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MicroEconomics > 1.2 > Flashcards

1.2 Flashcards

1.2.1. Rational Decision Making, 1.2.2. Demand, 1.2.3. Elasticities of Demand, 1.2.4. Supply, 1.2.5. Price Elasticity of Supply, 1.2.6. Price Determination, 1.2.7. Price Mechanism, 1.2.8. Consumer and Producer Surplus, 1.2.9. Indirect Taxes and Subsidies

1
Q

What is Utility?

A

The level of satisfaction gained from consuming a good or service.

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2
Q

What are the three types of irrational decision making?

A

-Herding
-Habitual
-Computation Weakness

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3
Q

What does the irrational decision making Herding mean?

A

Copying other people (Trends)

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4
Q

What does the irrational decision making Habitual mean?

A

Buying the same thing you did the last time

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5
Q

What does the irrational decision making Computation Weakness mean?

A

Picking an option and hoping for the best

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6
Q

What does a Demand Curve look like?

A

A graph with a downward sloping line from the top of the y axis to the right of the x axis.
Y axis=Price
X axis= Quantity

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7
Q

What’s the general rule of a Demand Curve?(Price and Quantity Demanded)

A

The general rule is the higher the price the lower the Quantity Demanded. If a business increases/decreases their price we move along the Demand Curve.

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8
Q

What are the Factors leading to a change in Demand?
(7 Factors)

A

-Changes in Price of Substitutes and complementary goods
-Changes in Consumer Incomes
-Fashion, Tastes and Preferences
-Advertising and Branding
-Demographics
-External Shocks
-Seasonality

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9
Q

What happens to Demand on a graph when its increased? (Shift)

A

It shifts to the right

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10
Q

What happens to Demand on a graph when its decreased? (Shift)

A

It shifts to the Left

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11
Q

What’s a substitute good?

A

A good that is an alternative product. e.g. Pepsi and Cola

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12
Q

What’s a Complimentary good?

A

Goods that are bundled together. e.g. Air pods and a phone

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13
Q

What happens to demand if a substitute goods price is increased? (On a graph)

A

Demand will shift to the right because if a substitute products price increases more people will then go for the non-substitute good. e.g. if Pepsi price increases more people will them go for coca cola instead

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14
Q

What happens to demand if a Complimentary goods price is increased? (On a graph)

A

Demand will shift to the left because if a complimentary goods price goes up then people will be less inclined to buy the good and so then wont buy the good that comes with it. e.g. if the price of apple phones go up and a person decides not to buy it then they aren’t going to buy the air pods that then only work if are with the phone.

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15
Q

What is Price Elasticity of Demand (PED)?

A

A measure of the responsiveness of Quantity Demanded for a product to a given change in its price. (When there is a change in Price what happens to the Quantity Demanded?)

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16
Q

What’s the equation for working out percentage change?

A

((New-old)/old)x100 =Percentage change

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17
Q

What’s the equation for PED?

A

PED=% change in QD/ % change in Price

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18
Q

What factors can affect PED? (6 Factors)

A

-Availability of Substitutes
-% Income spent on a product
-Type of Product
-Durability of Product
-Sustainability of Product
-Health benefits of Product

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19
Q

If the value is greater than 1 is Demand Elastic or Inelastic?

A

Demand is Elastic

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20
Q

If the value is less than 1 is Demand Elastic or Inelastic?

A

Demand is Inelastic

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21
Q

What will happen to the Demand Curve the more Elastic it is?

A

The more horizontal (—-)the Demand Curve Becomes

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22
Q

What will happen to the Demand Curve the more Inelastic it is?

A

The more vertical (|) the Demand Curve Becomes

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23
Q

What does Price Inelasticity mean?

A

Its means Consumers are willing to buy your product because its normally a necessity. e.g. Petrol

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24
Q

What does Price Elasticity mean?

A

A product that when the price is raised consumers will start to not buy your product as it isn’t needed e.g. Luxury items. So what is ideal is if the price is decreased.

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25
Q

What is Income Elasticity of Demand (YED)?

A

A measure of the responsiveness of demand for a product to a given change in consumer income.

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26
Q

What’s the equation for YED?

A

YED=% change in QD/% change in Y (Income)

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27
Q

What Good is it when YED is in between 0 and +1?

A

Normal Goods (essential goods we buy regularly)

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28
Q

What Good is it when YED is greater than +1?

A

Superior Goods (High priced quality brands)

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29
Q

What Good is it when YED is negative?

A

Inferior Goods (Budget Brands we replace with expensive brands when income increases)

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30
Q

What are Luxury Goods?

A

Expensive Goods that we wouldn’t consider unless our income improves.

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31
Q

What are Normal Goods?

A

More essential Goods that we buy regurarly

32
Q

What are Inferior Goods?

A

Budget brands bought when income falls.

33
Q

What is Cross Elasticity of Demand (XED)?

A

A measure of the responsiveness of the demand for one product to a change in the price of another product.

34
Q

What’s the equation for XED?

A

XED=% change in QD of Good A/ % change in price of Good B

35
Q

When XED is positive what does this mean?

A

It means that when the Price of an alternative goes up and the Quantity Demanded goes up as well it means that its a substitute good.

36
Q

When XED is Negative what does this mean?

A

It means that when the Price of an alternative goes up and the Quantity Demanded goes down it means that they are complimentary goods

37
Q

If the value of XED is greater than +1 what does it mean?

