Microeconomics Flashcards

Question

What causes a movement in the supply curve?

Answer 1

Movements along the supply curve --\> caused by a **change in price.** Caused by a shift in demand

Answer 2

Equilibrium = also known as market clearing price, where the quantity supplied is equal to the quantity demanded. There are no shortages or surpluses. This is where the market settles. - If price is too high, there will be a surplus. - If the price is too low, there will be a shortage.

Answer 3

Prices have a role in signalling and incentive. **Signals** communicate information to **decision makers**. Incentives **motivates decision makers** to respond to the information. - Shortage of supply acts as a signal to increase production - An increase in price acts like an incentive for producers or it is an incentive for consumers to buy less since prices have increased. The thrid function is rationing --\> When there is a shortage of a product, price will rise and deter some consumers from buying the product. This is when demand for a product increases which causes a shortage in the market. The price of the good increases. Then suppliers will respond by increase supply (Signalling and incentives). The raise in price will deter some costumers therefore leaving the people that actually need the product.

Answer 4

Consumer surplus --\> The extra satisfaction/utility gained by consumers from paying a price that is lower than that which they are prepared to pay. This is the **difference** between the **total amount** that **consumers are willing and able to pay for a good** or **service** (indicated by the demand curve) and the **total amount they do actually pay** (the actual price). - Indicated by the area above the market prive and below the demand curve.

Answer 5

Producer surplus --\> Measure of producer welfare which is measured as the difference between the amount producers are willing and able to supply a good for and the price they receive. - Producer surplus is the area under the equilibrium price and above the supply curve.

Answer 6

Allocative efficiency = this is defined as the best allocation of resources from society’s point of view. It occurs at competitive **market equilibrium**. This is when economic welfare is maximised. (marginal benefit = marginal cost).

Answer 7

Definition of PED: the responsiveness of demand to a change in price. PED = (%change in Qd) / (%change in price) The range of values PED can be between 0 and infinity. The value is usually a negative number, but we usually ignore the sign. (Demand is a negative sloping curve) Note --\> Don't forget it is a PERCENTAGE CHANGE.

Answer 8

If Ped is between 0 and 1 then demand is **inelastic**. Change in price results in a proportionally smaller change in Q_D. The product is inelastic --\> Producers can increase the price to receive more revenue. Examples: Essentials with no alternatives - Medicine Luxury itens/products - Bugatti Addictive products - cigarettes Necesities - Petrol, tooth paste

Answer 9

If Ped = 1 (i.e. the percentage change in demand is exactly the same as the percentage change in price), then demand is said to unit elastic. (Unitary elasticity) Change in price doesn't lead to a change in revenue.

Answer 10

If Ped = 0, demand perfectly inelastic. (Demand does not change at all when the price changes – the demand curve will be vertical) - E.g Heroine If PED = ∞, demands is perfectly elastic (Quantity demand is infinite --\> however, any deviation in price --\> Q_d will fall to zero)

Answer 11

If Ped \> 1, change in demand is proportionately greater than the change in price i.e. demand is elastic. For example, a 20% increase in the price of a good might lead to a 30% drop in demand. The price elasticity of demand for this price change is –1.5. Producer sells a product with elastic demand --\> Shouldn't increase price. Examples - Products with good substitutes - Products that are bought frequently --\> Change in price will have a greater effect on consumers.

Answer 12

XED = the responsiveness of a change in demand for good X as a result of change in price of good Y. Formula CED = (𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐h𝑎𝑛𝑔𝑒 𝑖𝑛 𝑑𝑒𝑚𝑎𝑛𝑑 𝑓𝑜𝑟 𝑔𝑜𝑜𝑑 𝑋) / (𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐h𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑌 ) The sign (either positive or negative) IS important when considering cross elasticity of demand.

Answer 13

If XED is positive, then the goods are substitutes A change in demand for one good is in the same direction as the change in price of the other good. When the price of Y increases, the demand for X also increases. When the price of Y falls, the demand for X also falls. E.g. of X and Y could be coffee and tea. Increase in price of Coffee - drop in demand More poeple end up buying tea (substitiute coffe) and therefore demand increases.

