DEFINIITONS FOR MCQs (ELASTICITY) and DATA FOR EVAL IN 25 MARKER. Context!!!!!! E.g. EoS,
financial, lower costs, lower interest rates, pass on in lwoer fares such as season tickets. Increase
consumer surplus.
.1 Nature of Economics
.1.1 Economics as a social science
Economics is a social science as it requires the observation of behaviour and use of
assumptions in order to come to conclusions.
There are so many changing variables, thus it is difficult to do experiments, so economists
use ‘ceteris paribus’ when looking at relationship between two factors, to keep all other
influencing factors constant.
Ethics of experiments e.g. could decrease levels of welfare payments but negative impact on
living standards of people.
.2 How markets work
1.2.1 Rational decision making - Consumers aim to maximise utility and firms aim to maximise profits
1.2.2 Demand
Moveemnt along demadn cureve is caused by change in price (increasd price = movement up
the curve) and a shift is caused by cahneg in any other factor e.g. increase in population, income,
advertising or changing tastes/seasons/expectations (if they expect shortage or price rise in
future, demand may rise).
The demand curve slopes downwards as it shows the inverse relationship between price and
quantity. This can be explained by the concept of diminishing marginal utility; the satisfaction
derived from the consumption of an additional unit of a good will decrease as more of the good
is consuemed. The extra benefit gained from the consumption of a good/service falls for each
additional unit that is consumed. Thus, if marginal utility decreases with each extra good
consumed, then the price a consumer is willing to pay for each extra good decreases as they
place less value on it since it brings them less satisfaction/benefit. E.g. for buffet, each additional
plate of food you refill provides less utility than the one before so most people will only eat until
they are satiated and their marginal utility matches the price they paid.
Composite demand = good demanded for more than 1 purpose, increase in demand for one
reduces supply available for another. E.g. oil demanded to make plastic bottles means less for
petrol.
Derived demand = demand for good arises due to demand for another good e.g. ingredients in
food.
Compelmtary/joint demand – goods bought in conjunction e.g. ink and printer
1.2.3 Price, income and cross elasticities of demand
Price elasticity of demand – the responsiveness of demand to a change in price of a good. PED =
%ΔQD/%Δ£
,Elastic = when demadn changes proportionately more than change in price. Inelastic = demand
changes proportinely less
Unitary = demand changes in same proportion to price change.
Determinants of PED:
Availability of substitutes, necessity, habit-forming/addictive, non-essential, % of income spent on
good, time (in LR, goods become more price elastic as easier to find alternatives and habits can
change).
Numerical values:
Unitary elastic; PED = 1.
Relatively elastic; PED is greater than 1 or less than -1
Relatively inelastic; PED = -1 to 1
Perfectly elastic; PED = infinity, change in price means Q falls to 0.
Perfectly inelastic; PED = 0, change in price has no effect on Q.
Significance for indirect taxes:
The more elastic, the lower the indicidence of tax on consumer.
Significance for subsidies: the more elastic, the smaller the price fall
, Significance for total revenue:
Income elasticity of demand – responsiveness of demand for a good to a change in a person’s
income. YED = %ΔQD/%ΔY.
Necessities are income inelastic (-1 to 1) and luxuries are income elastic (>1).
Normal good have + YED and inferior goods have – YED.
Signifiance of changes in real income:
Bussineses can know how their sales will be affected by changes in income; may impact type
of goods they produce e.g. During times of prosperity, firms may produce more luxury goods
and less inferior goods.
Cross-price elasticity of demand – the responsivness of demand for a good (x) to a change in the
price of another, related good (y). XED = %ΔQDx/%Δ£y.
Substitute goods – XED is positive; if the price of y increases, the demand for good x increases.
Complimentary goods - XED is negative; if the price of good y increases, the demand for good x
decreases.
Unrelated goods; XED = 0, change in price of good y has no impact on demand for good x.
