Studied by 0 peopleJoint Demand
Goods that compliment each other (Printers and ink)
Derived Demand
Demand is influenced by demand of another good (Car demand increase = engine demand increase)
Diminishing marginal Utility
Every extra unit of consumed good has less utility/satisfaction than the previous
Rational consumer
Aims to maximise utility (bang for your buck)
Rational firms
Aiming to maximise profit (earn as much as possible from one good)
Rational Governments
Aim to maximise social welfare (Gov works for public)
Demand Factors
Population
Income
Related goods
Advertising
Tastes
Expectations/confidence
Seasonality
Total Utility
Satisfaction gained from their overall good consumption
Price Elasticity of Demand (PED)
% Quantity demanded / % Change in price
Unitary Elastic PED
PED = 1 (A change in price causes a the exact same change in demand)
Relatively Elastic PED
PED > 1 ( Demand is relatively responsive to price)
Relatively Inelastic PED
PED < 1 (Quantity demanded changes by a smaller % than price )
Perfectly Elastic PED
PED = infinite (Any change in price causes a complete reduction in demand)
Perfectly Inelastic PED
PED = 0 (Demand is immune to any price changes)
PED Factors
Availability of substitutes
Necessity
Income
Time
Addictive
Income Elasticity of Demand (YED)
Quantity demanded / Income change
Inferior good
YED < 0 ( Rise in income causes a decrease in demand)
Normal Good
YED > 0 (Rise in income causes a rise in demand)
Luxury Good
YED > 1 (Rise in income causes a large rise in demand)
Cross Elasticity of Demand (XED)
Responsiveness of demand of A for a price change in B
XED formula
Demand of A / Price of B
Substitutes
XED > 0 (Increase in price of B = Increase demand of A)
Complements
XED > 0 (Increase in price of B = Decreased demand of A)
Unrelated goods
XED = 0 (A change in price of B has no impact on A)
Supply
Ability/willingness to provide a good or service at a given price point and time
Supply Factors
Productivity
Indirect Taxes
No of Firms
Technology
Subsidies
Weather
Cost to produce
Price Elasticity of Supply (PES)
Responsiveness to supply based on price changes
PES formula
Amount supplied / price change
PES Factors
Time
Stocks
Capacity
Factors of production
Barriers to entry
Substitutes
Excess Demand
Where price is set below equilibrium & consumers would buy more
Excess Supply
Where price is set above equilibrium & consumers want less = surplus of supply
Price Mechanism
Allocates resources through the functions
Rationing Function
Allocating goods to the people who can afford and value the goods highest
Signalling Function
Prices adjust, showing where resources are not needed & where needed most
Incentive Function
Agents receive incentives to alter behaviour (Being told about increased overtime pay so you take more overtime)
Producer Surplus
Difference between price willing to supply and price actually sold at
Consumer surplus
Difference between price willing to pay and actual price paid
Indirect Tax
A tax on expenditure where the person charged is not responsible to paying it to government
Types of indirect tax
Ad Valorem
Specific tax
Ad Valorem
A tax set at a % of the price of the good (VAT)
Specific tax
A constant amount is added to the price (Duties on demerit goods)
Impacts of a tax
Causes supply to fall due to an increase in cost to produce = rise in price and burden on consumers
Specific Tax
Ad Valorem Tax
PES And Tax
If elastic supplier will absorb tax
If inelastic tax will be passed onto consumer
Highest Tax revenue
More inelastic demand = Higher tax tevenue
Subsidy
Grant given my the government to encourage production/consumption
Alternative views on consumer behaviour
People may not always act with rationality in mind
Reasons for irrationality
Other peopleās influence
Habitual Behaviour
Computation Weakness
Influence of Otherās
Social norms, peer pressure, etc all play into irrational behaviour
Habitual Behaviour
If not regularly re-evaluated may cause suboptimal choices
Computation weakness
May struggle with complex calculations / limited information
Note
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