Flashcards
Economics -2
Cards in this deck (14)
- 1What does price elasticity of demand measure?The PED measures the responsiveness of quantity demanded to changes in the price of that good and service
- 2How would you calculate own-price elasticity of demand?By using the mid point method:
PED= P1+P2/Q1+Q2 X change in quantity/change in price. - 3What would be elastic demand?If PED between -1 and infinity = elastic demand
- 4If price elasticity of demand was -1 what would it be classed as?If PED = -1 Unit elastic
- 5If PED = infinity what is it?perfectly elastic
- 6If PED = 0 what is it?perfectly inelastic
- 7own-price elasticity of demand. Why is this always negative?The elasticity is always negative because the qty demanded is a negative function of price.
- 8income elasticity of demand: What is the difference between a normal, inferior and luxury good?+ve = normal good
-ve = inferior good
>1 = luxury good - 9cross-price elasticity of demand: What is the difference between a substitute and a complement?-ve = complement
+ve = substitute - 10Imagine that you are responsible for running Slow Coaches, and that you have access to the following information about the elasticities of demand for coach travel on the routes that Slow Coaches currently operates: Income elasticity = -0.4 Own-price elasticity = -1.2 Cross-price elasticity with respect to rail fares = +2.1 ->Explain how this information might be useful to the formation of business strategy if Slow Coaches is currently making a loss.-We have an inferior good.
-It is also a substitute.
-Price is elastic .
Increasing prices is not a good idea! Reducing prices will increase demand and make the firm more competitive with respect to using rail. As income increases year on year (for a proportion of the population), use a strategy that targets lower income consumers? - 11What are the main assumptions of the model of perfect competition?• In a perfectly competitive industry actions of individual buyers and sellers have no effect on the market price. The Firm is a PRICE-TAKER.
• There are lots and lots and lots of buyers and sellers.
• Homogeneous good
• There is also Perfect Information available to every buyer and seller
• There are no entry and exit barriers faced by prospective and current firms in the industry
• Each firm faces a PERFECTLY ELASTIC demand curve - 12Why do firms produce output where MC = MR?If by increasing output by 1 unit your revenue (marginal revenue) is greater than your cost (marginal cost) you have an incentive to continue to increase output. You do this until this profit opportunity vanishes where MC=MR.
If marginal cost is greater than marginal revenue then your incentive is to reduce output. - 13What will happen to firms if price is lower than Average Variable Cost (AVC).SHUT DOWN
- 14What happens when MC=MRFirms maximise their profit!!!
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- Flashcards on Economics -2, created by mariabutterworth on 07/05/2016.
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- mariabutterworth
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