Economics

Draw a diagram to show a subsidy, and analyze the impacts of a subsidy on market outcomes.

A graph with subsidy shifts the supply curve to the right, helping producers produce more at every price. Subsidy would increase the total supply quantity and would lower the price for consumers and suppliers. However, in this case, the government loses money by funding companies/firms. There is an opportunity cost: they could be using the money on something else such as infrastructure. This would also give an unfair advantage to firms receiving subsidies when compared to companies over seas.

Examine the implications for producers and for the economy of a relatively low YED for primary products, a relatively higher YED for manufactured products and an even higher YED for services.

A low YED for primary products means that even when the economy is in recession, they will still be purchased; as it is likely they are inferior or necessity goods. Producers of primary products would have relatively stable revenue. This also makes sense because primary products are more widely defined and therefore have fewer substitutes. As a result, the demand for primary products is more inelastic. A higher YED for manufactured products would mean that producers of these products would make more money when the economy is doing well, because consumers can afford manufactured products. However, during a recession producers of manufactured products would not do as well and might lay off workers to reduce costs of production. This would negatively impact the economy, as unemployment rates would rise. An even higher YED for services would make services a luxury good. Similar to producers of manufactured goods, providers of services would experience great increase in revenue if people's incomes were to increase, but also a great drop in revenue if people's incomes were to decrease.

Distinguish between movements along the supply curve and shifts of the supply curve.

A movement along the supply curve means that there was a change in price. Shifts of the supply curve means that a non-price determinant of supply was present.

Explain why scarcity necessitates choices that answer the "What to produce?" question.

Because there is limited resources, choices must be made to be as efficient as one can be in a society when answering "What to produce?".

Discuss the consequences of imposing an indirect tax on the stakeholders in a market, including consumers, producers and the government.

Consumers: Higher price of the products overall, if the demand for the product is inelastic the price is higher; if the demand for the product is elastic the price is lower than that of the price of the product when its demand is inelastic. Producers: Overall, imposing the tax will decrease total quantity supplied because of increased price on supplies. Furthermore, unemployment rates may rise as less supply would be needed. Government: The government will gain revenue by imposing an indirect tax.

Examine the implications of XED for businesses if prices of substitutes or complements change.

Firms need to be aware of the XED for the products that they produce. For instance, if the price of a good B decreases then the quantity demanded of a substitute good A could also decrease. This means that firm A would need to be come up with a way to differentiate their product from good B or also lower the price. On the other hand, if the price of a good C decreases then the quantity demanded of a complement good D might increase, since consumers' demand for good C would increase and would also buy more of good D, the complement.

Describe the relationship between an individual consumer's demand and market demand.

Many individual consumer's demand adds up to become the market demand, which is the total goods and services bought and sold in a community.

Explain, using diagrams, how demand and supply interact to produce market equilibrium.

Market equilibrium is where supply and demand meets. When either a supply curve shifts to the left or a demand curve shifts to the right, there is an increase in price. When either a supply curve shifts to the right or a demand curve shifts to the left, there is a decrease in price. When there is movement along either the supply or the demand curve, the price will increase or decrease back to its original equilibrium due to excess demand or excess supply.

Explain, using diagrams, that price has a signaling function and an incentive function, which result in a reallocation of resources when prices change as a result of a change in demand or supply conditions.

Price has a signaling function and an incentive function, because when price goes up, sellers are more willing to make more products while consumers are less willing to buy the product because of its expensiveness. If price goes down, sellers are less willing to make products while consumers are more willing to buy products. Rise in price gives an incentive for the sellers to make more of the product.

Draw diagrams to show specific and ad valorem taxes, and analyse their impacts on market outcomes.

See below. The supply curve with specific tax shifts up/left and is parallel to the original supply curve. With a specific tax, downsizing in companies will occur, as well as increased prices for the consumers. The government will gain revenue. The supply curve with ad valorem taxes creates a steeper sloped supply curve compared to the original curve. With an Ad Valorem price, the same effect of specific tax will take place.

