Week 2 Flashcards
(23 cards)
what questions does scarcity raise
- what should be produced?
- how should they be produced?
- who gets them?
what is the market
consists of all buyers and sellers of that good or service
describe consumers aim
utility maximisation
describe producers aim
profit maximisation
describe the demand curve
downward sloping as when prices fall people will buy more (ceteris paribus)
what is the buyers reservation price
largest amount a consumer is willing to pay for a good, equal to benefit received from good
describe substitution effect
when price of a good rises, consumers switch to other similar good
describe income effect
when price of good rises, consumers become effectively poorer so purchase less
when will the demand curve not be downward sloping
if it is a giffen good, demand increases as price rises
- water diamond paradox
describe the supply curve
upward sloping, as the price increases sellers wish to sell more
describe sellers reservation price
minimum price required by a seller to sell a unit of a good
describe market equilibrium
when supply and demand meet, no pressure to change
describe excess demand
- below the market equilibrium
- upward pressure on prices
describe excess supply
- above the equilibrium
- downward pressure on prices
describe changes in demand
- change in quantity demanded refers to movement along given demand curve
- change in demand refers to entirely new demand curve
what are factors that shift demand
- substitute goods
- complementary goods
- changes in income (normal/inferior goods)
- preference changes
- changes in population
- changes in expectations of future prices
what are factors that shift supply
- any change that affects cost of production
- weather
- change in expectations
- change in no of sellers
describe PED
- denoted as ε
- measure of responsiveness of q demanded to changes in the price
- ε = % change in qd/ % change in price
what are the elasticities
- ε>1, elastic and fairly responsive
- ε<1, inelastic and fairly unresponsive
- ε=1, unitary
what is arc elasticity
the price elasticity of demand between two points on the demand curve
what is point price elasticity
a measure of the elasticity of demand at a particular point on the demand curve
- ε = change in q/q divided by change in price/p
- ε = 1/slope x p/q
- the slope can be worked out by the change in q/change in p
how to work out total revenue
TR = P X Q
what are the determinants of ε
- availability of close substitutes
- share of the budget
- time to adjust (SR v LR)
- habitual behaviour
