Econ Final Term 1

Explain that when consumer and producer surplus are maximized, allocative efficiency is achieved.

Consumer Surplus - when consumer purchases good for below the original price they were willing to pay for it Producer Surplus - when producer sells good/service for more than the lowest price they were willing to sell it for When MB=MC/When the sum of consumer and producer surplus is maximized, allocative efficiency (competitive market equilibrium) is achieved

Explain the concepts of consumer surplus and producer surplus in the market for air travel.

Consumer surplus in this situation refers to the price of plane tickets. Producer surplus is selling out the whole plane each time (this is why some companies overbook flights). If there is an empty seat on the plane, that is dead weight loss.

Discuss the possible consequences of the imposition of an indirect tax on cigarettes for the different stakeholders in the market

Firstly, for consumers, the rise in price from the imposition of the tax, reduces their quantity demanded, as some consumers do not value cigarettes at this higher price. Secondly, for producers, the tax leads to a decrease in quantity sold, and an increase in costs, as the producers internalise the cost of the tax, which raises their overall production costs. Finally, the government benefits, as it captures the indirect tax, i.e. receive the revenue of the tax. (workers and society are also negatively affected) https://www.mytutor.co.uk/answers/25184/IB/Economics/Discuss-the-possible-consequences-of-the-imposition-of-an-indirect-tax-on-cigarettes-for-the-different-stakeholders-in-the-market/

Discuss the consequences for the government and for consumers of subsidizing the price of admission to museums

Good for consumers because the subsidization of museum admission price means entry is usually free. Government would lose money

Distinguish between the concepts of YED and XED

In conclusion, both income elasticity of demand and cross price elasticity of demand focus on the responsiveness of demand but YED revolves around changes in income whereas XED revolves around changes in the price of other goods and services. https://www.mytutor.co.uk/answers/25177/IB/Economics/Distinguish-between-the-concepts-of-income-elasticity-of-demand-YED-and-cross-price-elasticity-of-demand-XED/

Distinguish between the effect on an increase in income and an increase in the price of a good on the demand for the good

Increase of income means demand for normal goods, decrease for inferior goods. Increase of price would mean a decrease for demand of normal goods, and for inferior goods.

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

Inelastic - Decrease in price means decrease in TR Elastic - Decrease in price means increase in TR

Explain why the PED for primary commodities tends to be relatively low while the PED for manufactured products tends to be relatively high.

Low PED - Inelastic Good. High PED - Elastic Good. Determinants - Luxury vs Necessity: Luxury Goods are more Elastic. # of Substitutes available: Goods with many Substitutes are more Elastic. Price as % of Income: Goods with prices that are a large percent of Income are more Elastic. Time: The more time to make a decision, the more Elastic that good becomes.

'The YED for primary products tends to be lower than that for manufactured goods and services.' Examine the implications for this for producers and for the economy as a whole.

Normal Goods - Goods whose demands increase as income level increases (Luxury Cars, Expensive Clothes, Private Universities) YED IS POSITIVE Inferior Goods - Goods whose demands decrease as income levels rise (Ramen Noodles, McDonalds, Used Cars) YED IS NEGATIVE This allows producers to understand which products gain the highest demand among different communities... YED has an important effect on resource allocation within an economy. (http://textbook.stpauls.br/Microeconomics/page_94.htm)

Explain three determinants for PED

SUBSTITUTES - (Few Substitutes means Elastic) PROPORTION of INCOME - (Goods with prices that are a large percent of Income are more Elastic) LUXURY vs NECESSITY - (Luxury Goods are more Elastic) Addiction - (High Addiction means its more Inelastic) Time - (The more time to make a decision, the more Elastic that good becomes) This is a good video to explain it deeper: https://www.khanacademy.org/economics-finance-domain/ap-microeconomics/unit-2-supply-and-demnd/23/v/determinants-of-price-elasticity-of-demand-ap-microeconomics-khan-academy

Explain why a government might decide to impose an indirect tax on the consumption of cigarettes

Since cigarettes are addictive and therefore INELASTIC, the government placing a tax on them wouldn't heavily affect demand

Discuss the consequences of providing subsidies for goods such as agricultural products

Subsidies tend to reduce incentives for producers to boost efficiency and shift their focus from crops to farming subsidies. As a result, many end up doing less with more. https://www.theguardian.com/sustainable-business/agricultural-subsidies-reform-government-support

Explain the view that an increase in price will lead to a decrease in the quantity demanded while an increase in demand will lead to an increase in price.

Supply and Demand curve graph

Discuss the significance of price elasticity of demand for government intervention in markets.

The price elasticity of demand tells you how sensitive consumers are to a change in the price of a good. Therefore the more sensitive (elastic) the demand is, the more the tax will effect the demand. So, if the good has a relatively inelastic demand then a tax would cause relatively less percentage change in demand compared to the percentage change in price. This is the case for goods such as cigarettes, as they are addictive the demand is inelastic hence a tax would only marginally reduce demand. Thus if the aim of the government was to reduce the amount consuming cigarettes the PED would allow the government to realise that they should undertake different methods to deter consumers from purchasing cigarettes. Hence the PED helps the government foresee the result of the tax they would be imposing. https://www.mytutor.co.uk/answers/8615/GCSE/Economics/Why-should-the-government-consider-the-price-elasticity-of-demand-when-imposing-tax-on-goods/

Discuss the view that a free market at competitive equilibrium leads to the most efficient allocation of resources from a society's point of view.

The quantity supplied by producers is the quantity demanded by consumers, meaning there is no waste

To what extent might the concepts of YED and XED be of significance for business organizations?

They can be used to determine the change in Qd if the business changes price(XED) or if there is a change in Income(YED).

Discuss the consequences of the introduction of an indirect tax on gasoline (petrol) for consumers, producers and the government.

This is pretty much the same thing as what we did with the Flipgrid videos. It is bad for consumers bc they pay more, and its good for the government bc they make more money

The YED for primary commodities tends to be relatively low, while the YED for manufactured goods and services tend to be higher. Examine the likely effects of this for individual producers and for the economy as a whole

This signals to producers what they should produce for people of different levels of income. The economy is effected heavily by income due to this concept

Explain two reasons why governments might subsidize basic foodstuffs such as wheat

allocation of resources help make necessities more affordable

Evaluate the consequences of rising incomes of service sector producers (such as hotels) and primary sector producers (such as rice farmers)

https://quizlet.com/257893940/flashcards

A fall in income leads to a fall in demand for a good. Explain this relationship between the demand for a good and consumer income

it is a negative causal relationship because a fall in income would lead to a drop in demand for a normal good.

Explain why governments provide subsidies for some goods and services

lowers the price of essential goods guarantees a supply of necessity products enables local producers to compete with foreign competition

Discuss the significance of price elasticity of demand for firms that produce luxury cars and firms that produce less expensive cars.

luxury cars would be more elastic

Explain why an increase in incomes over time may lead to an increase in demand for some goods but a decrease in demand for other goods

normal and inferior goods