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A-level H2 Economics > topics 1-3: Central Economic Problem, DD and SS, Elasticity > Flashcards

topics 1-3: Central Economic Problem, DD and SS, Elasticity Flashcards

1
Q

Productive Efficiency

A

Economy produces maximum output for given amount of inputs. All goods and services produced should use the least cost combination of all available resources
- all points on PPC is productively efficient

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2
Q

Allocative efficiency

A

Society produces and consumes optimal mix of goods and services that maximizes it welfare
- only one combination of goods and services on PPC that is allocative efficient.

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3
Q

Decision-making process

A
  1. decision
  2. objective
  3. constraint
  4. MPB, MPC
  5. weigh MB with MC
  6. Review decision (intended/unintended consequences, internal/external changes)
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4
Q

Demand factors

A

EGYPT

  1. expectations of consumers
  2. government policies (direct taxes, direct subsidy)
  3. income/interest rates
  4. population/ prices of related goods [change in price of substitutes/ complements/final goods in the mkt for FOP)
  5. taste and preferences
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5
Q

Supply factors

A

WETPIGS

  1. Weather/season
  2. Expectations of producers
  3. Technology
  4. Prices of related goods (competitive/ joint supply)
  5. Input prices
  6. Government Policies (indirect tax, indirect subsidy)
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6
Q

Price Adjustment Process

A

Surplus:
At original price Po, quantity supplied Qs is more than quantity demanded Qd. The surplus exerts an downward pressure on price as producers seek to lower prices to clear inventories. With a lower price, consumers are more willing and able to consume and increase quantity demanded while profit-maximising producers reduce quantity supplied. Prices continue to drop until surplus QdQs is eliminated and equilibrium is reached again at E1

shortage: ^vice versa

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7
Q

Simultaneous shift in DD and SS

A
  • use PAP
  • concurrent increase in demand and supply will reinforce increase in equilibrium quantity but effect on eqm prices is indeterminate. depends on extent of increase in DD relative to SS (draw graph)
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8
Q

YED

A

degree of responsiveness of demand for good to given change in income of consumers.

  • inferior YED<0
  • necessity 0 1 (income elastic): increase in income leads to MTP increase in demand for good
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9
Q

PED

A

degree of responsiveness to qty demanded of a good to change in price of good itself

  • PED>1 (demand in price elastic): increase in price of goods leads to MTP fall in qty demanded
  • |PED|<1 (demand is price inelastic)
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10
Q

determinants of YED

A

degree of necessity

consumers income level

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11
Q

determinants of PED

A

TINS

  1. time period (more, more price elastic)
  2. proportion of household income spent on good (more, more price elastic)
  3. degree of necessity (more, more price inelastic)
  4. availability of close substitutes (the more substitutes, the more price elastic)
  5. broadness of definition
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12
Q

application of PED to producers

A

price inelastic demand: producers can increase price to raise total revenue - LTP fall in qty demanded. (gain in revenue - draw graph, fall in SS)

price elastic demand: producers can decrease price to raise total revenue - MTP increase in qty DD [but mot possible to continue reducing price as price should be above AC)

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13
Q

application of XED to producers

A

reduce substitutability of goods thru real/ perceived product differentiation

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14
Q

PES

A

degree of responsiveness of qty supplied of a good to given change in price of good itself

  • supply is price elastic PES>1
  • supply price inelastic 0
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15
Q

determinants of PES

A

MINTS

  1. factor mobility of FOP (more mobile, more elastic)
  2. level of stocks/ inventories + ease of keep stocks (highly perishable/long shelf life) (more, more elastic)
  3. nature of good (long gestation period VS manufactured that can be produced quickly)
  4. Time period (long run, more elastic) as FOP is variable (vs. fixed in supply)
  5. availability of spare capacity (more, more elastic) - utilise spare capacity
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16
Q

XED

A

degree of responsiveness of demand for good given change in price of related good (start point)
1. substitutes XED>0 (increase in P of one goods leads to increase in DD for other good)
strong sub XED>1: MTP increase in DD
2. complements XED<0 (^fall in DD for other good)
strong complement XED

17
Q

XED application

A

producers: joint promotion/ match price cut
govt: import tariffs

18
Q

change in demand/ supply: which elasticity concept to use

A 
change in DD:
due to...
1. income -> YED
2. price of sub/complement -> XED
3. other DD factors -> PES

change in SS -> PED

19
Q

shift in supply with diff PED values

A

fall in SS

dd is price inelastic: large rise in price, smaller fall in qty to eliminate shortage

20
Q

shift in DD with diff PES values

A

fall in DD

supply is price inelastic: larger fall in price, smaller fall in qty

A-level H2 Economics (10 decks)

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