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H2 Econs > Markets > Flashcards

Markets Flashcards

(64 cards)

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1
Q

Define demand

A

Demand is the quantity of a good that a consumer is willing and able to buy at each possible price point during a given time, ceteris paribus

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2
Q

What are the non price determinants of demand

A
  • Income distribution
  • Price and availability of related goods
  • Taste and preference
  • Expectations of future prices
  • Government policies
  • Population demography
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2
Q

Define quantity demanded

A

Quantity demanded is the quantity of a good a consumer is willing and able to buy at a specific price point during a given time, ceteris paribus

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2
Q

State law of demand

A

Law of Demand states that in a given time, quantity demanded of a good is inversely related to its price, ceteris paribus

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2
Q

What are goods in derived demand

A

Demand for one good occurs as a result of the other
- Both bought by different economic agents
(Car and steel)

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2
Q

Explain how an increase in income affects demand

A
  • Income increases
  • Purchasing power increases
  • Utility maximising consumers increase their demand for normal goods
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3
Q

What are goods in joint demand

A

Goods consumed together to satisfy the same want
- Both bought by same economic agent
(Car and petrol)

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3
Q

What are substitutes

A

Goods that are alternatives to each other

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4
Q

Explain how expectation of future prices to increase will affect demand

A
  • Consumers expect prices to rise in the future
  • Current demand for good will increase
  • Consumers are rational and utility maximising want to avoid paying higher price in future
  • Assume good is non perishable
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4
Q

What is composite demand

A

Demand for a good with multiple uses
(Crude oil used to produce energy and fertilisers)

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5
Q

Define supply

A

Supply is the quantity of a good producers are willing and able to sell at each possible price point during a given time, ceteris paribus

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5
Q

Define quantity supplied

A

Quantity supplied is the quantity of a good producers are willing and able to sell at a specific price during a given time, ceteris paribus

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6
Q

State the law of supply

A

Law of Supply states that in a given time, quantity supplied of a good is directly related to its price

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7
Q

What are the non price determinants of supply

A
  • Marginal cost of production
  • Government policies
  • Price of related goods
  • Expectation of future prices
  • No. of sellers in market
  • Unpredictable events
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8
Q

Explain how increase in marginal cost of production affects supply

A
  • Marginal cost of production increases
  • Marginal profit decreases
  • Profit driven producers reduce supply
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9
Q

How does increase in price of factor inputs affect marginal cost of production

A
  • Price of factor inputs increases
  • Marginal cost of production of an additional unit of good increases
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10
Q

How does technology improvement affect marginal cost of production

A
  • Technology improvement increases productivity
  • Each additional unit of output requires less input
  • Marginal cost of production decreases
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11
Q

What is indirect tax

A

Tax imposed by government on production of goods and services

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12
Q

What is direct tax

A

Tax imposed by government on wealth of individuals and corporations

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13
Q

What are the types of indirect tax

A

Specific tax
Ad valorem tax

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14
Q

Define subsidy

A

Subsidy is the provision of money and resources by the government to support individuals and corporations

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15
Q

What are goods in joint supply

A

Production of one good results in the production of the other
(Wool and mutton)

