Economics

• The substitiution effect is when the price falls so consumers will buy more of the cheaper product
• Marginal utility is the extra benefit to an individual of consuming a good or service
• Price mechanism shows how demand and supply forces interact in a market
• Competitive supply is when the supply of one good can easily be replaced to the supply of another good
• Joint supply is when two products are usually bought together meaning a rise in the output of good A leads to a rise in supply of good B
• Utility is the satisfaction that an economic agent gains from consuming a good or service
• Marginal utility is the additional utility gained from consuming more of a good
• Maximisation is when an economic agent tries to obtain the most that they can from an economic activity
• The law of diminishing marginal utility is the marginal utility of a good decreases as you consume more of it
• Direct tax is money paid to government by individuals or businesses
• Indirect tax is money imposed on goods and services
• Regressive tax is a tax imposed by the government that takes a higher percentage of a person's income
• What are the two types of indirect tax?

  Specific tax: a fixed tax per unit of goods and services purchased

  Ad-Valorem: a percentage of the price of the good
• What are the three functions of the price mechanism?

  • rationing
  • incentive
  • signalling
• What are the advantages to the price mechanism?

  • It is allocatively efficient
  • There is no time cost so it does not need to be monitored
  • Consumers have more control of what is made
• What are the disadvantages of the price mechanism?

  • Missing markets
  • Increased inequality
  • Has no moral overlay before a government intervenes
• What is market equilibrium?

  When the amount consumers want to buy is equal to what producers want to sell it for
• What is consumer surplus?

  It is the difference between the price the consumer is willing to pay for it and what they actually pay
• What is producer surplus?

  Producer surplus is the difference between the price the producer is willing to sell at and what they actuall sell for
• What is the formula for total economic welfare?

  consumer surplus + producer surplus
• What is the formula for maximising utility?

  marginal utility of good/price of good
• What are the four objectives of firms when behaving rationally?

  • profit maximisation
  • profit satisficing
  • growth
  • sales maximisation
• What are the four reasons why consumers may not act rationally?

  • social norms
  • nudge theory
  • weakness at computation
  • habitual behaviour
• What is the formula for revenue?

  selling price * quantity sold
• What is the formula for profit?

  Total revenue - Total cost
• What are the factors that affect demand?

  • population
  • income
  • related goods(complements and substitutes)
  • advertising
  • trends
  • external shocks
  • speculation
• What are the factors affecting supply?

  • productivity
  • indirect tax
  • new entrants to the market
  • technology
  • subsidies
  • weather(only for agriculture)
  • cost of production
• What are the factors affecting PED?

  • number of close substitutes
  • cost of switching
  • peak and off-peak
  • method of payment
  • time
  • portion of income spent
  • habitual behaviour
• What are the factors affecting PES?

  • perishability
  • storage capacity
  • time to produce
  • ease in entry to production
  • ease of switching
  • availability of resources
• What is the formula for government revenue?

  tax per unit * quantity sold

  OR:

  consumer burden + producer burden
• If the demand for the product is inelastic, who will carry most of the burden?

  Consumers
• If the demand for a product is elastic, who will pay most of the burden?

  Producers
• What is the law of demand?

  The law of demand shows the inverse relationship between price and quantity
• If there is an increse in demand, whoch way will the line shift?

  right
• If there is a decrease in demand, which way will the line shift?

  left
• If there is a decrease in supply, which way will the line shift?

  left
• If there is an increase in supply, which way will the line shift?

  right
• What are the value of elasticity for PED?

  elastic: PED > 1

  inelastic: PED < 1

  unitary: PED = 1
• What are the values of elasticity for PES?

  elastic: PES > 1

  inelastic: PES < 1

  unitary: PES = 1
• What is the formula for PED?

  The percentage change in quantity demanded/The percentage change in price