Term
| What is the main problem if Spicer charges a high price (high mark-up) so as to get a higher profit |
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Definition
- Higher prices will drive those that are more price sensitive away
- High prices, greater profit margin per cup but fewer cups sold; or more cups sold but lower profit margin per cup |
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Term
| What would Spicer do in order to not scare away the price sensitive customers? |
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Definition
| What Spicer’s would really like to do is charge a higher price to those who are less price sensitive and charge less from those who might be driven away by higher prices. |
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Term
| What is Price Discrimination |
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Definition
| The action of selling the same product at different prices to different buyers, in order to maximize sales and profits. |
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Term
| Cost of Fair Trade Coffee compared to price sold |
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Definition
EXPLOITING MARKET POWER
- The additional cost per cup of coffee to make it fair trade is very small, but the firms charge a huge increase
- They are trading on the fact that liberal minded people think that they are doing the farmers a favour when they are not making much of a difference |
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Term
| What alternative would Spicer's take in order not to Price Discriminate? |
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Definition
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Term
| Exploiting your market power Coffee prices at Starbucks |
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Definition
- Starbucks is not really interested in offering choices to you
- What they really want to figure out is who is looking at the prices and who is not
- After all it does not cost a whole lot more to make a larger cup of coffee, use flavoured syrup, squirt chocolate powder or add whipped cream
- Every single item on the menu above costs about the same to produce
- Yet, the above menu can help separate the price sensitive customers (the ones buying $2.50 cappuccino) from the one who are not so sensitive to the price (the ones ordering the $5 double-mocha-frappe-latte-mochaccino)! |
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Term
| Example of Elasticity and Time - Petrol Price Rises = Short Term Effect |
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Definition
- Petrol is a necessity
- therefore, in the short run, there will be very little change in quantity demanded since people will have to continue buying in order to use their cars
- It is RELATIVELY INELASTIC compared to a demand curve that is flatter |
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Term
| Example of Elasticity and Time - Petrol Price Rises = Long Term Effect |
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Definition
However, if after a longer time petrol prices stay high, consumers will switch to more fuel efficient ways of transport (smaller cars, car pooling etc) and their quantity consumed will fall.
Therefore, petrol becomes more PRICE SENSITIVE or RELATIVELY MORE ELASTIC |
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Term
| For the short term Petrol demand curve, why is it wrong to say that it is inelastic even though it is quiet steep? |
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Definition
| Because the curve has a mid point which means that even though it is steep, the section above the mid point is elastic, and the section bellow is inelastic |
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Term
| What is the demand for food and basic clothing in richer countries |
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Definition
- The demand for food and basic clothing does not increase with income nearly so much as does the demand for many other products.
- The demand that increases most rapidly as income rises is the demand for durable goods.
- The demand for services is rising even more rapidly than the demand for durables as income rises |
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Term
| What is the demand for food and basic clothing in richer countries |
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Definition
- The demand for food and basic clothing does not increase with income nearly so much as does the demand for many other products.
- The demand that increases most rapidly as income rises is the demand for durable goods.
- The demand for services is rising even more rapidly than the demand for durables as income rises |
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Term
| What is the relationship between Income and wealth? |
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Definition
| Income and wealth are not the same thing, but usually high income means high wealth |
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Term
| Income Elasticity of Demand meaning |
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Definition
| The responsiveness of demand for a good to changes in income |
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Term
| Income Elasticity of Demand equation |
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Definition
| IED = Percentage change in quantity demanded / Percentage change in income |
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Term
| Effect of increase in income for a Normal Good |
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Definition
| If the product is a NORMAL GOOD a rise in income causes more of it to be demanded, other things being equal, which means a rightward shift in the demand curve. |
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Term
| Is the income elasticity for a Normal Good positive or negative and why? |
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Definition
POSITIVE - elasticity above 0
In terms of IED equation:
Increase in income and increase in demand = positive
Decrease in income and decrease in demand = positive |
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Term
| Effect of increase in income for a Inferior Good |
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Definition
| A rise in income causes less of it to be demanded, which means a leftward shift in the demand curve |
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Term
| Inferior Good and increase income example |
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Definition
| RICE: As income increases, you switch from rice to potatoes which are higher quality and more expensive |
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Term
| Is the income elasticity for a Inferior Good positive or negative and why? |
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Definition
NEGATIVE
In terms of IED equation:
Increase in income and decrease in demand = negative
Decrease in income and increase in demand = negative |
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Term
| How is Consumer Surplus a good way of working out whether the market is efficient or not? |
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Definition
It helps us measure the consumer welfare.
