Test 2 - Elasticity Onwards Flashcards
(20 cards)
What does PED mean?
Price elasticity of demand
What is the formula for PED?
Percentage change in quantity demanded over the percentage change in price
What type of demand would a PED of between 0 to -1 be?
Inelastic demand
What type of demand would a PED of -1 be?
Unitary demand
What type of demand would a PED of between -1 and infinity be?
Elastic demand
Inelastic or elastic: the price of butter is increased by 20% resulting in a 10% fall in the quantity demanded
= 0.5 therefore it must be Inelastic
What qualities will cause goods to have a more inelastic demand?
- It has no close subsidies
- it is very cheap
- it is a necessary good
- it is addictive
How do you calculate total revenue?
Price X no. of sales
Will a inelastic demand graph have a steeper gradient line or shallower?
Steeper
Will a elastic demand graph have a steeper gradient line or shallower?
Shallower
If a good is inelastic should you raise the price in order to get more revenue or not?
You should increase the price as goods which are inelastic experience a increase in total revenue following a price increase
If a good is elastic should you raise the price in order to get more revenue or not?
Do not raise the price as elastic goods experience a decrease in total revenue following a price increase
What is a subsidy?
It is money supplied by the government in order to make products cheaper, to encourage consumption if it is beneficial, to encourage there development and production
What are indirect taxes?
Indirect taxes are taxes added onto goods by the government in order to restrict supply, to discourage the consumption because they are harmful, to reduce their production and to conserve natural resources
What is a merit good?
A merit good is a good that is beneficial to consumers e.g health care and public parks
What is a demerit good?
A demerit good is a good that is harmful to consumers e.g tobacco and alcohol
What are private costs?
A financial cost, such as the purchase of a new computer or the loss of satisfaction, incurred by the decision maker or firm responsible for the action or decision that caused it
What is a external cost?
A cost arising from a negative externality, such as pollution, that is incurred by other people or organizations but not by those responsible for the action or decision that caused it
What are the different types of market failure?
Information failure - happens when suppliers of goods and services in a market know things that consumers do not
Adverse selection - happens when the expected value of a transaction is known more accurately by the buyer or the seller e.g healthcare
What can governments do in markets?
They can set laws, taxes, subsidies and protect consumers