Explain the determinants of PED, including the number and closeness of substitutes, the degree of necessity, time and the proportion of income spent on the good.

The determinants of PED include the number and closeness of substitutes (for instance if a Subway store opens next to another sandwich shop, the demand for the sandwiches would become more elastic as there is a close substitute), the necessity of the good (a necessity good like toilet paper would have relatively inelastic demand as consumers are always in need of it and are not likely to stop buying it, even if the price increases), how widely the good is defined (tissue paper in general would have a more inelastic demand than a particular brand like Tempo), the amount of income spent of the good (consumers' willingness to buy a car if the price increased could be affected far more than their willingness to buy tomatoes that increased in price) and the time period (if the price of gasoline increased and remained that way for a long time, consumers would find an alternative source of transport or adjust to the price change).

Explain the determinants of PES, including time, mobility of factors of production, unused capacity and ability to store stocks.

The determinants of PES are mainly time (the shorter the time available for producers to increase production, the more difficult it is an the more inelastic the PES of that good becomes), mobility of factors of production (for instance, if the production of a product requires highly specialized workers, PES for that product becomes more inelastic as it is difficult to find more highly specialized workers), unused capacity (if there are extra capital goods, like an extra oven that is not used frequently in a restaurant's kitchen, it is easier to increase production, making the PES of that product more elastic) and ability to store stocks (perishable goods like fresh fruits cannot be stored for a long period of time; also if all the warehouses in which products are stored are full, stock cannot be stored if production is increased, rendering the product's PES more inelastic).

Explain how factors including changes in costs of factors of production (land, labour, capital and entrepreneurship), technology, prices of related goods (joint/competitive supply), expectations, indirect taxes and subsidies and the number of firms in the market can change supply.

The non-price determinants of supply as listed above shifts the supply curve either to the right or the left.

Explain that a supply curve represents the relationship between the price and the quantity supplied of a product, ceteris paribus.

The supply curve has a positive slope thus when price increases quantity supplied also increases.

Explain why governments impose price ceilings, and describe examples of price ceilings, including food price controls and rent controls.

To protect consumers to ensure low-cost food for the poor. Food price controls - Lowering price of food because they are a necessity good, to ensure that the poor are getting the food. Rent controls - Lowering price of rents because they are a necessity good, to ensure that the poor have shelter.

Explain why governments impose price floors, and describe examples of price floors, including price support for agricultural products and minimum wages.

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Analyze, using diagrams and with reference to excess demand or excess supply, how changes in the determinants of demand and/or supply result in a new market equilibrium.

A change in the determinants of demand and/or supply shifts the supply/demand curve to the left or to the right causing either an upward or a downward pressure on price.

Outline the meaning of the term market.

A market is where buyers and sellers come together to carry out an economic transaction. Goods or services exchanged for money; Online markets where money transfers or credit cards are used.

Explain the positive causal relationship between price and quantity supplied.

As price increases, quantity supplied increases.

Explain that the best allocation of resources from society's point of view is at competitive market equilibrium, where social (community) surplus (consumer surplus and producer surplus) is maximized (marginal benefit = marginal cost).

At market equilibrium, the consumer surplus and the producer surplus is the same thus customers and sellers make most profit. This is where the market is socially efficient.

Explain the concept of consumer surplus.

Consumer surplus is the extra satisfaction (or utility) gained by consumers from paying a price that is lower than that which they are prepared to pay.

Discuss the consequences of imposing a price ceiling on the stakeholders in a market, including consumers, producers and the Government.

Consumers: Price would decrease, thus it will help poor consumers consume (necessity) goods. Producers: There would be fewer incentives to produce because of decreased price. Unemployment is possible. Governments: To resolve the excess demand, they would have to: 1. Offer subsidies 2. Produce the product themselves 3. Release stocks of the products (If possible)

Discuss the consequences of providing a subsidy on the stakeholders in a market, including consumers, producers and the government.

