Notesale: Turn your study into money

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Unit one definitions (SL)
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Tax set as a percentage of the price of a good
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Allocation of resources
How resources (land, labour, capital and management) are distributed in an economy
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Examples include fishing
grounds, forests and jungle
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Changes when supply or demand changes
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Example: Tennis racket and tennis balls
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Formula:
% change in QD of X
% change in price of Y
Goods with a positive cross elasticity are substitutes
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Demand
The quantity of a good or service that consumers are willing and able to buy at each possible
price
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Goods that society believes brings lower
than expected benefits to consumers
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For example cigarettes
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Labour is derived demand
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Elastic supply
A % change in price leads to a greater % change in quantity supplied
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Equilibrium Price
The price at which quantity demanded equals quantity supplied, often called the market
clearing price
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More will
be demanded at the lower price and less will be supplied, therefore excess demand occurs
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More will be
supplied at the higher price and less will be demanded, therefore excess supply occurs
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Free market economy
In a free market economy resources are allocated by the price mechanism
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Resources are privately owned – land, factories, labour time etc
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Income elasticity of demand
YED measure the responsiveness of demand for a product to a change in consumers’ income
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Formula:
% change in QD
% change in income
Indirect tax
An indirect tax is a tax on expenditure
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Inelastic demand
A % change in price leads to a smaller % change in quantity demanded

Inelastic supply
A % change in price leads to a smaller % change in quantity supplied
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As income rises demand falls
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Marginal cost
The addition to cost of the production of one extra unit of output
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Marginal revenue
The addition to revenue of the sale of one extra unit of output
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Market
Any situation where buyers and sellers are brought together
Market Economy
An economy where resource allocation is determined by the market forces of demand and
supply
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Maximum Price/Price Ceiling
The price of a good or service cannot rise above this limit
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It is imposed by a government or other authority
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Merit goods
Goods that society believes bring unanticipated benefits to the consumer
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Minimum price/Price floor
The price of a good or service cannot fall below this limit
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It is imposed by a government or other authority
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Minimum wage
A wage set by the government below which employers must not pay their workers
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g
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As incomes rise, so does demand
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Opportunity cost
Opportunity cost is the next best alternative forgone when making a decision
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There is little/no role
for the price mechanism
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Positive externalities
Exists when the social benefit of an action are greater than the private benefits
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Price Elastic
Where a change in price of a good or service leads to a proportionally greater change in
quantity demanded
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Price Inelastic
Where a change in price of a good or service leads to a proportionally smaller change in
quantity demanded
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Price elasticity of demand
PED measures the responsiveness of quantity demanded for a product to a change in price
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Price controls

Government attempts to control the price mechanism in order to enforce a desirable price
(max price below equilibrium or min price above equilibrium)
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Changes when supply or
demand changes
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Goods which are non rivalrous and non excludable by price
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A way that scarce goods can be allocated
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Specific Tax
Specific tax is a fixed charge imposed per unit of good sold
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It is a
tax placed on the expenditure on the good
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Substitute goods
Goods which can be purchased instead of each other
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They
have a positive cross elasticity of demand
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par
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Total Revenue
Price X quantity sold
Tradable permits
Permits to pollute are allocated to firms in an industry, and if they produce less pollution than
their limit they are able to sell their surplus permits to those who pollute more than their limit
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Therefore choices
have to be made as to how these resources are allocated
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e
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Negative externalities
The bad effects that are suffered by a third party when a good or service is produced or
consumed
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e
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Private costs of consumption:
The money paid for the purchase of a good
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For example, pollution from the
production of paint
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Therefore, they can charge a lower price
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e
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Marginal Social Cost
The cost to society of producing/consuming one more unit of a good
Private benefits of production:
Sales revenue to the firm from selling a good
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Positive externalities of production:
When the production of a good causes benefits to third parties i
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firm producing good
trains workers who, in time, work for other firms who benefit from their training
Positive externalities of consumption:
When the consumption of a good benefits third parties i
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vaccinations benefit those
vaccinated and also other people who will not now catch the disease from the vaccinated
person
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Total revenue greater than Economic Costs
(explicit and implicit costs)
Accounting costs
Total Revenue – Total cost, where total costs are the explicit costs
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Allocative efficiency
P=MC
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Asymmetric information
What one party in a transaction has more information that the other party
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Average cost
Total cost divided by the number of outputs produced:

TC
Q

Average product
The total output per unit of variable factor being considered (e
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no of tables per employee)
Average variable cost
The variable cost of one unit of output
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Barriers to entry
Factors that make it difficult for a firm to enter a market
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Barriers to exit
Factors that make it difficult for a firm to leave a market i
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sunk costs e
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marketing,
specialist machinery with no resale value etc
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Break even level of output
The level of output where total revenue equals total costs
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Collusion
Firms acting together to reduce consumer welfare e
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restrict supply, raise prices
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Collusive oligopoly

Where a few firms act together to avoid competition by agreeing to fix prices or output
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The
higher the percentage the higher the concentration
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Demand function
Represents demand as a function of price
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Diminishing returns is a short term concept
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e
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Economic cost
The cost of all the resources employed by a firm, including entrepreneurship (implicit and
explicit costs)
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Economies of scale
Factors that cause a fall in long run unit costs as a result of a firm increasing its scale of
operations
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Formal collusion
This is where firms openly agree to set prices or output or market share or agree market
expenditure between themselves
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Costs which do not change when the level of output changes e
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rent
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However, this is not a stable position
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The tacit collusion has broken down and we tend to end up at

the Nash Equilibrium where both firms pursue the dominant strategy
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Implicit costs
The opportunity cost of the entrepreneur – what else could the entrepreneur have done
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Prohibits market entry
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Marginal cost
The extra cost of producing one more unit of output:

change in cost
change in output

Marginal product
The additional output gained by the employment of one more unit of variable factor (e
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the
additional output from one extra worker)
Marginal profit
The addition to total profit from one more unit of output sold
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Monopolistic competition
Many firms, producers have a little price making ability, no/low barriers to entry or exit
therefore SNP competed away in long run – only normal profit in long run, differentiated
product
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Monopoly
One firm, producer has large price making ability, high barriers to entry, SNP in long run,
unique product
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Natural monopoly
Where a firm which has all the sales in the market has not reached the Minimum Efficiency
Scale (economies of scale are so substantial that they are not exhausted even when there is
only one firm in the industry)
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2
producers would lead to higher unit cost
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Economic
profit is zero
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Perfect competition
Many buyers and sellers, producers are price takers, no barriers to entry or exit – SNP
competed away in long run, homogenenous products, consumers have perfect knowledge of
all prices charged, producers have perfect knowledge of all production processes, AR=MR
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When a firm sets its price below its average cost to drive another firm out of the market
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Price discrimination conditions
Conditions necessary for price discrimination are; a firm must have some market power
(price maker), markets must be separable, buyers in different markets must have different
elasticities of demand, no arbitrage/leakage possible, the cost of separating markets must be
low
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Productive efficiency
This exists when production occurs at the lowest possible cost per unit of output
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Technical efficiency is necessary for productive efficiency to be reached
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Profit maximisation
MR = MC
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Property rights
Confers legal control or ownership of a good
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This can lead to the over use of common land, over fishing
etc
Pure Monopoly
When one firm supplies a market
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TR is at its height
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Sales volume maximisation
The maximum level of sales a firm can make without making a loss i
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where AR=AC
Satisfying
Managers (who run the firm) return just enough profit to shareholders (who own the firm) to
keep them happy
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Short run
Any period of time where at least one factor of production is fixed
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Sunk costs
Costs which can not be retrieved when exiting a market e
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marketing costs, non resale
machinery
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Supply function
Represents supply as a function of price
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However, they collude through
things such as price leadership
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Total (physical) product
The total quantity of outputs produced over a period of time from a given quantity of inputs
Total revenue
The amount of revenue received from all products sold
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g
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Welfare loss
The loss of consumer plus producer surplus in imperfect markets

Economies of scale/increasing returns to scale
Long run concept
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g
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Long run concept
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Diseconomies of scale/decreasing returns to scale
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Factors that cause an increase in unit costs as output increases past a certain
point e
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bureaucracy
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When an (one) additional variable input is added to a production process where
one factor or production is fixed and it results in greater marginal product
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Diminishing returns
Short run concept
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Causes MC to increase

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