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chapter 2 Flashcards

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1
Q

Demand definition

A

the quantity of well-defined g&s that consumers are both willing and able to buy at each and every price given a period of time, ceteris paribus

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2
Q

Law of Diminishing Marginal Utility

A

as an individual consumes more & more of a good, the additional satisfaction he derives from each additional unit of the good decreases

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3
Q

Law of Demand

A

in a given period, the quantity demanded of a product is inversely related to its price, ceteris paribus

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4
Q

Law of Supply

A

in a given period, the quantity supplied of a product is directly related to its price, ceteris paribus

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5
Q

Types of Demand & Supply Determinants

A
  • price determinants
  • non-price determinants
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6
Q

Non-Price Determinants of Demand

A

change in :
- income
- taste & preference
- substitutes/complements in consumption
- consumers’ expectation
- number/composition of consumers
- government policies

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7
Q

Supply definition

A

the quantity of well-defined g&s that producers are both willing and able to produce at each and every price given a period of time, ceteris paribus

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8
Q

Non-Price Determinants of Supply

A
  • changes in cost of factors of production
  • changes in substitutes/complements in consumption
  • changes in supply shocks
  • changes in producers’ expectations
  • changes in technology
  • changes in number of sellers
  • government policies
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9
Q

Shortage definition

A

demand exceeds supply

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10
Q

Surplus definition

A

supply exceeds demand

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11
Q

Revenue definition

A

total amount of money earned by a firm from the sales of the g&s produced

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12
Q

Price Adjustment Process

A

the surplus/shortage leads to a downward/upward pressue on price until a new market equilibrium (Qs = Qd) is achieved.

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13
Q

Types of Elasticites

A
  • price elasticity of demand (PED)
  • income elasticity of demand (YED)
  • cross elasticity of demand (XED)
  • price elasticity of supply (PES)
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14
Q

PED definition

A

the degree of responsiveness of quantity demanded of a good to a change in its price, ceteris paribus

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15
Q

Coefficient of PED

A
  • 1 < lPEDl < infinity : price elastic
  • 0 < lPEDl < 1 : price inelastic
  • lPEDl = 1 : unitary price elastic
  • lPEDl = infinity : perfectly price elastic
  • lPEDl = 0 : perfectly price inelastic
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16
Q

Factors affecting PED

A
  • availability & closeness of substitutes
  • degree of necessities
  • proportion of income spent on g&s
  • time period
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17
Q

YED definition

A

the degree of responsiveness of demand of a good to a change in income, ceteris paribus

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18
Q

Types of Goods

A
  1. inferior goods
  2. normal goods :
    - necessities
    - luxury goods
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19
Q

Coefficient of YED

A
  1. YED < 0 : inferior goods
  2. YED > 0 : normal goods
    - 0 < YED < 1 : neccesities
    - YED > 1 : luxury goods
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20
Q

Factors affecting YED

A
  • type of goods
  • initial level of income
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21
Q

XED definition

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A

the degree of responsiveness of demand of a good A to a change in price of good B, ceteris paribus

22
Q

Coefficient of XED

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A
  1. XED > 0 : substitutes
  2. XED < 0 : complements
23
Q

Factors affecting XED

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A
  • closeness of substitute / complement
24
Q

PES definition

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A

the degree of responsiveness of quantity supplied of a good to a change in its price, ceteris paribus

25
Coefficient of PES
- PES > 1 : price elastic - PES < 1 : price inelastic - PES = 1 : unitary price elastic - PES = infinity : perfectly price elastic - PES = 0 : perfectly price inelastic
26
Factors affecting PES
- time period - existance of spare capacity - availability & durability of stocks - length of production period - factor mobility - proportion of marginal cost of production as output changes
27
Limitations of elasticity capacity
1. assumption of ceteris paribus 2. reliability and accuracy of elasticity data 3. interactions between demand & supply
28
Direct Price Controls
- price ceiling - price floor
29
Price Ceiling definition
the **maximum legal market price** set & allowed by the government (usually set below current market price level)
30
Purpose of Price Ceilings
- increase affordibility & fairness - to protect consumers' SOL
31
Problems with Price Ceilings
- emergence of black markets - inefficient resource allocation - increased opportunity cost due to more time spent searching and waiting for the good
32
Price Floor definition
the **minimum legal market price** set & allowed by the government
33
Purpose of Price Floors
- protect producers' incomes - protect producers' SOL
34
Problems with Price Floors
- can be ineffective - might be unneccesary
35
Direct Quantity Controls
- quota
36
Quotas examples
- tradable permits
37
Quota definition
the **legal limit** set by the government on the **quantity** on a good that can be transacted in a market
38
Purpose of Quotas
- reeduce consumption of certain goods - protect domestic industries from foreign competition
39
Taxes definition
**involuntary payment of funds to the government** by a household / firm for which they receive no g&s in return
40
Types of Taxes
- direct taxes - indirect taxes - specific taxes - ad valorem - lump-sum
41
Direct Taxes definition
- taxes on **income & wealth** - by **households** to **the government**
42
Indirect Tax definition
- taxes on **expenditure** - by **firms** to **the government**
43
Specific Tax definition
when a **fixed amount** is taxed **per unit of good** sold
44
Ad Valorem Tax definition
when a **percentage of the good's value** is taxed
45
Lump-Sum Tax definition
when a **fixed amount** is taxed **regardless of output level / revenue**
46
Subsidies definition
the **payment of money to a household / firm** by the government for which it receives no g&s in return
47
Types of Subsidies
- direct subsidies - indirect subsidies
48
Direct Subsidies definition
subsidies that increase **households' income & wealth**
49
Indirect Subsidies definition
subsidies on expenditure, **paid directly to the producers of the g&s**
50
Income analysis | for demand
increased/decreased **purchasing power**

economics (18 decks)

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