Answer 14

If CED is negative, then the goods are complements A change in demand for one good and the price of another good, change in the opposite directions. This occurs when the two goods are complements for each other. Eg strawberries and cream. If price of strawberries drops (better/cheaper harvesting) then more people will buy it. Since cream is a compliment (joint demand) they will also buy cream with their strawberies. (Demand for cream increases)

Answer 15

No connection between the products.

Answer 16

YED = the responsiveness of demand to changes in income. Formula YED = (𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐h𝑎𝑛𝑔𝑒 𝑖𝑛 𝑑𝑒𝑚𝑎𝑛𝑑 𝑓𝑜𝑟 𝑔𝑜𝑜𝑑 𝑋) / (𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐h𝑎𝑛𝑔𝑒 𝑖𝑛 𝑖𝑛𝑐𝑜𝑚𝑒)

Answer 17

Demand is inelastic (unresponsive to change in income) when the YED is between -1 and 1. Examples: Necessities - Low value, routine purchases have a positive low YED. (Toothpaste)

Answer 18

The product is elastic when the YED is less than -1 and greater than +1. This means that the products demand is responsive to a change in income. Examples: - Normal goods- Positive YED (elastic) - More disposable income. - Inferior goods have a negative YED. If income increases, demand is lowered. - Luxury goods - very elastic --\> high positive YED.

Answer 19

Definition = the responsiveness of supply to changes in price PES = (𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐h𝑎𝑛𝑔𝑒 𝑖𝑛 𝑠𝑢𝑝𝑝𝑙𝑦 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑋 ) / (𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐h𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 )

Answer 20

Taxes are payments made by businesses to the governments which increase their cost of production. Reason: This is done in order to reduce comsumption of demerit goods or increase government revenue. -Taxes increase costs of production (inward shift)

Answer 21

Flat rate tax (Unit tax) = these are taxes calculated as an absolute amount per unit of the good or service sold. For example all wine bottles can be taxed 50 cents.

Answer 22

Ad valorem tax = these are **taxes calculated as a fixed percentage of the price of the good or service.** The amount of tax increases as the price of the good/ service increases For example - BTW (21%)

Answer 23

The incidence of a tax refers to the extent to which an individual or organisation suffers from the imposition of a tax. Elastic demand curve --\> Greater burden on producers Inelastic demand curve --\> Greater burden on consumers Burden on consumers + Burden on producers = total revenue for government. Deadweight loss --\> quantity in supply lost as a result of tax on producers.

Answer 24

Price x Quantity = Revenue

Answer 25

Progresive tax - A higher proportion is payed in tax by higher income earners. Example: Income tax in the Netherlands Regressive tax - a higher proportion is paid in tax by lower income earners. For example BTW in The Netherlands. (Poorer people have to pay a larger percentage of their income) Proportional tax - Same proportion of income paid in tax regardless of earnings. Indirect tax - An indirect tax is imposed on producers. It is seen when products are purchased (BTW). Direct tax - They are paid directly to the government by the individual tax payer - "usually pay as you earn". For example income tax.

Answer 26

Profit = revenue - costs

Answer 27

A subsidy is a payment from the government to firms to encourage production of a good/service. (merit goods). It reduces buisnesses costs. Therefore, it shifts the supply curve away from the axis --\> Cost of production decreases, they can supply more at a lower price. Example: Governments might subsidies firms in the solar panel industry as solar panels are seen to be a merit good.

Answer 28

It is better to tax inelastic goods to make more revenue becuase if there is a large change in price due to the tax, there will only be a small change in quantity demand simply due to the inelastic nature of the curve. For buisnesses a inelastic good places more of the burden on the consumers. A tax on a elastic good places a larger burden on the producers.

Answer 29

Price controls are controls that governments (or other authorities) put in place to try to influence the outcome of a market.

