Economics Stage 2 Flashcards

Question

How does CED relate to substitutes and complements in economics?

Answer 1

This is often applied in the case of complements and substitutes: ▪ If the price of a substitute good increases, the QD of a good increases. ▪ If the price of a compliment good increases, the QD of a good decreases.

Answer 2

CED = 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐷𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑜𝑓 𝑎 𝐺𝑜𝑜𝑑 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝐴𝑛𝑜𝑡ℎ𝑒𝑟 𝐺𝑜𝑜𝑑 * When CED is negative, the two goods in question are complements * When CED is positive, the two goods in question are substitutes

Answer 3

The income elasticity of demand (YED) is a measure of how responsive QD of a good is to a change in income.

Answer 4

YED = 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐷𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑜𝑓 𝑎 𝐺𝑜𝑜𝑑 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐼𝑛𝑐𝑜𝑚𝑒

Answer 5

The price elasticity of supply (PES) is a measure of how responsive QS of a good is to a change in the price of a good.

Answer 6

PES = 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑆𝑢𝑝𝑝𝑙𝑖𝑒𝑑 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒

Answer 7

▪ The steeper the slope of the supply curve, the lower the PES. ▪ The shallower the slope of the supply curve, the higher the PES. * PES is deemed to be inelastic if it has a value of less than 1 and elastic if it has a value greater than 1.

Answer 8

▪ Availability of FOPs – if a good uses FOP which are rare then their PES is likely to be inelastic when substitutes are not present. Goods which use common FOPs tend to have an elastic PES. ▪ Timeframe – the PES of a good may change across a period of time since a change in the price occurred.

Answer 9

▪ Momentary PES – the instantaneous change in supply which can be achieved by goods. Non- rivalrous goods tend to have elastic momentary PES. ▪ Short-Run PES – the change in supply which can be achieved when at least one FOP can be varied but not all. Labour is often the most flexible FOP, with firms making use of overtime and zero-hour contracts. ▪ Long-Run PES - the change in supply which can be achieved when all FOPs can be varied. Capital can be increased through the expansion of manufacturing plants and Land can be increased through the purchase of new real estate.

Answer 10

1. Price Setting Decisions – firm strategy concerning how to set prices to achieve the best outcome. 2. Tax Revenue Decisions – government strategy regarding the equity and effectiveness of imposing or changing fiscal policy.

Answer 11

* The revenue a firm receives from selling its product can be calculated by: * Total Revenue (TR) = Price (P) * Quantity Demanded (QD)

Answer 12

* If a firm has the ability to control the price level for its product, it should be mindful of the PED. * Elastic PED – TR will shrink if prices rise and grow if prices fall. * Inelastic PED – TR will grow if prices rise and shrink if prices fall. * Unity PED – a change in price has no bearing on TR.

Answer 13

* Markets may experience reductions in the costs of manufacturing their product due to changes in the price of factors of production/technology breakthroughs.

Answer 14

* This reduction in the cost of FOPs is illustrated by a rightward shift in the supply curve for the market. * What implications will this have for the market agents? * This will depend on the PED: * Inelastic PEDs – consumers will gain more from the situation. * Elastic PEDs – firms will gain more from the situation.

Answer 15

* Governments raise revenue by levying taxes on economic activities such as duties and value added taxes (VAT). * Some taxes are referred to as ‘sin taxes’ as they attempt to discourage an undesirable activity.

Answer 16

* Who pays them – the distribution between consumers and firms. * How demand is affected – the PED

Answer 17

* The incidence of taxation on the market agents will depend on the elasticities of demand and supply. * PED elastic and PES inelastic: the burden of the tax will be felt disproportionately by the firms in the market. * PED inelastic and PES elastic: the burden of the tax will be felt disproportionately by the consumers in the market.

Answer 18

State and briefly outline the main components of an expenditure approach to measuring the gross domestic product of an economy GDP represents the value of all products traded within an economy. An expenditure approach to measuring GDP contains a number of elements set out in the following equation: GDP = C + I + G + (X – M) Where: C represents consumer spending on goods and services (e.g. food) I represents investments made by firms (e.g. machinery) G represents government spending (e.g. healthcare and welfare) (X – M) represents net-exports being the difference between the value of goods exported from an economy and the value of goods imported to the economy

Answer 19

Profit Maximization occurs at the level of output where Marginal Revenue equals Marginal Cost.

Economics Stage 2 Flashcards

(44 cards)