Consumers: They would be able to consume products at a lower price. Producers: They would be able to produce products at a lower price. Government: They would have to fund money towards companies/firms which have an opportunity cost for doing something else. Producers in other countries: Producers in other countries would be harmed if they are not receiving the same amount of subsidy as the d

Outline the concept of cross price elasticity of demand, understand that it involves responsiveness of demand for one good ( and hence a shifting demand curve) to a change in the price of another good.

Cross price elasticity of demand involves responsiveness of demand for one good (and hence a shifting demand curve) to a change in the price of another good.

Explain, using diagrams and PES values, the concepts of elastic supply, inelastic supply, unit elastic supply, perfectly elastic supply and perfectly inelastic supply.

Elastic supply is when the value of PES is greater than 1 and less than infinity. This means when a product that has elastic supply experiences a change in the price, it leads to a greater than proportionate change in the quantity supplied of it. For instance, newspapers have a fairly elastic supply, meaning that production can increase significantly over a short period of time in response to rising prices. This can be seen from diagram (d) since any straight-line supply curve starting from the y-axis has a PES greater than 1. Inelastic supply is when the value of PES is greater than 0 and less than 1. This means when a product that has inelastic supply experiences a change in the price, it leads to a less than proportionate change in the quantity supplied of it. For instance, airplanes have a fairly inelastic supply because, if prices rise, it is difficult to significantly increase production over a short period of time due to the large amount of capital goods employed. This can be seen from diagram (e) since any straight-line supply curve starting from the x-axis has a PES value less than 1. Unit elastic supply is when the value of PES equal to 1. This means when a product that has unit elastic supply experiences a change in the price, it leads to a proportionate change in the quantity supplied of it. This can be seen from diagram (c) since any straight-line supply curve starting from the origin has a PES value of 1. Perfectly elastic supply is when the value of PES is equal to infinity. This means that when a product that has perfectly elastic supply experiences a change in the price, it leads to an infinite change in the quantity supplied. As a result the percentage change in quantity supplied would be infinity and so would the numerator in the PES equation. Since infinity divided by anything is infinity, the PES value will be infinity. This is a very theoretical situation best seen from diagram (b). As it is a horizontal line, at no price apart from the y-intercept can there be any production whatsoever. Perfectly inelastic supply is when the value of PES is equal to 0. This means that when a product that has perfectly inelastic supply experiences a change in the price, it leads to no change in the quantity supplied. As a result the percentage change in quantity supplied would be zero and so would the numerator in the PES equation. Since 0 divided by anything is 0, the PES value will be 0. This is a very theoretical situation but some products are very close to having a PES of 0. Crops that are seasonal can experience hardly any increase in production (even if the price rises) once the crops have been planted. This can be seen from diagram (a) since it is a vertical line, so that at any price, the quantity supplied remains constant.

Examine the role of PED for firms in making decisions regarding price changes and their effect on total revenue.

Firms producing inelastic products can raise the price of their product so that they maximize revenue. Of course, governments might tax inelastic goods so that consumers can still have access to necessary goods without spending unreasonable amounts and the firm would not find it in its interests to raise the price too much, as very few products are perfectly inelastic. Firms producing elastic products would have to careful in how much they raise the price of their product, however lowering the price might cause such an increase in demand that the total revenue would be maximized.

Explain why governments impose indirect (excise) taxes.

Governments impose indirect taxes to gain revenue from a good/service. The tax is usually imposed on goods with inelastic demands so that most of the tax burden is on the consumer.

Explain why governments provide subsidies, and describe examples of subsidies.

Governments provide subsidies in hopes to increase the consumption of a certain good by lowering its prices, to guarantee the supply of products that the government thinks are necessary for the economy, and to enable producers to compete with overseas trade.

Examine the significance of PED for government in relation to indirect taxes.

If the PED of a product is quite low, so that consumers would buy the product even after a significant increase in price (e.g. milk since it is a necessary ingredient as well as drunk on its own), the government might indirectly tax the good so that the good would still be accessible to consumers would could not afford paying a high price for everyday goods.