Answer 30

A government may feel that a price is **too high** and so set a maximum price for the good or service. eg rent controls.The price ceiling is a **maximum price, below the market equilibrium price.** Maximum prices are designed to benefit consumers Maximum prices are often found in situations where a government wants to ensure that goods are available to the poorest people at affordable prices . eg rice and dried milk in Sri Lanka where the government intervenes to keep prices affordable

Answer 31

A government may feel that the market results in a **price that is too low** and set a minimum price. eg minimum wage. Two reasons: 1. Raise income for producers of goods/services that the governments think are important (Agricultural) 2. Protect workers by setting a minimum wage. Eg minimum wages if the government believes the market equilibrium wage is too low to provide a sufficient standard of living

Answer 32

A price ceiling causes shortages in the market. The reason being that suppliers can no longer sell for such a high price, therefore, making them consider other possibilities that are more profitable. Therefore, some suppliers leave the market which causes a shortage. Government intervention - people who actually need the price ceiling benefit from it or increase supply 1. Proof of low income 2. Rationing system 3. Government subsidies 4. Governments could produce product themselves.

Answer 33

Markets --\> can be very unstable/price floor --\> makes governments intervene to stabilise the markets/correct the market. Eg agricultural markets **Buffer stock schemes** seek to stabilize the market price of agricultural products by buying up supplies of the product when harvests are plentiful and selling stocks of the product onto the market when supplies are low. With a Buffer stock scheme, the government will always **guarantee a price to producer**. Buffer stocks in agriculture - Aim to stabilise prices - Constant supply food (especially when countries don't import) - Prevent firms from leaving the market due to price drops

Answer 34

Prices of agricultural products tend to fluctuatate more. This is becuase supply can vary due to weather, bad harvests, supply is inelastic therefore they can't respond quickly to demand and demand is relatively inelastic as food is a neccesity. - Guarantee price for producer - Surplus, the government will intervene and buy the excess goods. - Shortage when supply falls due bad harvests the government will release its stock back on to the market to deal with the shortage. It is important to note that crops don't have a long shelf life.

Answer 35

Advantages: - Stable prices help maintain farmers' incomes and improve the incentive to grow. Less firms leaving the market. - Stability enables capital investment in agriculture needed to lift agricultural productivity. - Stable prices prevent excess prices for consumers – helping consumer welfare Disadvantages - High Cost of buying excess supply - Oppertunity cost - How much do you pay and buy from farmers when there is excess - Food might go bad and it might have to be destroyed - Significant amount of start up capital,

Answer 36

Market Failure is a situation in which the free market leads to a misalocation of society's scarce resources in the sense that either products are over produced or underconsumer. If there are positive and negative externalties then a market is unable to acheive allocative efficiency. (Fails to allocate resources at a socially optimum price/quantity) Market failure is a relative term - people have different views on what the social optimum is.

Answer 37

1. **Merit goods** - desirbale goods tend to be undercosumed. **Demerit goods** - undersirable goods tend to be overconsumed. 2. **Monopoly power**/ lack of competition - They can set **higher prices** and **provide less choice for the consumer**. They are price makers and control the market. 3. **Public goods** are underprovided as they are not profitable. - They are **Non excludable** ( can't exclude people from using it - Park) and **non rival** (If someone is using the public good they can't prevent anyone from using it - doesn't reduce in avalibility). 4. **Missing markets** - Good are not provided by the market mechanism. 5. **Positive externalities** - society benefits - underconsumed (education). Negative externalities - society doesn't benefit - over consumed. (smoking) 6. **Poverty/unemployment** - decreases in productive efficiency.

Answer 38

Positive externality - beneficial for society - underprovided. (Merit Goods) MSB = this is the benefit to society as a whole. (2nd demand curve) MPB = this is the benefit to the individual who is consuming the good, shown by their **demand curve.** If MSB \> MPB = the good will be under consumed if left to the market mechanism eg education/ health care. (Due to imperfect information) MSB = MPB then the socially optimum level would be reached. Supply curve is equal to marginal private cost - Is it worth producing? No externalities in production Triangle from MSB equilibrium to MPB equilibrium = Potential welfare gain or wellfare loss.

Answer 39

Negative externalities occur when production and/or consumption impose external costs on third parties outside of the market for which no appropriate compensation is paid. Represent a misallocation of societies resources --\> too much paint is produced at a low price. This causes social costs to exceed private costs. (noise pollution, industrial waste) MSC = this is the cost to society as a whole as a result of the production of a good / service. MPC = this is the cost to the individual firm of producing a good. If MSC \> MPC = the good will be over produced if left to the market mechanism eg. Factory - pollution.

