout its length, regardless of its slope. This is illustrated with three supply curves in Figure 2.18, showing that a proportionate change in price results in an equivalent change in output along these curves.
123
what is the price elasticity of supply
The responsiveness of quantity supplied to a change in price.
124
what is the formula for price elasticity of supply
The percentage (or proportionate) change in quantity supplied divided by the percentage (or proportionate) change in price: %∆QS divided by %∆P. Using the arc formula, this is calculated as ∆Q S/average Q S divided by ∆P/average P.
125
what is elasticity
The responsiveness of one variable (e.g. demand) to a change in another (e.g. price). This concept is fundamental to understanding how mar- kets work. The more elastic variables are, the more responsive is the market to changing circumstances.
126
what is the formula for price elasticity (arc method)?
∆Qs/averageQs divided by ∆P/averageP.
127
define income elasticity of demand
The responsiveness of
demand to a change in consumer incomes.
128
what is formula for income elasticity of demand
The percentage (or proportionate) change in demand divided by the percentage (or proportionate) change in income: %∆QD divided by %∆Y.
129
define normal goods
Goods whose demand increases as consumer incomes increase. They have a positive income elasticity of demand. Luxury goods will have a higher income elasticity of demand than more basic goods.
130
define inferior goods
Goods whose demand decreases as consumer incomes increase. Such goods have a negative income elasticity of demand.
131
what is cross-price elasticity of demand
The responsiveness of demand for one good to a change in the price of another.
132
what is the formula for cross-price elasticity of demand
The percentage (or proportionate) change in demand for good A divided by the percentage (or proportionate) change in price of good B: %∆QDA divided by %∆PB.
133
How does elasticity vary with the time period under consideration in the context of supply and demand? Explain the relationship between time periods and the responsiveness of producers and consumers to price changes. Provide an illustration of this concept using Figures 2.19 and 2.20 and describe the differences in short-run and long-run price and quantity changes in each case.
This passage explains that the elasticity of supply and demand varies with the time period considered. It highlights that producers and consumers take time to adjust to price changes, and longer time periods result in more significant responses and greater elasticity in both supply and demand.
This concept is illustrated in Figures 2.19 and 2.20, where equilibrium shifts from points a to b to c. In both cases, there is a substantial short-run price change (P1 to P2) and a small short-run quantity change (Q1 to Q2), while there is a small long-run price change (P1 to P3) and a substantial long-run quantity change (Q1 to Q3). This demonstrates the time-dependent nature of elasticity in supply and demand.
134
define speculation
Where people make buying or selling decisions based on their anticipations of future prices.
135
define speculators
People who buy (or sell) commodities or financial assets with the intention of profiting by selling them (or buying them back) at a later date at a higher (lower) price.
136
define self-fulfilling speculation
The actions of speculators tend to cause the very effect that they had anticipated.
137
define stabilising speculation
Where the actions of speculators tend to reduce price fluctuations.
138
define destabilising speculation
where the actions of speculators tend to make price movements larger
139
define risk
When a (desirable) outcome of an action may or may not occur, but the probability of its occurring is known. The lower the probability, the greater the risk involved in taking the action.
140
define uncertainty
when an outcome may or may not occur and the probability of it occurring is not known
141
define short selling
Where investors borrow an asset, such as shares, oil contracts or foreign currency; sell the asset, hoping the price will soon fall; then buy it back later and return it to the lender. Assuming the price has fallen, the short seller will make a profit of the difference (minus any fees). There is always the danger, however, that the price may have risen, in which case the short seller will make a loss.
142
define futures or forward market
A market in which contracts are made to buy or sell at some future date at a price agreed today.
143
define future price
A price agreed today at which an item (e.g. commodities) will be exchanged at some set date in the future.
144
define spot price
the current market price
145
what is minimum price
A price floor set by the government or some other agency. The price is not allowed to fall below this level (although it is allowed to rise above it).
146
what is maximum price
A price ceiling set by the government or some other agency. The price is not allowed to rise above this level (although it is allowed to fall below it).
147
What are some reasons for governments to set minimum prices, and how can they address surplus issues associated with these minimum prices?
Governments set minimum prices for various reasons, including protecting producers' incomes, creating surpluses, discouraging the consumption of certain goods, and regulating minimum wages.
Minimum prices can prevent income fluctuations for producers in industries affected by supply fluctuations.
They can create surpluses, which can be stored for future use.
Minimum prices may discourage excessive consumption of specific goods due to health concerns or irrational behavior.
In the context of labor, minimum wage legislation can be used to establish a floor for workers' wages.
Governments can address surplus issues by purchasing, storing, destroying, or selling the surplus on the world market.
Supply can be controlled through quotas, while demand can be influenced by advertising, finding alternative uses, or reducing the consumption of substitute goods.