A

Strong Substitutes

38
Q

If the value of XED is greater than +0-1 what does it mean?

A

Weak Substitutes

39
Q

If the value of XED is greater than -1 what does it mean?

A

Strong Complements

40
Q

If the value of XED is greater than -0-1 what does it mean?

A

Weak Complements

41
Q

What does the Supply Curve look like on a graph?

A

The Line goes from the point where the x and y axis meet and goes up.
Y axis= Price
x axis= Quantity

42
Q

What are the factors leading to a change in supply?

A

-Changes in the cost of production
-Introduction of new technology
-Indirect taxes
-Government subsidies
-External Shocks

43
Q

What way will the Supply Curve shift if it increases?

A

Supply will shift to the right

44
Q

What way will the Supply Curve shift if it Decreases?

A

Supply will shift to the left

45
Q

What’s an Indirect Tax? (what does it do to the supply of demerit goods?)

A

A tax on goods and services rather than on income or profits. VAT Decreases the supply of demerit goods.

46
Q

What’s a subsidy? (what does it do to the supply of merit goods?)

A

A sum of money granted by the state or a public body to help an industry or business keep the price of a commodity or service low. Grant increases supply of merit goods.

47
Q

What does a graph look like when there is market Equilibrium?

A

The Supply is equal to the Demand. Any price above it would create excess supply and any price below it would create excess Demand.

48
Q

What is Price Determination?

A

Price determination is the process of how the forces of demand and supply in a market interact to determine the price of a product or service. There are different methods of price determination, such as cost-based, value-based, or competition-based. The equilibrium price is the price that balances demand and supply.(How the Product is priced due to different factors)

49
Q

What is Price Elasticity of Supply?

A

Measures the relationship between change in quantity supplied and a change in Price. (When price of product changes how QS is affected)

50
Q

What’s the equation for PES?

A

% Change of QS/ % Change of P

51
Q

What are the factors that affect Price Elasticity of Supply?

A

-Spare Production Capacity
-Level of Stock Available
-Ease and cost of substitution/ability to switch resources
-Time it takes to increase output when price increases

52
Q

What does a graph look like when there is Elastic Supply?

A

The Demand has shifted to the right on the supply and demand diagram.

53
Q

What does a graph look like when there is Inelastic Supply?

A

The Demand has shifted to the Left on the supply and demand diagram.

54
Q

If price is too high what will there be excess of?

A

Excess Supply

55
Q

If price is too low what will there be excess of?

A

Excess Demand

56
Q

What is Market Clearing?

A

Markets may not automatically find their equilibrium so prices need adjusting for supply to equal demand. This is called market clearing as we clear up any excess supply or Demand.

57
Q

What does Price Mechanism Mean?

A

This determines how resources are allocated in the economy. It has 3 main functions. (Signaling, Rationing and Incentives)

58
Q

What are the three main functions of Price Mechanism?

A

Signaling
Rationing
Incentives

59
Q

What is Price Signaling?

A

Increases price signals to reallocate resources or that there is more demand for a good which means they need to produce more.

60
Q

What is Price Rationing?

A

When there’s excess demand the price of a good or service begins to rise. This prices out certain consumers and helps it go back to equilibrium.

61
Q

What are Price Incentives?

A

Increased price encourages producers and consumers to change their behavior. Firms supply more hopes of more profit. Consumers reduce consumption or switch to cheaper substitute goods.

62
Q

If Demand Increases it shifts to the right signaling to producers to do what?

A

Increase their supply

63
Q

If supply Increases it shifts to the right signaling to consumers to do what?

A

Consumer more goods and services

64
Q

What’s Consumer Surplus?

A

The difference between how much a consumer pays and how much they are willing to pay. At any point there will be consumers willing to pay more for that good or service.

65
Q

Where is Consumer Surplus shown on a graph?

A

Top Triangle (P1AB)

66
Q

What’s Producer Surplus?

A

The difference between how much a producer recieves and the cost of producing it. At any Point there will be producers willing to supply that good for less.

67
Q

Where is Producer Surplus shown on a graph?

A

Bottom Triangle (P1BC)

68
Q

If Supply and Demand are at equilibrium what does that mean for Producer and Consumer Surplus?

A

They will be the same

69
Q

What are Merit Goods?

A

Goods and Services that are healthy or socially desirable due to the positive effects they have on the consumer. They are under-consumed.

70
Q

What are De-Merit Goods?

A

Goods and Services that are unhealthy, degrading or socially undesirable due to the negative effects they have on the consumer. They are Over-Consumed Goods.

71
Q

What does an Indirect Tax do for a firm’s Cost of Production?

A

Increases Cost of Production.

72
Q

What are the two types of Indirect Taxes?

A

Specific Tax and Ad valorem Tax (VAT)

73
Q

What is Specific Tax? What does this do Supply?

A

A Fixed Amount placed on a Good. This shifts supply to the left.

74
Q

What is Ad Valorem Tax (VAT)? What does this do to Supply?

A

Percentage placed on a good.(UK VAT=20%). This creates a skewed supply curve shifted to the left.

75
Q

What are Subsidies?

A

A sum of money granted by the state or a public body to help an industry or business keep the price of a commodity or service low.

76
Q

What do subsidies do for a firm’s cost of production?

A

Decreases a firms cost of production. Used to increase production/consumption of Merit Goods.

77
Q

How is the Supply affected on a graph when the firm has a subsidy?

A

The supply increases due to the subsidy and so shifts to the right.

MicroEconomics (8 decks)

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