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ECONOMICS THEME 1 - TOPIC 1.2 - HOW MARKETS WORK - Coggle Diagram
ECONOMICS THEME 1 - TOPIC 1.2 - HOW MARKETS WORK
price elasticity of demand (PED)
this is the responsiveness of a demand to a change in the price of the good
%change in quantity demanded / %change in price
PED = 0 is perfectly inelastic
PED = infinite is perfectly elastic
PED between 0 and -1 is inelastic
PED more than -1 is elastic
factors affecting PED
necessity
income
time
addictive
subsitutes
significance
when its elastic the producer takes more
when inelastic the consumer does
determines the imposition of taxes + subsidies
on a graph inelastic is more vertical demand line whereas elastic is more horizontal
indirect taxes and subsidies
an indirect tax is a tax on expenditure
2 types of indirect tax
ad valorem tax
(tax is a % of the price)
specific tax
is where an amount is added to the the price e.g 10p a litre of petrol
diagram^^
the incidence of the tax is the burden on the tax payer
the more inelastic the PED is the more the consumer will pay
diagram ^^
a subsidy is a grant given by the government to encourage production/consumption of a good or service
price elasticity of supply (PES)
measures the relationship between a change in quantity supplied and a change in price
when PES is infinite its perfectly elastic
when PES is 0 its perfectly inelastic
PES bigger than 1 is elastic
PES smaller than 1 is inelastic
factors affecting PES
availability of factors of production
working below full capacity
ease + cost of production
spare stock
time period
%change in Q / %change P
consumer and producer surplus
consumer surplus is the difference between the price the consumer is willing to pay and the price they actually pay
producer surplus is the difference between the price the supplier is willing to produce their product at and the price they actually produce it at
diagram ^^
a fall in demand leads to a fall in consumer and producer surplus and a rise in demand has the opposite effect
a decrease in supply will lead to a fall in consumer + producer surplus whereas an increase in supply will have the opposite effect
cross elasticity of demand (XED)
the responsiveness of demand for one product (A) to the change in price of another product (B)
%change in quantity demanded of A / %change in price of B
independent products = XED is 0
if figure is positive they're subsitutes
strongly related = XED more then 1
if figure is negative they're compliments
weakly related = XED between 0 and 1
income elasticity of demand (YED)
this is the responsiveness of demand to a change in income
%change in quantity demanded / %change in income
an inferior good is less than 0 (as income rises, demand falls)
0-1 is a normal good and inelastic
YED more than 1 is elastic
+1 to infinite is luxury goods
YED between 0 and 1 is inelastic
factors influencing YED...
necessities
luxuries
rational decision making
underlying assumptions...
firms aim to maximise profits
consumers aim to maximise utility (satisfaction gained form consuming product)
governments aim to maximise social welfare
demand
demand is the ability and willingness to buy a particular good at a given price and at a given moment in time
diagram^^
factors that may cause demand to shift
population
income
related goods
advertising
taste/fashion
expectations
seasons
diminishing marginal utility
total utility represents satisfaction gained by a customer as a result of their overall consumption of a good e.g eating a bar of chocolate
marginal utility represents the change in satisfaction resulting from the consumption of the next unit of the good e.g eating another bite
law of diminishing utility states the satisfaction derived from the consumption of an additional unit of a good will decrease as more is consumed
this explains why the demand curve slopes downwards
supply
the ability and willingness to provide a good or service at a particular price at a given moment in time
factors effecting supply...
technology
goals of supplier
weather e.g agriculture
government legislation
price of other goods
taxes + subsidies
cost of production
price determination
price equilibrium is where supply is equal to demand
price mechanism
the signalling function
acts as a signal of when to do things such as increase supply when price rises
rationing function
limited resources can be rationed and allocated to those who afford them and value them highly
the incentive function
acts as an incenitve for people to work hard
alternative views of consumer behaviour
people do not always behave rationally and this occurs for 3 main reasons
influence of habitual behaviour
habits prevent rational thinking e.g addicts buying more drugs
consumer weakness at computation
e.g not looking for cheaper versions of goods
influences of other people
copying actions of a large group