Answer 40

The free rider problem is when people **benfit from resources, goods or services they do not pay for themselves.** Results in the **underprovision** of these goods or services. Therefore, the government has to step in and provide such goods/services in order to avoid market failure. For example - No company is going to supply streetlights as there is no profit to be made

Answer 41

Demerit- Goods that are deemed undesirable by society. Nevertheless, they tend to be overconsumed/overproduced. (Negative externalities) Demerit good caused by imperfect information **Government intervention** --\> Taxes, fines, banning or limiting consumption, behavioural nudges - restricting choices, financial discentives, influecing choice - Social norms, advertising etc.

Answer 42

Both these goods are underconsumed in the market.

Answer 43

Productive effieciency occurs when firms produce at the **lowest possible cost while also maximising output.** (It is acheived when P = minimum AC). Perfect competition is productively efficient at the profit maximising level of output.

Answer 44

- Subsidies - Taxes - Financial support - vouches - Behavioural nudges - Regulations/Laws - Fines and consequences - government provision (supply) - Price ceiling/price floor

Answer 45

Pro - Increase production Con - Costly for the government - they might have to increase taxes in order to fund. Con - Difficult to predict how much to subsidies Con - Make the demand for a good or service unproportionate to the rest of the market. Other firms will be affected by their drop in demand Con - Reduces incentives for efficiency

Answer 46

Pro - It targets a specific audience - people that need help will receive it. Pro - Provides provision and financial support Con - Embarresment for people - they don't want to be seen as poor. Con - People might use vouchers for products that have negative externalities.

Answer 47

Pro - spreads awarness - Changes social norms Con - Very costly Con - Doesn't always work Con- Highly dependent on the PED (Inelastic goods less effective) Con - dependent on the effectiveness of the campaign.

Answer 48

Pro - Not very costly to set laws in place Cons - Laws need enforcement - Otherwise people ignore them Cons - Might lead to a black/illegal market

Answer 49

Pro - Not very costly - Low Opportunity cost (Unless they decide to subsidize/provide good in order to decrease shortage) Pro - Reduces price for consumers Con - Causes shortages as firms might drop out of the market as they can't benefit. Con - Regulations/rationing has to be set in place so that the right people benefit from the help. Con - What level should the price ceiling be placed? (Government failure) Con - the emergence of a black market which sells at higher prices --\> due to the shortage

Answer 50

Pro - The neccessary goods and services are provided on too the market. Con - Opperunity cost --\> It is costly / something has to be done or given up in order to fund it. Con - What is the socially optimum level for these goods. E.g Public goods --\> Government failure

Answer 51

1. What is the social optimum? 2. How much should the government intervene in order to acheive the social optimum.

Answer 52

**Common access resources ---\>** resources that are not owned by anyone, do not have a *price,* and are available for anyone to use without payments. Forests, pastures, oil fields, gas fields etc. As a result of non-excludability in consumption, it is impossible to charge a price for the use of these resources and therefore overconsumption, depletion and degradation is likely to be the outcome. Lack of price mechanism for common access resources results in their overuse, depletion and degradation. There is a threat to sustainability and, therefore, the availability of common access resources for future generations.

Answer 53

The total costs to society includes the private costs of the firm plus the external costs on third parties that the firm creates, but does not pay for. Since the producer does not pay the total cost, the good or service is over-produced, which results in a welfare loss.

Answer 54

Normal goods --\> Income increases ---\> demand goes up.

Answer 55

Inferior Goods --\> They will see a fall in demand as income rises. People will prefer to buy more luxury items. E.g Bread, Patato, rice etc.

Answer 56

Basic goods are goods which **poor people will buy more of when the price rises** and less when the price falls. This is becuase as the price rises it takes up a larger part of their budget and therefore leaving them with insufficient money to buy a sufficient amount of a more expensive good therefore, they buy more of the basic good. Examples - Rice and meat --\> Rice increases in price --\> less meat will be bought.

Answer 57

A Vebelen good has a snob value and as the price rises --\> demand will also rise. People have the notion that "The more expensive ones, are the better ones". -Branded clothing/ desginer clothing.

