Theme 1.2 Flashcards

Question

What is total revenue?

Answer 1

This is the price per unit of a good multiplied by the quantity sold.

Answer 2

The total revenue of certain goods will be higher or lower at certain prices depending on its PED. Total revenue will be higher for an inelastic good when the price is higher, however for an elastic good total revenue will be higher at a lower price, where the quantity demanded is higher.

Answer 3

This is the revenue gained by a firm from selling one extra unit of output.

Answer 4

When at unit elasticity, total revenue has been maximised. When the marginal revenue is positive, demand is price elastic. When the margin revenue is negative, the demand is price inelastic.

Answer 5

This means that the demand is unit elasticity.

Answer 6

-Availability of substitutes. If there are many substitutes for the product it will likely have a demand that is price elastic. There will be more substitutes the more a good is defined. E.g Heinz ketchup has more substitutes than ketchup on a whole would. -Luxury and necessity goods. Luxury goods will be price elastic, where as necessity goods will be price inelastic. - % of income spent on good. If a high % of income is spent on the good, it’s demand will be price elastic. A small part of your income and the goods demand will be price inelastic. -Addictive/habit forming. Alcohol, tobacco etc will most likely have a demand that is price inelastic. -Time period. Most goods will be less elastic in demand in the short term than the long term. This is because in the long term people have more time to make changes meaning they no longer need to use the good which has gone up in price, so it’s demand falls. Brand image - Goods with a strong brand image are more likely to have goods which have a demand that is price inelastic.

Answer 7

This is the responsiveness of demand for a good or service to a change in real income. Real income is the spending power of money income - and amount of goods and services that can be purchased with the income.

Answer 8

Percentage change in demand for a good / percentage change in real income

Answer 9

In most cases the YED is positive. The two variables of income and demand move in the same direction. A rise in income causes a rise in the normal good demanded. Some economists say if the YED is >1, it is a luxury good. This is still a type of normal good. A good with a YED <1 is income inelastic of demand. A good with a YED = 1 means it has unit elasticity.

Answer 10

Usually, for inferior goods the YED would be negative, as the values move in opposite directions. This is because as incomes rise, people tend to demand higher-quality goods and substituting them in for the lower quality (inferior) goods. An example of an inferior good is public transport, as people will buy a car when they can afford the quality of a car.

Answer 11

The responsiveness of demand for good B to a change in price of good A. This is used to determine if goods are compliments or substitutes of each other.

Answer 12

% change in demand for good B/ % change in price for good A.

Answer 13

XED is positive for substitute goods, this is because the two variables for price and demand will move in the same direction. There is a positive gradient. An example is a rise in the price of coffee will cause a rise in the demand of tea.

Answer 14

XED is negative, as the two examples move in opposite directions. For example, as the cost of tennis rackets increases, the demand for tennis balls will decrease.

Answer 15

Zero. If they’re unrelated, a price increase in good A will have absolutely no affect on the demand of good B. For example, if microwaves increased in price, the demand for cigarettes would not change.

Answer 16

This is the quantity of a good or a service that firms are willing to sell at a given price and over a given time period.

Answer 17

This shows the quantity of a good or service that firms are willing to sell to a market over a range of different price levels in a given period of time. The supply curve shifts upwards from left to right, as when a firm raises output in the short run, they then face rising production costs and pass them onto consumers by charging higher prices. As well as this, as price rises, it encourages firms to supply more of a good to increase profits.

Answer 18

Higher prices may encourage firms to enter a market and so raise supply.

Answer 19

This movement along a supply curve is ONLY when there is a change in price. A rise in price causes an extension in supply, and a fall in price causes a contraction in supply.

Answer 20

-Improvement in technology - Change of labour costs - Change in capital costs - Change in transport costs - Discovery of new resources - Change in the number of firms in an industry - Change in laws surrounding the industry - Weather conditions (for for agricultural industries) - Change in taxation on the industry/land - Change in government subsidies.

Answer 21

This is the responsiveness of the supply of a good to a change in its price.

Answer 22

% change in supply of a good/ % change in price of a good.

Answer 23

>1, good is relatively price elastic = 1, unit elasticity <1, the good in price inelastic.

Answer 24

-Level of spare capacity. A large amount of spare capacity means that a firm can raise its production quickly. - State of the economy. In a recession there’s many unemployed resources and therefore a high level of spare capacity. - Level of stock of finished goods. A high level of stocks means a firm can quickly increases supply, so the supply is price elastic. An example of this is car companies, who stock cars. -Perishability of the product. Some goods cannot be stockpiled, e.g fruit, as it will go off. - Ease of entry to an industry - Time period in consideration. Many products will be supply inelastic in the short term, but will become more price elastic in the long term.

Answer 25

The time taken to explore and find as well as extracting certain minerals may take time to do. However, once they have started extracting them, they can be done efficiently and the supply will then become price elastic.

Answer 26

Price is determined through the interaction of demand and supply in a competitive market. An equilibrium price and quantity occurs when there’s a balance in the market. There’s no tendency for price or quantity to change. This point occurs at the point of intersection between the demand and supply curves.

Answer 27

This is the price where the quantity demanded equals the quantity supplied for a good or service in a market.

