exam Flashcards
(33 cards)
price elasticity of demand
refers to the responsiveness of total quantity demanded of a product to a change in the price of that product. determines the slope of the curve, steepening with low elasticity and flattening with high elasticity.`
factors affecting PED
degree of necessity
availability of substitutes
time period
proportion of income
degree of necessity
essential services and products such as medication, rental accommodation and basic foods are fairly inelastic whereas non essential services and products such as luxury cars, holidays and entertainment are relatively elastic.
availability of substitutes
large numbers of substitutes e.g multiple breakfast cereals are fairly elastic wheras unique products such as petrol tend to be inelastic
time period
long term tend to be more elastic as opposed to short term, due to being able to find alternatives, substitutes and change habits, eg. choosing a heating system.
proportion of income
expensive things that take up more proportion of income tend to be more elastic, as opposed to items that take up less of an income.
Price elasticity of supply
refers to the responsiveness of total quantity supplied of a product to a change in the price of that product. determines the slope of the curve, with high PES flattening the curve and low PES steepening it.
PES factors
Product storability
resource mobility and unused industry capacity
production time period
product storability
items that are more durable and can be stored successfully without deterioration such as minerals, wheat, wool, and red wine are more elastic.
resource mobility and unused industry capacity
more elastic if production levels can be readily and inexpensively changed by moving resources between industries, and is especially elastic when there is unused or spare productive capacity in an industry.
production time period
inelastic in the short term and elastic in the long term
Balance of payments
consisting of the current account and the combined capital & financial account, BOP summarises the economic transactions of an economy with the rest of the world. overall total amount of debits is equal to credits.
current account
broken down into 4 components, net goods, net services, net primary income and net secondary income. is the difference between al receipts(credits) and payments(debits) of a current nature .
factors affecting AD
disposable income interest rates consumer confidence business confidence exchange rate rates of economic growth overseas
factors affecting AS
changes in general level of prices quantity and quality of factors of production cost of production technology productivity growth exchange rates climatic conditions
factors affecting demand
disposable income price of substitutes and complements consumer preferences interest rates consumer confidence population growth and demographic density
factors affecting supply
changes in cost of production
technology
productivity
climate change/climatic conditions
role in open market operations in altering interest rates
involves the manipulation of the liquidity in the cash rate market by the RBA through the purchasing and selling of government security
how RBA increase interest rates
RBA makes an announcement stating they are going to raise the cash rate and outline the reasons why. The RBA would then set out to achieve this by selling government securities in the open markets operations. Financial institutions then transfer funds to the RBA from exchange settlement accounts. In doing so this creates a shortage of cash in the money market putting upward pressure on the cash rate, reducing the supply of cash in the market. Banks will then increase interest rates on new variable loans.
how RBA decreases the cash rate
RBA make an announcement that they are decreasing the cash rate and outline the reasons why. The RBA will buy government securities from financial institutions through the open markets operations. The RBA will transfer funds to financial institutions into their Exchange settlement accounts. In doing so this creates a surplus of cash in the market putting downward pressure on the cash rate, increasing the supply of cash in the market. Banks will then lower their interest rates to encourage borrowing and reduce saving.
methods to finance a budget deficit
sell bonds to RBA
sell bonds to Aus investors
sell bonds to overseas investors
selling bonds to RBA
most expansionary however most inflationary due to money that wasn’t in circulation is now supplied
selling bonds to Australian investors
least expansionary as places upward pressure on interest rates, which leads to crowding out in the private sector as businesses and households are less likely to spend
selling bonds to overseas investors
leads to capital inflow which can place downward pressure on AUD and reduce price competitiveness of AUS exporters leading to crowding out of external sector