Answer 58

1. The time period --\> Impacts the firm's ability to change factors of production which impacts output. 2. Substitutability of resources 3. Stocks --\> Large amount of stocks --\> react quickly to price. 4. How much cost rises as output increases --\> Large increase in cost --\> unlikely to increase output. Influenced by... a) The existence of unused capacity b) The mobility of factors --\> Factors of production can be easily moved from one productive use to another.

Answer 59

Manufactured goods are able to respond quickly to changes in demand whereas primary commodities can't. This is because manufactured goods can be easily produced and extra stocks tend to be available. On the other hand, it takes time to grow crops and stocks don't last for very long.

Answer 60

The ease at which it is firms can substitute factors of production (Labour/Materials) in order respond and produce more. E.g: 1. Labour - More skilled labour and specialised labour, the longer it will be to replace. 2. Materials- If a process uses materials that can't be substituted easily then the supply elasticity will be low.

Answer 61

Spare capacity that firms can use in order to respond to changes in price. More spare spacity (below maximum capacity) - Produciton can be increased - To respond to changes in price. (Elastic) Full spacity - production can't be increased - can't change quickly to chanes in prive (elastic)

Answer 62

The availiability of stocks can increase the ability of a firm to respond to changes in price. Respond quickly - increase supply elasticity (Short run).

Answer 63

In the short term at least one factor of production will be fixed.

Answer 64

Long run – where all factors of production of a firm are variable

Answer 65

This is when demerit goods with negative externalities are overconsumed. - Since the MSC (cost to society) is greater than MSB, there is welfare loss to society and a market failure. - The free market consumes at the level of MPB. - In reality, they should consume at level MSB (Social optimum) in order to minimise external costs on third parties (spillover costs). Examples: Cigarettes, car and air pollution.

Answer 66

External costs on third parties outside of the market for which no appropriate compensation is paid.

Answer 67

Production of a good or service creates external benefits for third parties. This case the MPC is more than MSC --\> because production creates external benefits. In this case, the MSB \> MSC --\> Resources are under-allocated Example: 1. Firm provides education. 2. Cost for th firm 3. Educated employees are more skilled and can thus benefit society as a whole.

Answer 68

The government has to estimate the social benefit from the consumption of public goods. This can be difficult and can lead to government failure (the government does not provide in the optimum quantity for the benefit of society as a whole).

Answer 69

Social cost includes private costs plus the cost of the negative externalities - Firms have to pay more money in order to be enviornmentally friendly. Private cost is only the cost of production --\> its lower therefore, firms tend to settle for the lower production costs.

Answer 70

REMEMBER - ANSWER the question - No more nor less 1. Define + example 2. Diagram 3. Use diagram to answer question 4. Have you answered the question? YES - Move on! Remember - For any comparative question (Distinguish, compare, contrast) - Link both things,

Answer 71

1. Definitions 2. Quick example 3. Diagram 4. Analysis/Evaluation - Bouncing ideas back and forth INCLUDE refrences to diagram where necessary. 5. Conclusion - Your final stance on the question! - Refer to question - Summarise main points + reject alternative argument.

Answer 72

**H**ow much? - How much does it impact? how much to intervene? **A**ssumptions - Ceteris paribus - Other factors in the market changing **L**ong term vs Short term **S**takeholders -Government, producers and consumers **P**riorities **P**ros and cons -High oppertunity cost

Answer 73

Factors of production --\> resources that allow an economy to produce it output 1. **Land** --\> Includes a large number of thing --\> Natural resources, etc. 2. **Labour** --\> Human factor --\> physical and mental contribution of the existing workforce. 3. **Capital** --\> Comes from investment in physical/human capital. **Physical capital** is the stock of manufactured resources (factories, machinery, roads, tools, etc.) **Human capital** is the value of the workforce (i.e. level of education). **Social overhead capital** refers to infrastructure. 4. **Management** ---\> Organising and the risk-taking factor of production.

Answer 74

It is a curve because not all the factors of production used to build good X are equally as good as producing good Y. Hence, when both goods are produced equally, then the skilled workers in each industry will be specializing in the production of the goods which they are the best/most skilled at producing

Answer 75

Total utility --\> The total satisfaction gained from consuming a certain quantity of a product. Marginal Utility --\> the extra utility gained from consuming one more unit of that product. Most cases marginal utility falls the more a person consumes a product.