Explain how factors including changes in income (in the cases of normal and inferior goods), taste, prices of related goods, (in the cases of substitutes and complements) and demographic changes may change demand.

If there were increased income, demand would increase for normal goods. If a product were considered to be inferior, there'd be decrease in demand since people would start buying higher priced brands instead of inferior goods. If there were decreased income, demand would decrease for normal goods. If a product were considered to be inferior, there'd be increase in demand since people would start buying inferior brands instead of normal goods. If everyone's taste changed on a certain product, the demand would increase if everyone started to like that certain product possibly because of advertisement campaigns. If everyone's taste changed on a certain product, the demand would decrease if everyone started to hate that certain product possibly because of consistency. If prices of related goods decreases, the demand for the substitute would decrease since more people would buy the related good because it's cheaper. For complement goods, if prices of related goods decrease, the demand for the related goods will increase thus resulting in increased demand for the complements. If prices of related goods increase, the demand for the substitute would increase since more people would buy the substitute good because it's cheaper. For complement goods, if prices of related goods increase, the demand for the related goods will decrease thus resulting in decreased demand for the complements. All of these factors may shift the demand curve to the left or the right, increasing quantity demanded when shifted right and decreasing quantity demanded when shifted left.

Outline the concept of income elasticity of demand, understanding that it involves responsiveness of demand (and hence a shifting demand curve) to a change in income.

Income elasticity of demand involves responsiveness of demand (and hence a shifting demand curve) to a change in income.

Explain why PED varies along a straight-line demand curve and is not represented by the slope of the demand curve.

It is logical that the PED falls going down a demand curve. This is because low-priced products have a more inelastic demand than high-priced products, because consumers are less concerned when the price of a relatively inexpensive product rises than when the price of a relatively expensive product rises. It is obvious that the slope does not represent PED because there is no change in a linear demand curve.

Describe the relationship between an individual producer's supply and market supply.

Many individual producers' supply adds up to become the market supply.

Distinguish between movements along the demand curve and shifts of the demand curve.

Movements along the demand curve means that there was a change in, and shifts of the demand curve mean that there were non-price determinants of demand such as income and substitutes.

Calculate PED using the following equation.

PED = percentage change in quantity demanded /percentage change in price (Example $5 to $4.50, and 200,000 to 300,000. Remember, (b-a)/a *100 = % change. & PED value is treated as if it were positive although its value is usually negative.)

Calculate PES using the following equation.

PES = percentage change in quantity supplied /percentage change in price (Example: Price +2%, Quantity +4%) 4%/2% = 2, PES is elastic

Explain the concept of price elasticity of demand, understanding that it involves responsiveness of quantity demanded to a change in price,and along a given demand curve.

Price elasticity of demand involves responsiveness of quantity demanded to a change in price, along a given demand curve.

Explain the concept of price elasticity of supply, understanding that it involves responsiveness of quantity supplied to a change in price along a given supply curve.

Price elasticity of supply involves responsiveness of quantity supplied to a change in price along a given supply curve.

Explain, using diagrams and PED values, the concepts of price elastic demand, price inelastic demand, unit elastic demand, perfectly elastic demand and perfectly inelastic demand.

Price elastic demand can be seen in the top middle diagram above where the slope is quite gentle and PED is greater 1 but less than infinity. This means that a change in the price of a product leads to a greater than proportionate change in quantity demanded of it. For instance, if the price of an elastic product is raised, the quantity demanded will decrease so much so that the total revenue generated by the producers would also decrease, despite making more money per product. Price inelastic demand can be seen in the bottom left diagram above where the slope is steep and PED is greater than 0 but less than 1. This means that a change in the price of a product leads to a proportionally smaller change in the quantity demanded of it. For instance, if the price of an inelastic product is raised, the change in the quantity demanded will be comparatively so small that the total revenue generated by the producers would increase. Unit elastic demand can be seen in the bottom right diagram above (it should be a curve) where the graph is a curve so that PED is 1. This means that a change in the price of a product leads to a perfectly proportional change in the quantity demanded of it. For instance, if the price of a unit elastic product is raised, the quantity demanded will fall by the same percentage so that the producer generates the same amount of total revenue as before the price change. Perfectly elastic demand can be seen in the top left diagram above where the line is horizontal and PED is infinity. This means than even the slightest price change would cause demand to drop to 0. Of course this is a very theoretical situation and while PED for certain products may approach infinity (e.g. a very specific, not widely known brand of chocolate because consumers would switch to another brand if the price increased), no product is perfectly elastic. Perfectly inelastic demand can be seen in the top right diagram above where the line is vertical and PED is 0. This means that any price change would not affect the quantity demanded in the slightest. Of course this is a very theoretical situation and while PED for certain products may approach 0 (e.g. insulin because consumers who needed it would die if they didn't buy it), no product is perfectly elastic.

