When the same amount of tax is imposed on HIGH-QUALITY-PRODUCTS and LOW-QUALITY-PRODUCTS The relative price of HIGH-QUALITY-PRODUCTS in terms of LOW-QUALITY-PRODUCTS decreases Relatively higher proportion of HIGH-QUALITY-PRODUCTS will be consumed
Surplus / Shortage
Quantity demanded > Quantity supplied Price is below the equilibrium price
Quantity supplied > Quantity demanded Price is above the equilibrium price
Elasticity
When price increases, how total expenditure will be affected?
When demand is inelastic,
Price increases, quantity demanded decreases % increase in P > % decrease in Qd Total expenditure increases
Price increases, quantity demanded decreases % increase in P < % decrease in Qd Total expenditure decreases
Factors affecting the price elasticity of demand
Availability of close substitutes
When there are more and closer substitutes for a good Ed will become more elastic
If the good is a daily necessity Ed will become more inelastic
If the good is a luxury good (which is not daily necessity) Ed will become more elastic
If a good is addictive / people develops a habit of consuming that good Ed will become more inelastic
Proportion of expenditure to income
If the proportion of expenditure on consuming that good is higher to income Ed will become more elastic
If there are many uses for a good Ed will become more elastic
Time available to adjust competition
If there is more time available to adjust consumption Ed will become more elastic
Durable goods (e.g. television) Ed will become more elastic
Non-durable goods (e.g. food / clothes ) Ed will become more inelastic
Factors affecting the price elasticity of supply
Ease of adjusting factors of production
Easier to adjust factors of production
(e.g. more easier to employ more factors of production)
Amount available of the good
Some goods have fixed quantity supplied available Es is perfectly inelastic
Higher factor mobility
(ease of a factor of production to change from one industry to another)
Firms can enter the market more easily
Reserve capacity on production
Higher reserve capacity
(more amount of resources are ready to put into production)
Time allowed for adjusting production
More time is allowed for adjusting production
Government Intervention
When the price control is effective,
Price ceiling (Maximum Price control)
Is below the equilibrium price
Price floor (Minimum price control)
Is above the equilibrium price
When the quantity control is effective,
Is below equilibrium quantity
Tax burden / Subsidy benefit
Ed (Elasticity of Demand) < Es (Elasticity of Supply) | Ed (Elasticity of Demand) > Es (Elasticity of Supply) |
CTB (Consumer Tax Burden) > PTB (Producer Tax Burden)
CSB (Consumer Subsidy Benefit) > PSB (Producer Subsidy Benefit) | CTB (Consumer Tax Burden) < PTB (Producer Tax Burden)
CSB (Consumer Subsidy Benefit) < PSB (Producer Subsidy Benefit) |
Paper 2 Structured Question
| | Concepts involved in answers |
Changes in demand and supply at the same time | Under what condition will price increases / decreases Under what condition will quantity transacted increases / decreases | Comparing the extent of demand change and supply change |
Change in price /
Change in supply | Under what condition will total revenue increase / decrease | The price elasticity of demand |
Imposition of tax / subsidy | Comparing the size of CTB and PTB / CSB and PSB | Comparing the elasticity of demand and supply |