148
Why do governments set maximum prices, and how do shortages resulting from price controls lead to the allocation of goods among potential customers?
Governments may set maximum prices to ensure affordability, especially for basic goods, benefiting people with lower incomes.
Maximum prices can be implemented in response to crises, emergencies, or natural disasters when supply disruptions occur, and demand rises rapidly.
Shortages resulting from price controls can lead to sellers having to allocate goods among potential customers using methods such as 'first-come, first-served,' random ballot, favoured customers, a merit-based approach, or specific rules and regulations.
149
define rationing
Where the government restricts the amount of a good that people are allowed to buy.
150
define shadow market
Where people ignore the government’s price and/or quantity controls and sell illegally at whatever price equates illegal demand and supply.
151
define price gouging
Where sellers raise their prices by an amount considered to be excessive, to take advantage of a crisis such as a war, natural disaster or pandemic.
152
define indirect tax
A tax on the expenditure on goods. Indirect taxes include value-added tax (VAT) and duties on tobacco, alcoholic drinks and petrol. These taxes are not paid directly by the consumer, but indirectly via the sellers of the good. Indirect taxes contrast with direct taxes (such as income tax) which are paid directly out of people’s incomes.
153
define specific tax
An indirect tax of a fixed sum per unit sold.
154
define ad valorem tax
An indirect tax of a certain percentage of
the price of the good.
155
define incidence of tax
The distribution of the burden of tax between sellers and buyers.
156
define consumers share on tax good
The proportion of the revenue from a tax on a good that arises from an increase in the price of the good.
157
define producers share on tax good
The proportion of the revenue from a tax on a good that arises from a reduction in the price to the producer (after the payment of the tax).
158
define subsidy
a payment by the government to a producer or consumer and so is the opposite of a tax.
159
What are the key factors that determine the cost of a specific subsidy for the government, and how do these factors interact to influence the overall expenditure related to the subsidy?
The cost of a specific subsidy for the government is determined by two main factors: the size of the per-unit payment and the equilibrium quantity after the subsidy is introduced.
Size of the per-unit payment: A larger per-unit payment means the government provides more financial support for each unit of the subsidized product, resulting in a higher total cost for the government. Conversely, a smaller per-unit payment leads to lower costs.
Equilibrium quantity after the subsidy: Changes in the equilibrium quantity caused by the subsidy also impact the cost. If the subsidy increases the equilibrium quantity (stimulating more production or consumption), the government's total cost will be higher. Conversely, if the equilibrium quantity decreases, the cost will be lower.
In summary, the cost of a government subsidy is influenced by the payment amount and its impact on the equilibrium quantity. Larger payments and increased quantities result in higher costs, while smaller payments and decreased quantities lead to lower costs. These factors are crucial for the government's budget management and policy objectives.
160
What are the key considerations and consequences associated with the government providing goods and services, such as healthcare, to the public for free, and how do these factors impact both the demand and supply of these services?
The provided information discusses the provision of free goods and services by the government, particularly focusing on health services. Key points include:
Public's Perception: People often believe they have a right to certain free government services, like education and emergency healthcare, reflecting a societal consensus.
Economic Rationale: There are economic reasons behind providing such services for free, including the societal benefits associated with education and healthcare.
Consequences of No Charges: When services are provided at zero cost, an economic analysis is similar to a maximum price of zero. The demand for these services would be affected, with the demand curve being less elastic when alternatives are limited and distant.
Supply Inelasticity: The supply of healthcare is assumed to be inelastic in the short run, and it may become upward-sloping in the long run if revenue from charges can be reinvested in healthcare infrastructure.
Shortage and Rationing: At a zero price, there is a shortage of services (Qd - Qs), requiring some form of rationing. Waiting lists are one way to ration healthcare, but this approach has limitations, including potential delays and prioritizing urgent cases over non-urgent ones.
Criticisms of Free Services: Public healthcare systems that do not charge for treatment are sometimes criticised for being unresponsive to patients' needs, especially for non-urgent treatments.
In summary, the information discusses the public's perception of free government services, the economic consequences of not charging for services, and the challenges and criticisms associated with such a system, with a focus on healthcare.
161
What are the primary factors contributing to the rapid growth in demand for healthcare services, and what are the potential solutions to address shortages and increase the supply of healthcare while keeping it accessible and free for the public?
Rapid Demand Growth: Demand for healthcare services has grown more rapidly than people's incomes, leading to concerns about shortages in the healthcare system.
Reasons for Demand Growth:
Demography: An aging population in developed countries requires more medical treatment, as elderly individuals generally have higher healthcare needs.
Medical Advances: Advances in medical science and technology have made more medical conditions treatable, leading to increased demand for healthcare services.
Solutions to Address Shortages:
Increasing Supply: One solution is to increase the supply of healthcare services while keeping them free. This can be achieved through efficiency improvements and cost reduction measures.