- If as a result of a certain policy CS goes down then we say consumers are worse off while if CS goes up then we say they are better off.
- Governments, in deciding public policy, use CS as the measure of the welfare impact on consumers |
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Term
| What is Consumer Surplus? |
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Definition
The difference between the price an individual consumer is willing to pay and the price he is actually pays.
It is a 'Psychic Profit' |
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Term
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Definition
[image]
CS is what everyone was willing to pay up to demand 4
- If the CS was $18, consumers would be better off
- If the CS was $12, consumers would be worse off |
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Term
| What is a producer surplus? |
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Definition
The difference between the price an individual producer is willing to accept and the price he is actually gets for his product.
The sum of all the individual producer surpluses gives us the aggregate producer surplus for the market |
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Term
| Producer Surplus and Market Efficiency |
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Definition
Producer surplus is a measure of what is happening to the welfare of producers
- If PS goes up then producers are better off
- If PS goes down then they are worse off |
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Term
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Definition
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Term
| When is the market at its most efficient in relation to Producer and Consumer surplus? |
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Definition
When the sum of the two triangles (of demand and supply) are at the biggest area size, the market is at its most efficient.
However, taxes mess this up. |
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Term
| What is a Price Ceiling and what are its effects? |
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Definition
[image]
Where the government sets a maximum price that suppliers may charge.
If the Price ceiling is below the Equilibrium, it creates a SHORTAGE as the suppliers are not willing to supply at that price but demand is high. Can lead to a black market. |
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Term
| What is a Price Ceiling and what are its effects? |
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Definition
[image]
Where the government sets a minimum price that buyers have to pay.
If the price floor is above the Equilibrium, it creates a SURPLUS as the suppliers are willing to supply a lot and the consumers are not willing to pay |
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Term
| What are Taxes on goods and services for? |
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Definition
- A way of collecting revenue for public services (funding health care, building roads)
- Discourage consumption of harmful substances (e.g. alcohol, cigarettes) |
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Term
| Who is responsible for paying the tax? |
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Definition
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Term
| What happens to the supply curve which a tax of $3 |
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Definition
Supply curve shifts up by $3
- So at every price quantity, we must add $3
- Tax always foes on the supply curve because the firm is the one responsible for paying the tax |
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Term
| Example of the effect of $3 tax |
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Definition
[image]
- Supply curve increased by $3
- Demand decreases from 4 to 3
- Consumers pay $10 instead of $8 (price increased by $2)
- Suppliers receive $7 instead of $8
- Demand curve remains the same |
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Term
| What does "What is the incidence of the price?" mean? |
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Definition
| What portion of the $3 is paid by the buyer, and what portion is paid by the firm? |
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Term
| How do you work out the incidence of the $3 tax? |
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Definition
New Price paid by buyer =$10
Old Price paid by buyer = $8
Income to buyer = 10-8 = 2
Total tax = $3
So firm pays 3-2 = $1
and customers pay $2
Thus even if the tax is imposed on sellers in the market, typically both the buyers and the sellers will end up sharing the tax. |
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Term
| The sellers would like to pass on the entire tax on to the buyers, have they succeeded? |
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Definition
| No, but they have managed to pass $2 of the $3 tax on to the buyers |
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Term
| How much does the government earn as a result of the tax? |
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Definition
| Equilibrium Quantity x Tax (per unit) |
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Term
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Definition
[image]
Surplus is not lost just transferred to government from firms
3 x $3 = $9 |
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Term
| What is the Dead Weight loss? |
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Definition
- Measure of inefficiency due to tax
-Vanished because no one has produced or bought the last unit
- No one can enjoy proceeds
* Government should aim to make it as small as possible |
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Term
| Tax Effect on Elastic Supply and Inelastic Demand (supply is more elastic than demand) |
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Definition
[image]
- Most of the tax pay is above the old equilibrium, which implies the consumer is going to pay most of the price and the firm only pays a little.
- Makes sense because with a really steep demand curve, good is probably a NECESSITY and consumer has no choice but to buy |
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Term
| Tax Effect on Inelastic Supply and Elastic Demand (supply is less elastic than demand) |
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Definition
[image]
- Most of the tax is below the old equilibrium, so supplier is going to pay most of the tax
- Supplier has not got much choice due to readily available substitutes |
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Term
| What is the tax effect on suppliers and consumers according to market elasticity |
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Definition
| The burden of a tax falls more heavily on the side of the market that is LESS ELASTIC |
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