Economics (Micro)- How Markets Work (1.2)

1.2.6 Price determination d) The use of supply and demand diagrams to show how shifts in demand and supply curves cause the equilibrium price and quantity to change in real-world situations

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1.2.2 Demand a) The distinction between movements along a demand curve and shifts of a demand curve

Movement- Changes in price causes movement along the demand curve. Movement up the curve is called a contraction. Movement down the curve is called an extension. Shifts- Changes in quantity (but not price) causes a shift in the demand curve

1.2.4 Supply a) The distinction between movements along a supply curve and shifts of a supply curve

Movement- Changes in price causes movement along the supply curve. Shifts- Changes in anything other than price causes a shift in the demand curve

1.2.5 Elasticity of supply a) Understanding of price elasticity of supply

The sensitivity of a change in quantity supplied to a change in price

1.2.2 The Law of Demand

At higher prices, quantity demanded is less (and vice-versa)

1.2.3 Price, income and cross elasticities of demand d) The factors influencing PED

Availability of substitutes (fewer substitutes means less elastic) Branding and loyalty (greater brand loyalty means less elastic) luxury vs necessity Proportion of income spent on goods (higher proportion means less elastic Can the purchase be postponed (if it can't it is less elastic) Addictive goods are less elastic Regularity of purchase (irregular means less elastic) Limited edition means less elastic

1.2.4 Why do supply curves slope up?

Average production costs decrease as you produce more When the price is higher, firms can make more profit so produce a higher quantity

1.2.7 Price mechanism b) The price mechanism in the context of different types of markets, including local, national and global markets

Certain goods and services operate on a NATIONAL level within the UK. The price mechanism will still work the same but on this scale the implications of it can be much greater and efficient outcomes harder to achieve. Certain goods and services operate on a GLOBAL market. The price mechanism will still play the same role but the scale of the G/S means it is influenced by all countries which can limit the UK's ability to control it.

1.2.2 Demand b) The factors that may cause a shift in the demand curve (the conditions of demand)

Change in quantity demanded is caused by: Population Advertising Substitutes Income Fashion Interest rates Complementary

1.2.8 Consumer and producer surplus a) The distinction between consumer and producer surplus

Consumer Surplus is the difference between how much buyers are prepared to pay for a good and what they actually pay Producer Surplus is the difference between what producers are willing and able to supply a good for and the price they actually receive

1.2.9 Indirect taxes and subsidies -the impact of subsidies on consumers, producers and government

Consumers- Cheaper healthy products so higher consumption of them Producers- Lower production costs so higher supply of products Government- Lower healthcare and environmental costs, higher governmental expenditure costs

1.2.9 Indirect taxes and subsidies -the impact of indirect taxes on consumers, producers and government

Consumers- Redistribution of wealth, reduces unhealthy consumption, Less disposable income so less healthy consumption as well Producers- Higher costs of production Government- Revenue increases so more government spending, reduces healthcare costs

1.2.3 Price, income and cross elasticities of demand Numbers

Demand curves always slope downwards so PED is always negative. Make Sure To Remember To Work With Percentages, Not Absolute Numbers Remember that the elasticity from A to B is not the same as from B to A PED between 0 and -1 is inelastic so bigger than -1 is inelastic PED smaller than -1 is elastic

1.2.3 Price, income and cross elasticities of demand d) The factors influencing YED

Income Substitutions available Type of good (inferior, normal. luxury or necessity)

1.2.3 Price, income and cross elasticities of demand c) Interpret numerical values of -income elasticity of demand: inferior, normal and luxury goods; relatively elastic and relatively inelastic

If YED is negative, it is an inferior good If YED is positive, it is a normal good When YED < 1, it is a necessity and as income increases, consumption increases by a proportional amount which is less than the increase in income When YED > 1, it is a luxuary

1.2.3 Price, income and cross elasticities of demand c) Interpret numerical values of -cross elasticity of demand: substitutes, complementary and unrelated goods