Answer 76

Goods --\> Tangible (Physical) --\> Can be split into durable and non-durable Services --\> intangible

Answer 77

1. Total production, investment, trade, consumption are too complicated to plan efficiently --\> results in a misallocation of resources, shortages, surpluses 2. No price system --\> resources not used efficiently. 3. Incentives --\> distorted --\> Worker with guaranteed employment + managers who gain no profit --\> hard to motivate --\> output/quality will suffer. 4. The dominance of the government --\> loss of personal liberty and freedom of choice. 5. Governments don't share the same aims as the rest of the population --\> implement plans that are not popular/corrupt.

Answer 78

1. Demerit goods --\> over provided by high prices/ high-profit motive 2. Merit goods --\> Underprovided --\> only produced for those who can afford them. 3. Resources may be used up too quickly/environment may suffer (pollution). 4. Some members need help to look after themselves. 5. Large firms may grow and dominate industries --\> high prices and loss of efficiency, and excessive power. 6. Public goods underprovided

Answer 79

A market is where buyers and sellers come together to carry out an economic transaction.

Answer 80

Q_d = a - bP Q_d --\> Quantity demanded a --\> Quantity that would be demanded if the price was zero --\> X --\> intercept. b --\> The slope of the curve/ gradient

Answer 81

Q_d = a - bp A change in the value 'a' will cause the curve to shift. A change in the value of 'b' will cause a change in the gradient. Both 'a' and 'b' are influenced by changes in non-price determinants of demand. For example, if peoples taste change then they will have more of the good at every price --\> 'a' will increase + they will be less responsive to changes in price --\> curve becomes more inelastic.

Answer 82

Q_s = c + dP Q_s = Quantity supplied C = quantity that would be supplied if the price was zero. d = Slope

Answer 83

The value of 'c' and 'd' are influenced by changes in non-price determinants of supply. If the value of 'c' changes then there will be a shift in supply. If the value of 'd' changes then there will be a change in slope for the supply curve.

Answer 84

Example --\> demand and supply for aeroplane tickets Situation Increase in consumer income --\> increase in demand for foreign holidays ---\> demand for aeroplane tickets increase. Explanation Increase in demand --\> outward shift --\> initially price remains at the initial level of P₁ --\> results in a shortage/excess demand --\> upward pressure on price until... Quantity demanded equals quantity supplied.

Answer 85

Resources are constantly allocated and re-allocated in response to price. For example... Increase in price --\> due to increased demand --\> signal to producers to produce more --\> producers allocate more resources towards production. Hence, resources are allocated where they are needed/demanded the most by the buyers in an economy.

Answer 86

Community surplus --\> The sum of the consumer and producer surplus which shows the total benefit to society. Community surplus is maximised when demand and supply equal.

Answer 87

1. Using the diagram --\> look at the point of intersection and read the 'x' and 'y' values from the axis. 2. Simultaneous equations - Equate both equations as we assume that at equilibrium Q_D=Q_S . - Solve for P - Plug the value for P back into the equation to find out Q_D/Q_s .

Answer 88

No, the value of PED falls as we move down the demand curve. Logical --\> Lower priced products --\> more inelastic demand because consumers are less concerned about price.

Answer 89

1. **The number and closeness of substitutes** --\> More substitutes --\> more elastic + closer the substitutes --\> more elastic. 2. **The necessity of the product and how widely the product** **is** **defined** --\> 'How we define' --\> The elasticity of 'food' and 'meat' are different --\> food we need for survival but we have alternatives for meat. Remember that necessity changes between consumers. 3. **Time period** ---\> When there is a change in price it takes time for consumers to change their spending habits. Short term is more inelastic but as time continues it become more elastic.

Answer 90

A positive value for YED --\> Normal goods --\> Income increases --\> demand increases. A negative value for YED --\> Inferior good --\> income increases --\> demand decreases.

Answer 91

**Perfectly Inelastic** --\> In the very short run, some firms are not able to increase their supply straight away, regardless of the change in price. I.e. Rice **Perfectly elastic** --\> Infinite supply of good/service. Example: In international markets commodities is perfectly elastic as consumers are able to import the good from anywhere given that they pay the world price.

