H2 econs definitions

normal good definition

a normal good is a good whose demand is positively related to changes in income, ceteris paribus

inferior good definition

an inferior good is a good whose demand is negatively related to changes in income, ceteris paribus

cross elasticity of demand (XED) definition

measures the degree of responsiveness of demand for one good to a change in the price of another good, ceteris paribus

cross elasticity of demand (XED) formula

percentage change in quantity demanded of Good X / percentage change in price of Good Y

income elasticity of demand (YED) definition

measures the degree of responsiveness of demand to a change in the income of consumers, ceteris paribus

income elasticity of demand (YED) formula

percentage change in quantity demanded / percentage change in income

price elasticity of demand (PED) defintion

measures the degree of responsiveness of quantity demanded of a good to a change in its own price, ceteris paribus

price elasticity of demand (PED) formula

percentage change in quantity demanded / percentage change in its own price

Price Elastic

a given change in own price brings about a more than proportionate change in quantity demanded, ceteris paribus

Price Inelastic

a change in price brings about a less than proportionate change in quantity demanded, ceteris paribus

price elasticity of supply (PES) definition

measures the degree of responsiveness of quantity supplied of a good to a change in its own price, ceteris paribus

price elasticity of supply (PES) formula

percentage change in quantity supplied / percentage change in own price

Inferior goods

Inferior goods are goods that have a negative income elasticity of demand which means demand is inversely related to income, ceteris paribus

price floor

an effective price floor is a legally established minimum price above the market equilibrium price. When the government sets this minimum price, producers are prohibited from selling below the stipulated price

price ceiling

an effective price ceiling is a legally established maximum price below the market equilibrium price. when the government sets this price, producers are prohibited from selling above the stipulated price.

Indirect subsidy

Governments will implement indirect subsidies on producers, which are monetary payments given to a firm to boost production, to allow for a greater consumption of the good by society

unintended consequence of production subsidy

In the absence of market failure, subsidies may end up distorting the efficient allocation of resources
Encourages wasteful consumption (ie. excessive or overconsumption) leading to resources not being allocated optimally

consumers “fooled” by the artificially lower costs might resort to excessive consumption without weighing the full or real cost of production to society

there is no incentive to cut down wasteful consumption; adopt more efficient forms of energy

unintended consequence of price ceiling

emergence of a black market

consumers who have the dollar votes/purchasing power, may be prepared to pay very high prices

This will lead to inequitable distribution as the poor might not have access due to lack of dollar votes.

demand factors

income, taste and preferences, Demographics, Consumer Expectations, Prices of related goods

supply factors

Cost of production, Supply shock, Number of producers, Price of related goods, Producer Expectations

direct tax definition

Imposed on income or wealth, directly paid to the government by a taxpayer.

indirect tax definition

Imposed on goods and services, collected by an intermediary on behalf of government.

specific tax

A tax of a specific value is imposed equally on every single unit of production

ad-valorem tax

A fixed percentage tax on the total value of the good

subsidies desired outcomes

Encourages consumption of merit goods (e.g., education, healthcare), Reduces production costs, making goods more affordable, promotion of economic equity.

consumer surplus

difference between the price that buyers and willing and able to pay for the good and the actual price paid

producer surplus

difference between what a producer is willing and able to put up for sale for a good and the actual price charged

why luxury goods are income elastic

people generally prefer to spend a higher percentage of their extra income on them to enhance their quality of life when they become affluent

these are goods that people will consider first in cutting back expenditures when incomes fall.

minimum wage law

regulation that makes hiring labour below a specific wage illegal

unintended outcome of minimum wage policy

low wage earners are typically unskilled or low-skilled workers who can be easily substituted by machines

black market situation where workers illegally working at wages below minimum wage

intended outcome of minimum wage policy

intended consequence of minimum wage is to increase the wage of workers whose market equilibrium wage is deemed too low

Normal Necessity Goods

In economically developed countries, at initial income levels, consumers could already satisfy most of their needs and wants for (chicken) and hence demand is less responsive to changes in income.

Normal Luxury Goods

Even in economically developed countries, at initial income levels, consumers could not satisfy most of their wants for luxury goods
an increase in income will lead to a large rise in their ability and willingness to consume more of income goods and hence demand is more responsive to changes in income

Inferior Goods

This is because as income increases, particularly in developed economies, the rise in income will increase consumers’ willingness and ability to consume normal goods such as (new cars). As such, they will be less willing to consume inferior goods such as (second hand cars).

MSB definition

Marginal Social Benefit (MSB) measures the benefit to society from the consumption or production of an additional unit of the good. Society is a term used to refer collectively to consumers, producers as well as third parties.

MSC definition

Marginal Social Cost (MSC) measures the cost to society from the consumption or production of an additional unit of the good. This cost reflects the opportunity cost of the scarce resources used to enable the production and consumption of an additional unit of the good.

Market failure definition

Market failure occurs when the price mechanism, operating in the absence of government intervention, fails to allocate scarce resources in a way that achieves efficiency