A level Economics Revision: Cheeky Revision Shortcuts

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Supply and Demand

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Elasticities

Ceteris paribus

This is a Latin phrase meaning ‘all other things being equal’. It is used in economics because it would be difficult to assess the relationship between one variable and another without assuming that all other variables remain constant. It’s a bit like having the ‘control’ in science experiments.

Complements

Goods are complementary if they ‘go together’ in some way. For example, tea and sugar are complements, as are petrol and cars.

Cross price elasticity of demand

This is very similar to the price elasticity of demand, except two goods are involved. It is defined as the responsiveness of the demand for one good to a change in price of a different good. It can be calculated by dividing the percentage change in the quantity demanded of good A by the percentage change in the price of good B.

Elastic demand

The demand for a good is relatively elastic when, for a given percentage change in its price, the percentage change in the quantity demanded is larger. Goods with lots of substitutes tend to have relatively elastic demand (e.g. a type of chocolate bar).

Elastic supply

The supply for a good is relatively elastic when, for a given percentage change in its price, the percentage change in the quantity supplied is larger. Supply is more likely to be relatively elastic if the time period in question is longer, or the supplier has the ability to change the good he is producing at short notice (maybe because his production process is transferable across different product areas).

Full capacity

A firm (or an industry, or an economy) is said to have full capacity if all resources (machines, labour, etc.) are being used and so it is not possible to increase output.

Giffen goods

Giffen goods are very inferior goods! Whilst the substitution effect of, say, a price rise causes demand to fall (as with all goods), the income effect acts in the opposite direction and is very strong. This means that the overall effect of a price rise for a Giffen good is an increase in its demand! Very unusual! A good example is potatoes during the famine in Ireland 150 years ago.

Income effect of a price change

If the price of a good rises, ceteris paribus, then, assuming that one’s nominal income remains constant, the amount that one can really buy with this income has fallen. One’s real income has fallen. The opposite happens for a price cut. In other words, price changes will affect consumers’ demand for goods via changes in their real incomes.

Income elasticity of demand

It measures the responsiveness of the quantity demanded to a given change in real income. It can be calculated by dividing the percentage change in the quantity demanded of a good by the percentage change in real income.

Inelastic demand

The demand for a good is relatively inelastic when, for a given percentage change in its price, the percentage change in the quantity demanded is smaller. Goods with very few substitutes tend to have relatively inelastic demand (e.g. petrol).

Inelastic supply

The supply for a good is relatively inelastic when, for a given percentage change in its price, the percentage change in the quantity demanded is smaller. Supply is more likely to be relatively inelastic if the time period in question is very short, so that firms do not have the time to react to changes in price.

Inferior goods

An inferior good is one where its income elasticity of demand is negative. This means that the demand for inferior goods falls as real incomes rise and vice versa. Bus travel is a good example of an inferior good.

Infinity

Perfectly elastic curves have infinite elasticity. Infinity, in a sense, does not exist. Think of the biggest number possible and then you can always add one to it. In this context, infinity is a very large number!

Luxuries

Luxuries are goods whose income elasticity of demand is greater than one. So, for a given rise in real incomes of, say, 10%, the demand for these goods rises, but by a larger percentage, say, 20%. Examples include holidays abroad and expensive meals out.