Answer 92

Elastic: Any straight line starting from the y-axis has a PES greater than one. Inelastic: Any straight line starting from the x-axis has a PES smaller than one. Unit elasticity: Any straight line starting from the origin

Answer 93

Commodities (raw materials) --\> Inelastic as they are necessities with few or no substitutes.

Answer 94

Commodities have an inelastic supply --\> For example, once a harvest has been collected it is going to be hard to increase supply quickly as one would have to wait

Answer 95

The combination of inelastic demand and inelastic supply means that any change in quantity leads to large swings in price.

Answer 96

Elastic demand --\> larger burden falls on producers relative to consumers. Revenue for producers drops Government revenue increases --\> equal to area of consumer + producer burden.

Answer 97

Inelastic demand --\> larger burden falls on consumers relative to producers. Revenue for producers drops Government revenue increases --\> equal to the area of consumer + producer burden.

Answer 98

1. PED = PES --\> Burden will be shared equally. 2. PED \> PES --\> Burden will be greater on producers than consumers. 3. PED \< PES --\> Burden will be greater on consumers than producers. Hence, based on this government tend to tax inelastic goods because demand only changes slightly (minimal impact on unemployment) and government revenue is larger.

Answer 99

1. Lower the price of essential goods --\> in the hope that consumption would increase. For example, Milk. 2. Guarantee the supply of products that the government thinks are necessary for the economy. (Goods that are essential --\> Coal for power/Industry that provides a lot of employment) 3. Enable producers to compete with overseas trade.

Answer 100

Producer revenue --\> 0DWQ₁ Consumer expenditure --\> 0P₁ZQ₁ Government subsidy --\> P₁DWZ

Answer 101

1. Producers can be limited using quotas --\> restricting supply so that it doesn't exceed the quantity demanded. 2. Governments artificially increase demand by advertising, restricting an imported product or buying up extra stocks themselves. Problems.... 1. Firms are less cost-conscious --\> inefficiency + waste of resources. 2. Firms produce more of the protected product instead of other products.

Answer 102

1. Tax the firm --\> increase private costs and shift MPC upwards so that it is closer to MSC. But... - Difficult to measure the cost of pollution. - Which firm is polluting and to what extent - Taxes do not stop polluting from taking place. 2. Legislate/ban polluting firms But.... - Fewer jobs --\> higher unemployment - Cost of setting and then policing --\> greater than pollution cost. 3. Government issues tradable emission permits --\> permits that allow pollution up to a certain level. But.... - Doesn't lead to a reduction in pollution once the limit has been set. - What pollution level is acceptable? - How does one measure pollution

Answer 103

1. Subsidize firms that offer training But... - Difficult to determine how much subsidy each firm deserves. - Opportunity cost 2. Provide vocational training through the state - Opportunity cost (high costs)

Answer 104

1. Ban good/service completely --\> make it illegal. But... - Government revenue would decrease - Unemployment in tobacco industry 2. Impose indirect tax But... - Addictive products are inelastic --\> little effect - Taxes are raised too much --\> consumers go to other markets. 3. Education about negative effects - High cost/opportunity cost - Effectiveness? --\> Evidence --\> Many teenager still smoke.

Answer 105

1. Government subsidise - High Cost --\> Opportunity cost ---\> developing countries unlikely to fund. 2. Advertising to encourage consumption - High cost --\> Only really effective in the long run 3. Pass laws insisting citizens to do things i.e. vaccinations. - Seen as an infringement of civil liberties.

Answer 106

1. Cap and trade systems National/international targets for emissions reduction/economic incentives to reduce emissions/etc. 2. Clean technologies Subsidizing the development of clean technology (Wind farm to generate electricity instead of coal)

Answer 107

This is when one party in an economic transaction has access to more information or better information than the other party. The market will fail to allocate efficiently if either party has incomplete or inaccurate information.

Answer 108

The act of dividing up the scarce resources of the economy to produce different goods and services to meet the needs and wants of society

Answer 109

Quasi-public goods have characteristics of both private and public goods, including partial excludability, partial rivalry, partial diminishability and partial rejectability.

Microeconomics Flashcards

(137 cards)