Controversial Measures: Some measures to increase supply, like reducing hospital stay durations or relocating patients to cheaper facilities, can be controversial.
Resource Allocation: Another way to increase supply is to allocate more funds to healthcare, which involves raising taxes or reallocating resources from other areas of public expenditure, such as education or social security.
Scarcity and Choices: The allocation of resources to healthcare highlights the concept of scarcity, necessitating choices between various public spending priorities.
UK NHS Spending: The example of the UK's National Health Service (NHS) is provided, with information on changes in spending as a percentage of GDP and the pressure on resources due to an aging population and rising treatment costs.
In summary, the information discusses the challenges of increasing healthcare demand and the potential solutions, including improving efficiency, controversial measures, and resource allocation decisions, with a focus on the UK's National Health Service as an example.
162
What are the potential consequences of prohibiting products like drugs and the development of illegal markets? How does the severity of penalties and the likelihood of being caught influence the price of these prohibited products in the illegal market?
Illegal Market Development: When certain products, such as drugs, are prohibited by law, it means they cannot be legally produced, sold, or purchased. However, there is still a demand for these products, driven by various factors, including consumer preferences or addiction.
Impact on Demand and Supply: In a prohibited or illegal market, both demand and supply are affected. Demand for the prohibited product continues to exist, but it may be lower than in a free, legal market due to the risks and consequences associated with illegal activities.
Price Determination: The price of prohibited products can vary in the illegal market, and it may go in one of two directions:
Higher Prices: If the penalties for suppliers (i.e., those involved in production and distribution) are more severe and the likelihood of getting caught is greater, the price of the prohibited product tends to be higher. This is because suppliers demand a higher price to compensate for the increased risks and costs associated with illegal activities.
Lower Prices: On the other hand, if the penalties for users (i.e., consumers) are harsher and the probability of being caught is higher for them, the price may be relatively lower. This is because users may be willing to accept a lower price to entice them to engage in illegal consumption.
The ultimate price in the illegal market is a result of the interplay between these factors and is influenced by the balance of risks and rewards for both suppliers and consumers.
163
Why is there significant government intervention in agricultural markets worldwide, and what are the primary objectives that governments aim to achieve through such interventions in the agricultural sector?
Despite the fact that a free market in agricultural produce would be highly competitive, there is large-scale government intervention in agriculture throughout the world. The aims of intervention include preventing or reducing price fluctuations, encouraging greater national self-sufficiency, increasing farm incomes, encouraging farm investment, and protecting traditional rural ways of life and the rural environment generally.
164
What are the factors that primarily contribute to price fluctuations in agricultural markets, and how can these fluctuations be explained in terms of supply and demand dynamics, especially considering the seasonality of harvests?
Price fluctuations are the result of fluctuating supply combined with a price-inelastic demand. The supply fluctuations are due to fluctuations in the harvest.
165
Why do agricultural prices tend to experience downward pressure over time, and how does the combination of income inelastic demand for food and rapid supply growth due to technological advancements contribute to this pricing challenge, especially for farmers?
The demand for food is generally income inelastic and thus grows only slowly over time. Supply, on the other hand, has generally grown rapidly as a result of new technology and new farm methods. This puts downward pressure on prices – a problem made worse for farmers by the price inelasticity of demand for food.
166
What are some of the common methods of government intervention in agricultural markets, and how do these measures, including buffer stocks, subsidies, price supports, quotas, and structural policies, aim to address challenges such as price fluctuations and oversupply in the agricultural sector?
Government intervention can be in the form of buffer stocks, subsidies, price support, quotas and other ways of reducing supply, and structural policies.
167
How do buffer stocks function in the context of agricultural markets, and what is their primary purpose, especially in terms of price stabilisation and their limitations when it comes to enhancing farm incomes in the long term?
Buffer stocks can be used to stabilise prices. They cannot be used to increase farm incomes over time.
168
What is the dual effect of subsidies in the agricultural sector, and how do they impact farm incomes and consumer prices, especially in terms of aligning consumer prices with world price levels or market-clearing points?
Subsidies will increase farm incomes but will lower consumer prices to the world price level (or to the point where the market clears).
169
How do minimum price controls, especially when set at higher levels, lead to surpluses in agricultural markets, and what measures does the government typically employ to manage these surpluses, particularly when dealing with partially imported food products and the use of variable import levies to maintain the desired price?
Minimum (high) prices will create surpluses, which must be bought by the government and possibly resold on international markets. In the case of partly imported foodstuffs, the high price is achieved by imposing variable import levies.
170
How can the supply of agricultural products be effectively reduced, and what are two common methods mentioned in the paragraph to achieve this reduction?
Supply can be reduced by the imposition of quotas on output or restricting the amount of land that can be used.