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16
Q

What are goods in competitive supply

A

Production of one good diverts resources away from production of another

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17
Q

Explain how expectation of future prices to increase will affect supply

A
  • Producers expect prices to increase in future
  • Current supply decreases
  • Profit maximising producers want to capture additional marginal profits of selling good in the future
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18
Define equilibrium
Equilibrium is the position of balance, where there is no inherent tendency to deviate in absence of exogenous change
19
Explain how increase in demand affects equilibrium price and quantity
- Demand increases - Initial shortage created at original price point, exerting upward pressure on price - Utility maximising consumers restricted by their budget will reduce their quantity demanded - Profit maximising producers increase quantity supplied to capture additional marginal profits - Equilibrium quantity increases - Equilibrium price increases - Shortage eliminated
20
Explain how increase in supply affects equilibrium price and quantity
- Supply increases - Initial surplus created at original price point, exerting downward pressure on price - Utility maximising consumers increase quantity demanded - Profit driven producers reduce quantity supplied due to lower marginal profits - Equilibrium quantity increases - Equilibrium price decreases - Surplus eliminated
21
What are the functions of price mechanism
- Signalling function - Incentive function - Rationing function
22
Define allocative efficiency
Allocative efficiency is when the total net social benefits is maximised
22
Explain the 3 functions of price mechanism
Signalling function - Market prices adjust to demonstrate shortage or surplus of resources Incentive function - Consumers sent information to producers about changing needs/wants through expression of preferences Rationing function - Price mechanism rations out resources according to willingness and ability to buy
23
Define consumer surplus
Consumer surplus is the difference between maximum price consumers are willing and able to pay for good and the actual price of the good
24
Define producer surplus
Producer surplus is the difference between minimum price producers are willing and able to sell the good at and the actual price of the good
25
Define elasticity
Elasticity is the measure of responsiveness of one variable to changes in another
26
What are the different types of elasticity
- PED - YED - XED - PES
27
Define PED
Price elasticity of demand is a measure of the degree of responsiveness of quantity demanded for a good to a change in price of good itself, ceteris paribus
28
Formula for PED
% change in quantity demanded / % change in price
29
What is the sign of PED
Negative
30
Why is the sign of PED always negative
Law of Demand states that in a given time, quantity demanded for a good is inversely related to its price
31
What does it mean when magnitude of PED is more than 1
- Demand for good is price elastic - Change in price results in a more than proportionate change in quantity demanded in the opposite direction
32
What does it mean when magnitude of PED is less than 1
- Demand for good is price inelastic - Change in price results in a less than proportionate change in quantity demanded in the opposite direction
33
What are the determinants of PED
- Availability and closeness of substitutes - Proportion of income spent on good - Degree of necessity - Addiction - Time period
34
Define XED
Cross price elasticity of demand is a measure of the degree of responsiveness of the quantity demanded for one good to a change in price of another good
35
What is the sign of XED
Positive or negative
36
Formula for XED
% change in quantity demanded for B / % change in price of A
37
When is sign of XED positive
- Substitutes - Change in price of one good results in change of quantity demanded of the other good in same direction
38
When is sign of XED negative
- Complements - Change in price of one good results in change of quantity demanded of the other good in opposite direction
39
What does the magnitude of XED show
Closeness of both goods - Larger magnitude of XED = More closely related the goods are
40
Define YED
Income elasticity of demand is a measure of the degree of responsiveness of quantity demanded to changes in income
41
Formula for YED
% change of quantity demanded / % change in income
42
What is a normal good
A good whose demand changes in the same direction as the change in income
43
What is an inferior good
A good whose demand changes in the opposite direction as the change in income
44
When is YED positive
When good is normal good
45
When is YED negative
When good is inferior good
46
What are the types of normal goods
Necessities Luxuries
47
What has YED of more than 1
Luxury
48
What has YED of more than 0 but less than 1
Necessity
49
What has YED of less than 0
Inferior good
50
Define PES
Price elasticity of supply is a measure of the degree of responsiveness of quantity supplied of a good to a change in price of good itself
51
Formula for PES
% change in quantity supplied of good / % change in price of good
52
What is the sign of PES
Positive
52
Why is sign of PES always positive
Law of Supply states that quantity supplied of a good is directly related to its price
53
What does it mean when 0
- Supply for good is price inelastic - Change in price results in a less than proportionate change in quantity supplied
54
What does it mean when PES>1
- Supply for good is price elastic - Change in price results in a more than proportionate change in quantity supplied
55
What are the determinants of PES
- Availability of stock - Existence of spare capacity - Mobility of FOP - Time period

H2 Econs (1 decks)

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