Answer 28

This is where the quantity supplied exceeds the quantity demanded for a good at the current market price.

Answer 29

This is where the quantity demanded exceeds the quantity supplied for a good at the current market price.

Answer 30

This was suggested by Adam Smith. It says the the price mechanism automatically eliminates surpluses and shortages of a good.

Answer 31

This is the exchange value for a good or a service.

Answer 32

This is the use of market forces to allocate resources in order to solve the economic problem of what, how and for whom to produce.

Answer 33

This is the way that price responds to the changes in demand and supply for a product or factor input, so that a new point of equilibrium can be reached. It is the principle method of allocating resources in a market economy.

Answer 34

- A rationing device. Resources are scarce, and their supply is limited. The price mechanism allocates these goods and services to those prepared to pay the most for them. In effect, price will rise or fall until equilibrium reached between - An incentive device. Rising prices tend to act as an incentive to firms to produce more of a good or service, since higher profits can be earned. These rising prices all allow firms to be able to cover the cost of increasing the output. - A signalling device. The price mechanism indicates changes in the conditions of demand and supply. Eg, an increase is demand for a good or service raises its price and encourages firms to expand their supply, where as a decrease in demand will cause firms to decrease their supply. As a result, fewer resources are are allocated to the production of a particular good or service.

Answer 35

This is the extra amount of money that consumers are prepared to pay for a good or service above what they actually pay. The utility of satisfaction gained from a good or service in excess of the amount payed for it.

Answer 36

This is the extra amount of money paid to producers above what they’re willing to accept to supply a good or service. It’s the extra earnings obtained by a producer above the minimum required for them to supply a good or a service.

Answer 37

An increase in demand for a good is likely to raise producer and consumer surplus.

Answer 38

A decrease in supply is likely to reduce consumer and producer surplus.

Answer 39

This is a tax imposed on goods or services supplied by businesses. This includes both specific and ad valorem taxes. The purpose of taxes is to raise funds in order to pay for government spending programmes.

Answer 40

This is levied directly on an individual or organisation. Direct taxes are generally paid on incomes, e.g income tax and corporation tax.

Answer 41

This is a fixed amount per unit of a good, e.g a litre of wine or packet of cigarettes.

Answer 42

This is charged as a percentage of the price of a good. E.g VAT is 20%.

Answer 43

They shift the supply curve to the left, this is because the price rises per unit in order to pay for the tax.

Answer 44

This is the distribution of tax paid between producers and consumers. It usually falls partly on consumers and party on the producers. This ratio will change depending on how elastic the demand and supply of the product is. For an inelastic demand product such as cigarettes, the firm can pass most the of the tax cost onto the consumers.

Answer 45

As most of the tax burden is placed on producers, it may also lead to a significant reduction in output and therefore also production. As a result, the government may be reluctant to place high indirect taxes on these goods and services.

Answer 46

This is a government grant to firms, which reduced the production costs and encourages an increase in output. These are often given to public transport companies in order to increase the amount of services. These directly benefit the producer, but also indirectly benefit the consumers who get reduced prices.

Answer 47

If the demand is price inelastic, then the market price falls by a relatively large amount, increasing the benefit to consumers. If the demand is price elastic, then there is less gain to consumers, but the quantity demanded increases, giving the producer a greater gain.

Answer 48

Economists often assume that consumers behave in a rational manner and would therefore allocate their income to buy goods and services which maximise their utility. Rational economic decision making comes from a deductive approach to the subject, where models are made based on how consumers are expected to behave and that their aim should be to maximise total utility. However, an inductive approach to economics starts by investigating how consumers ACTUALLY behave, and how consumers don’t always act in a rational way. They often aim to reach a satisfactory level of utility rather than maximising utility.

Answer 49

Consumers are influenced by the behaviour of others. For example, if some people start buying a share in a particular company, others may follow even if this causes it to become less of a bargain due to the price rising. This is due to a ‘herd’ mentality which is often displayed that consumers who arrive too late gain a little benefit. An example is the property market, where you will lose out if you buy at the peak of an economic cycle.

Answer 50

-Consumers are creatures of habit and prefer what they know and have, rather than risking something new with uncertainty. An example of this would be switching bank accounts to get lower charges, or energy supplier for lower prices. - This consumer inertia could also be explained through the difficulties involved in change, like mistakes in final bills and switchover as well as lots of time spent filling out forms. Many consumers prefer doing nothing. - Consumers also prefer thinking in the short term - they’re often unrealistic about their future behaviour. An example is overweight adults. They expect to change their habits and eat less in the near future, but they often don’t and remain overweight, which leads to long-term health issues. This is because the short term benefit is overvalued and the long term cost is under-estimated, as well as undervaluing the long term benefit received if you don’t get the short term benefit.

Answer 51

-Humans have limited processing skills - this means that they can struggle to work out what is actually the best buy for them. For example, bulk buying isn’t always the cheapest option but many people don’t realise and will buy the biggest packet anyway rather than multiple smaller packets. -Imperfect market knowledge - This often underlies the weakness that some consumers display in computation. Consumers may buy a good at a higher price than necessary or a good of lower quality since they do not have full market knowledge on which they base their decisions. As a result, some markets will operate inefficiently.

Theme 1.2 Flashcards

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