As Economics Unit 1: Markets

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2.1 The Demand Curve

Factors which cause demand to shift:

  • Population
  • Advertisement
  • Substitutes
  • Interest rates
  • Fashion
  • Indirect Taxes
  • Compliments
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2.1 The Demand Curve

Consumer Surplus: The difference between how much buyers are prepared to pay for a good and what they actually pay.

Producer Surplus: The difference between the market price which firms receive and the price at which they are prepared to supply.

(http://mrski-apecon-2008.wikispaces.com/file/view/350px-Consumer_producer_surplus_fro.png/115186879/350px-Consumer_producer_surplus_fro.png)

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2.2 The Supply Curve

Factors which cause the supply curve to shift:

  • Productivity
  • Investment
  • Number of firms
  • Technology
  • Weather
  • Cost of production

(http://mortgageprocess.files.wordpress.com/2009/08/shift-in-supply-curve-to-left.gif?w=500)

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2.3 Price Determination

Equilibrium Price: The price at which there is no tendency to change because demand is equal to supply.

Excess Demand: Where demand is greater than supply.

Excess Supply: Where supply is greater than demand.

Free Market Forces: Forces in free market which act to reduce prices when there is excell supply and raise prices when there is excess demand.

Market Clearing Price: The price at which there is neither excess demand nor excess supply but where everything offered for sale is purchased.

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2.4 Interrelationships Between Markets

Derived Demand: When the demand for one good is the result of or derived from the demand for another good e.g. and increase in demand for cars will lead to an increase in demand for steel.

Composite Demand: When a good is demanded for two or more distinct uses e.g. Milk might be bought to produce yoghurt or cheese or butter or to drink.

Joint Supply: When two or more goods are produced together, so that a change in supply of one good will necessarily change the supply of the other good with which it is in join supply e.g. cows are supplied for both beef and leather. An oil well can produce both oil and gas.

Join Demand: When two or more complements are bought together.

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2.5 Price Elasticity Of Demand

Price Elasticity Of Demand: The % change in QD given a change in price.

Elastic Demand: Where price elasticity of demand is greater than 1.

Inelastic Demand: Where the price elasticity of demand is less than 1.

Unitary Elasticity: Where the value of price elasticity is equal to one. The responsiveness of demand is proportionally equal to the change in price.

Determinants of price elasticity of demand:

  • Availability of substitutes
  • Width of market definition
  • Time
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2.6 Elasticities

Income Elasticity Of Demand: %Change in QD divided by %Change in income. If income elasticity of demand is less than 0 then the good is an inferior good. If income elasticity of demand is positive it is a normal good. If income elasticity of demand is above 1 then this is a luxury good. If income elasticity of demand is between 0 and 1 it is a necessity.

Cross Elasticity Of Demand: %Change is QD of Good X divided by %Change in Price of Good Y. Two goods that are substitutes will have positive cross elasticity of demand, whilst two goods that are compliments will have negative cross elasticity of demand. If the cross elasticity of demand is between +1 and -1 it is cross price ineleastic. If cross price elasticity is less than -1 or more than +1 it is cross price elastic.

Price Elasticity Of Supply: %Change is QS divided by %Change in price. Perfectly inelastic when there is no response to a change in price (zero). Inelatic if between zero and one. Elastic if above 1. Perfectly elastic if infinite number of producers are prepared to supply any amount at a given price.

  • Substitutes
  • Time
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2.7 Normal, Inferior And Giffen Goods

Normal Goods: Demand for normal good increase and income increases.

Inferior Goods: Demand for an inferior good decreases as income increases as consumers choose other more expensive luxury goods.

Giffen Goods: A special type of inferior good where demand increases when price increases, where consumers of a low income demand more of the giffen good instead of other luxury goods.

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2.8 Indirect Taxes And Subsidies

Ad Valorem Tax: Tax levied as a percentage of the value of the good e.g. VAT which is a regressive tax.

(http://12jungev.files.wordpress.com/2010/11/ad-valorem-tax.png?w=480&h=457)

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2.8 Indirect Taxes And Subsidies

Subsidy: A grant given which lowers the price of a good, usually designed to encourage production or consumption of a good.

(http://econhelp.org/wp-content/uploads/2010/02/Subsidy-on-Consumers.png)

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2.9 The Labour Market

The Labour Market: The labour market is a factor market where the price of labour is the wage rate and the quantity is the level of employment. Labour is a derived demand.

Factors which affect the demand for labour:

  • The price of other factors of production.
  • The price of other workers.
  • New Technology
  • Increased Efficiency
  • Demand for the product

Factors affecting the supply of labour:

  • Natural population changes
  • Migration
  • Income tax and national insurance contributions
  • Welfare benefits
  • Government labour regulations
  • Trade unions
  • The minimum wage (The minimum wage firms are required by law to pay workers)
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