If the XED is positive, it means that the two goods are substitutes as if one becomes more expensive, demand for the other increases If XED is negative, it means that the two goods are compliments as if one becomes more expensive, the other is demanded less

1.2.6 Price determination b) The use of supply and demand diagrams to depict excess supply and excess demand

If the price is too high, there is a surplus. If the price is too low, there is a deficit

1.2.6 Price determination c) The operation of market forces to eliminate excess demand and excess supply

If there is a deficit, rationing occurs and the price goes up so only the people who value the item the most get it so the equilibrium shifts up If there is a surplus, suppliers drop their prices in order to sell so the equilibrium shifts down

1.2.2 Why do demand curves slope down?

Income effect: at a higher price, consumers will have less money left over so will buy less of the product Substitute effect: at a higher price consumers will find cheaper products relatively more attractive and may choose to buy those instead Diminishing marginal utility: as you buy one more, you get less utility from it than last time so you are less likely to buy another as you put less of a value and price on that next unit

1.2.9 Indirect taxes and subsidies a) Supply and demand analysis, elasticities: Definitions and examples -Indirect Tax

Indirect Tax- A tax on consumption which raises revenue and reduces consumption. They are levied by the government. It is a tax on expenditure, levied on the selling price of a good or service and raises the production costs for a firm. It shifts supply to the left so prices rise and output falls. E.G VAT or cigarette tax

1.2.5 Elasticity of supply c) Interpret numerical values of price elasticity of supply: perfectly and relatively elastic, and perfectly and relatively inelastic

It is always positive as the supply curve slopes up If PES = 1 to infinity, it is relatively elastic If PES = 0 to 1, it is relatively inelastic If PES = 0, it is perfectly inelastic If PES = infinity, it is perfectly elastic

1.2.5 Elasticity of supply e) The distinction between short run and long run in economics and its significance for elasticity of supply

Long run = all FOP are variable, Short run = at least one FOP is fixed Usually, supply is more inelastic in the long run than in the short run as it assumes that all factors of production can be utilised to increase supply, whereas in the short run, only labour can be increase

1.2.3 Price, income and cross elasticities of demand b) Use formulae to calculate price, income and cross elasticities of demand

PED = % change in quantity demanded / % change in price XED (for good y) = % change in quantity demanded for good y / % change in price of z YED = % change in quantity demanded / % change in income

1.2.5 Elasticity of supply b) Use formula to calculate price elasticity of supply

PES = % change in quantity supplied / % change in price

1.2.9 Indirect taxes and subsidies What is a subsidy?

Paying a producer or consumer to produce something. It is used to create initial demand (electric cars) or on essential services that otherwise wouldn't survive or to control inflation

1.2.3 Price, income and cross elasticities of demand a) Understanding of price, income and cross elasticities of demand

Price Elasticity of Demand- A measure of the sensitivity to a percentage change in the price of quantity demanded of a good or service Income Elasticity of Demand-A measure of the sensitivity to a percentage change in the quantity demanded of a good or service to a change in someone's income Cross Elasticity of Demand- A measure of the sensitivity to a percentage change in the demand of a good or service is to the demand for another good or service

1.2.4 Supply b) The factors that may cause a shift in the supply curve (the conditions of supply)

Production Costs Taxes Transportation Costs Price of Inputs Number of Suppliers Price of Substitutes Price of Compliments

1.2.8 Consumer and producer surplus c) How changes in supply and demand might affect consumer and producer surplus

Shifts in the demand curve are directly related to the amount of producer surplus. If demand decreases, and the demand curve shifts to the left, producer surplus decreases. Conversely, if demand increases, and the demand curve shifts to the right, producer surplus increases. If supply decreases, the producer surplus decreases. An outward shift in supply or demand would increase the producer and consumer surplus, whereas an inward shift in supply or demand would decrease the producer and consumer surplus

