Theme 1 economics

• In a competitive market, the price will settle at the equilibrium point where the supply and demand curves intersect.
• The price elasticity of demand (PED) is the % change in quantity demanded / % change in price
• If PED < 1, then its inelastic
• Income elasticity of demand (YED) is the % change in quantity demanded / % change in income
• Cross elasticity of demand (XED) is the % change in quantity demanded of good Y / % change in Price of good X
• Price elasticity of supply (PES) is the % change in quantity supplied / % change in price
• Relatively price elastic: demand or supply is more responsive to a change in price
• Substitute goods are those that can be used instead of one another
• Complementary goods are those which are consumed together
• Inferior goods have a decrease in demand as income increases
• Normal goods have an increase in demand as income increases
• The law of diminishing marginal utility states that as we consume more of any product, the extra satisfaction gained from consuming it will fall.
• Marginal cost = additional costs from producing one extra unit
• Total revenue (TR) = price x quantity sold
• Price elasticity of supply measures how much suppliers respond to changes in price
• Elastic= PED > 1
• Elastic= PES > 1
• Elastic= YED > 1
• Relatively price inelastic: demand or supply is less responsive to a change in price
• Inelastic= PED < 1
• Inelastic= PES < 1
• Inelastic= YED < 1
• Unitary elastic demand is a type of demand which changes in the same proportion to its price
• Inelastic demand is steeper, as the price increases, the quantity demanded decreases more significantly.


  Elastic demand slopes, as the price increases, the quantity demand doesn't decrease as much.

  
• Examples of perfectly elastic products: Luxury products such as jewels, gold and high-end cars


  Examples of perfectly inelastic products: Medicines, water

  
• Perfectly elastic: a change in price results in the quantity demanded falling to zero
• Perfectly elastic= ∞
• Unit elastic= 1
• Perfectly inelastic= 0
• SPLAT is for PED (price elasticity of demand)

  S= number of Subsidies

  P= Proportion of Income

  L= Luxury or commodity

  A= Addiction

  T= Time Period
• In PES the short-run is more relatively price inelastic
• In the long-run, all factors of production are variable
• PES is always positive
• PED is always negative- include the sign in the calculation but ignore it in your interpretation
• Factors that affect the PES of a good= PETCATS
• P1 and Q1 is the equilibrium market clearing price

  
• If there is excess demand, firms will increase their prices 


  If there is excess supply, firms will lower their prices

  
• Subsidy= Government grant to firms to increase production and lower the price of a good
• Why does the government use indirect tax?

  ~Welfare, discourages unhealthy lifestyles

  ~Raises tax revenue

  ~Less direct tax

  ~Less spending on negative externalities goods
• This is specific tax. It is a per unit tax that shifts the supply curve parallel.