Explain the concept of producer surplus.

Producer surplus is the excess of actual earnings that a producer makes from a given quantity of output, over and above the amount the producer would be prepared to accept for that output.

Distinguish between specific and ad valorem taxes.

Specific tax is a tax which has a fixed value for all quantity supplied. On the contrary, ad valorem taxes are percentage taxes that are imposed for every quantity supplied.

Explain why the PES for primary commodities is relatively low and the PES for manufactured products is relatively high.

Supply for primary commodities tends to be inelastic because they cannot suddenly change how much is planted. The factors of production, mainly land, are not as mobile. Supply for manufactured goods, on the other hand, tends to be elastic because it is easier to change production in a factory or shop.

Explain why the PED for many primary commodities is relatively low and the PED for manufactured products is relatively high.

The PED for many primary commodities is low (meaning that the demand for primary commodities is relatively inelastic) because there is a higher necessity of them since they often contribute to making more manufactured products (that have an elastic demand) and also because primary commodities tend to be more widely defined than manufactured products. For instance, there is little differentiation that can be made between two different harvests of coffee beans in comparison to the vast differences between two different types of phones.

Explain, using YED values, the concepts of inferior good, normal good, necessity (income inelastic) good, and luxury (income elastic) good.

The YED value of an inferior good is negative (as income rises, consumers are likely to decrease demand of cheap substitutes), the YED value of a normal good is positive (as income rises, consumers are able to increase purchase of these goods). Within normal goods, necessity goods have a YED value between 0 and 1 (even if income rises, consumers will only increase purchase of necessity goods to a certain extent), while luxury goods have a YED value greater than 1 (the purchase of these goods will generally always increase with increasing income).

Explain that a demand curve represents the relationship between the price and the quantity demanded of a product, ceteris paribus.

The demand curve represents the relationship between the price and the quantity demanded since it has a negative slope, increasing the quantity demanded while decreasing the price.

Explain why choice results in an opportunity cost.

When one makes a choice, there is always another option that cannot be achieved because of the decision one has made.

Explain the negative causal relationship between price and quantity demanded.

When price decreases, quantity demanded increases.

Calculate XED using the following equation.

XED = percentage change in quantity demanded of good x /percentage change in price of good y. (Example: Quantity + 5%, Price - 10%) XED = 5%/-10% = -0.5% Substitute goods have a positive value of XED and complementary goods have a negative value of XED. The (absolute) value of XED depends on the closeness of the relationship between two goods. This means the two products from the example that have an XED of -0.5% are remote complements.

Calculate YED using the following equation.

YED = percentage change in quantity demanded /percentage change in income (Example: Income rises from 50,000 to 55,000, demand rises 7%) YED = 7%/10% = 0.7

Draw a diagram to show a price ceiling, and analyse the impacts of a price ceiling on market outcomes.

With a price ceiling, quantity demanded would increase as quantity supplied decreases creating excess demand. Also, the price would increase to maximum price or higher.

Examine the possible consequences of a price ceiling, including shortages, inefficient resource allocation, welfare impacts, underground parallel markets and non-price rationing mechanisms.

With a price ceiling, there would be excess demand, and thus black markets could arise. The sellers in the black market would take advantage of the excess demand and sell the products at a higher price than the price ceiling.