1.2.7 Price mechanism a) Functions of the price mechanism to allocate resources: -rationing -incentive -signalling

Signalling- The signalling function is changes in price providing information to both producers and consumers about changes in market conditions Incentivising- An incentive is something that motivates a producer or consumer to follow a course of action or to change behaviour. Higher prices provide an incentive to existing producers to supply more because they provide an incentive to existing producers to supply more because they provide the possibility of more revenue and thus higher profits Rationing-The rationing function is when there is a shortage of a product so price rises to deter some consumers who value it less from buying it Photo- An increase in demand (Q1 to Q2) has led to excess demand at P1. The producer is incentivised to produce more as prices can rise, increasing revenue and profit. Producers raise prices which rations off demand. The New equilibrium is at point C

1.2.9 Indirect taxes and subsidies a) Supply and demand analysis, elasticities: Definitions and examples -Specific/Unit tax

Specific/Unit Tax- A tax set at a constant amount per unit of output. This is the vertical distance between the two supply curves

1.2.6 Price determination a) Equilibrium price and quantity and how they are determined

The equilibrium price and quantity is where the supply and demand curves meet

1.2.5 Elasticity of supply d) Factors that influence price elasticity of supply

Surplus capacity Expectations of future demand Training costs Timescale Competition Legislation Type of good Flexible production

1.2.3 Price, income and cross elasticities of demand How does elasticity change along a line?

The line becomes more inelastic as you go right as the percentage of change in price starts to increase by less while percentage change in quantity stays the same so the fraction becomes closer to -1

1.2.9 Indirect taxes and subsidies a) Supply and demand analysis, elasticities: Definitions and examples -Ad Valorem tax

This is a percentage tax so the more expensive the product, the more expensive the tax is so you can make your product cheaper to reduce tax

1.2.2 Which goods don't slope down on a demand curve?

Veblen Goods- something that people want more of when the price increases Giffen Goods- a good that is so inferior that an increase in price has such a large income effect, and there are so few available substitutes, that quantity demanded is extended

1.2.3 Price, income and cross elasticities of demand f) The relationship between price elasticity of demand and total revenue (including calculation)

When demand is inelastic, a rise in price leads to a rise in total revenue- e.g. a 20% rise in price might cause demand to contract by only 5% (Ped = -0.25) When demand is elastic, a fall in price leads to a rise in total revenue- a 10% fall in price might cause demand to expand by only 25% (Ped = +2.5) When demand is perfectly inelastic (i.e. Ped = zero), a given price change will result in the same revenue change- e.g. a 5 % increase in a firm's prices results in a 5 % increase in its total revenue Ped is inelastic (< 1) and a firm raises its price--> Total revenue increases Ped is elastic (> 1) and a firm lowers its price--> Total revenue increases Ped is elastic (> 1) and a firm raises price -->Total revenue decreases Ped is unit elastic (= 1) and a firm raises price--> Total revenue remains the same Careful of +/- signs above

1.2.9 Indirect taxes and subsidies -the incidence of indirect taxes and subsidies on consumers and producers

When it is more elastic, the tax falls more on the producer When the demand curve is very elastic, the total amount of subsidy is further out, so larger When the demand curve is more inelastic, the amount of the subsidy that ends up in the consumers pockets is relatively large

1.2.3 Price, income and cross elasticities of demand e) The significance of elasticities of demand to firms and government in terms of: -the imposition of indirect taxes and subsidies -changes in real income -changes in the prices of substitute and complementary goods

When the demand curve is very elastic, the total amount of subsidy is further out, so larger and the producer benefit is larger When the demand curve is more inelastic, the amount of the subsidy that ends up in the consumers pockets is relatively large ? ?

1.2.3 Price, income and cross elasticities of demand d) The factors influencing XED

Whether the goods are compliments or substitutes

1.2.2 Demand c) The concept of diminishing marginal utility and how this influences the shape of the demand curve

With each extra unit, the returns decrease. The margin is what happens when you increase something by one and take into account what happens with the next unit