Micro Economics test

The 4 main factors of production

The 4 main factors of production

1. Land

2. Labour

3. Capital

4. Entrepeneur

Scarcity

Short in supply

Demand includes

Buyers

Supply includes

Sellers

Definition of demand

Quantity of a product or services that consumers are willing and able to purchase at a given price at a given time period

Definition of supply

The willingness and ability of producers to create goods and services to take them to the market

Definition of market supply

Quantity supplied by all producers (all firms together)

If average income increases company's will...

raise the price (visa versa)

If market prices fall, we expect...

to see a contraction (decline) of supply and producers have less incentive produce at lower prices

The non price factors of supply

1. Cost of production

2. Price of related goods

3. Productivity

4. Technology

Decrease in supply means that...

suppliers are less willing and able to supply at the SAME price

The causes of change in supply

1. Factors of production

2. In the price and profitability of other goods and services

3. Technology

4. Business optimism and expectations

5. Global factors

The law of supply

As the price of a product rises, the quantity supplied of the product will usually increase (ceteris paribus)

The definition of subsidy

A payment made to producers to help reduce their cost of production (by the government)

The result of subsidy

Producers will tend to increase supply at every given price

The law of demand

Price increases, demand decreased (visa versa)

The income effect

Changes in price affects consumers' purchasing power. Those with higher income can afford to purchase more than those with lower income

The substitute effect

Changes in price motivates consumers to purchase relatively cheaper products instead of the higher priced goods

Relationship between income and quantity demanded

If income increases, quantity demanded increases (visa versa)

The law of taxes

If cost increases, supply decreases (visa versa)

The definition of merit goods

Products good for society (solar panels, agriculture, medicine, education, electric cards, public transport)

The definition of consumer surplus

The difference between the price and what you would have potentially (willing) to have paid

The definition of producer surplus

The difference between the price and what you are willing and able to produce for

Community surplus

Consumer surplus + producer surplus

How to find the surplus

base(1/2) x height

What PED stands for

Price elasticity of demand

What PED measures

The responsiveness of the quantity demanded to a change in price

PED > 1

The good is price elastic, meaning that it is highly responsive to change in price

PED = 1

The good has unit elasticity, meaning everything goes up in uniform (the same)

PED < 1

The good is price inelastic, meaning price change does not affect demand

The formula for PED

% change in quantity demanded / % change in price

((new quantity - original quantity) / original quantity) / ((new price - original price) / original price)

The 3 economic bases

1. Income

2. Consumption

3. Wealth

The definition of direct taxes

Unavoidable taxes (income, corporation, inheritance tax)

The definition of indirect taxes

Levied on goods and services (to discourage the merit goods)

Avoidable taxes (sales, BTW, Duty tax)