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Microeconomics > 1.2 > Flashcards

1.2 Flashcards

1
Q

what are the assumptions of rational economic decision making

A

consumers aim to maximise utility - satisfaction gained from receiving a product

firms aim to maximise proft

governments aim to maximise social welfare

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2
Q

define demand

A

demand is the ability and willingness to buy a particular good at a given price at a given time

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3
Q

what does a movement along a demand curve represent compared to a shift in the demand curve

A

movement along a curve is a change in price of a good

short of demand curve is a change in the factors that affect demand

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4
Q

what does it mean if there is the shift to the right on demand curve compared to a shift to the left

A

increase In demand if shifts to the right

decrease in demand if shifts to the left

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5
Q

what does it mean if there is movement to the right along the demand curve compared to a movement to the left

A

extension in demand if to the right, quantity demand rises as prices fall

contraction in demand if to the left, quantity demanded decreases as prices rise

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6
Q

what are the conditions of demand

A

PIRATES

Population
Income
Related goods
Advertising
Taste
Expectations
Seasons

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7
Q

what is diminishing marginal utility

A

the satisfaction derived from the consumption of an additional unit will decrease as more of a good is consumed

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8
Q

what is PED

A

price elasticity of demand

responsiveness of demand to a change in the price of a good

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9
Q

what is the formula of PED

A

% change in quantity demanded divided by % change in price

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10
Q

what are the numerical values of PED

A

unitary elastic = 1 - quantity demanded changes by how much price changes

relatively elastic = PED>1

Relatively inelastic = PED<1

perfectly elastic = PED = infinity

perfectly inelastic = PED = 0

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11
Q

factors influencing PED

A

availability of substitutes

time

necessity

size of total expenditure

addictive

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12
Q

significance of PED

A

if demand is inelastic, the imposition of tax will be ineffective as quantity demanded will not fall

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13
Q

PED and revenue

A

for elastic demand curve, prices decrease increase revenue as there is a higher quantity demanded

for inelastic demand curve, prices decrease, decrease revenue as

for unitary elastic curve - change in price does not effect revenue

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14
Q

income elasticity of demand equation

A

%chnage in quantity demanded divided by % change in income

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14
Q

what is income elasticity of demand

A

responsiveness of demand to a change in income

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15
Q

numerical values for income elasticity of demand

A

YED<0- inferior good

YED>0- normal good

YED>1 - luxury good

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16
Q

significance of YED

A

during times of high income, businesses may produce more luxury goods, likely increasing sales

17
Q

what is cross elasticity of demand

A

responsiveness of demand for one product to the change of price of another product

18
Q

equation of cross elasticity of demand

A

%change of quantity demanded for A divided by %chnage in price of B

19
Q

numerical values for XED

A

XED> 0 is substitutes

XED < 0 is complimentary goods

XED -0 is unrelated goods

20
Q

significance of XED

A

firms need to be aware of their competition and those producing complementary goods, need to know how price changes by other firms will impact them

21
Q

what is supply

A

ability and willingness to provide a good or service at a particular price and a given moment in time

22
Q

what does a movement along the supply curve signify compared to a shift

A

movement means change in price

shift due to change in factors of supply

23
Q

What are the conditions of supply

A

Cost of production

Price of other goods (joint supply, competitive supply)

Weather

Technology

Goals of supplier

Government legislation

Taxes and subsidies

24
Q

What is the elasticity of supply

A

Responsiveness of a Change of supply to a change in price of a good

25
Q

What is the equation for PES

A

% change in quantity supplied divided by % change in price

26
Q

What are factors influencing PES

A

Time

Stock

Efficiency

Availability of factors of production

Substitutes availability

Ease of entry into market

27
Q

what does it mean if a point on the supply curve moves to the left compared to a move to the right

A

to the left is a contraction in supply, quantity supplied falls due to a decrease in price

to the right is extension in supply, quantity supplied rises due to an increase in price.

28
Q

what are the conditions of supply

A

cost of production

price of other goods

weather

technology

government legislation

taxes and subsidies

29
Q

what is the price elasticity of supply

A

responsiveness of supply to a change in the price of the good

30
Q

price elasticity of supply equation

A

% change in quantity supplied divided by % change in price

31
Q

factors affecting PES

A

time

stocks

working below full capacity

availability of factors of production

ease of entry into the market

availability of substitutes

32
Q

what does the price equilibrium mean

A

supply is equal to demand, no more forces bringing about change.

33
Q

what is the price mechanism

A

allocates resources and price is determined by the interactions of demand and supply

34
Q

what are the price mechanism functions

A

rationing function- limited resources can be rationed and allocated to those who value them the most

signalling function- acts as a signal of where resources should be used

incentive function- incentive to work harder

35
Q

what is consumer and producer surplus

A

consumer - difference between price consumers Pay and the price they actually pay

producer- difference between the price the supplier is willing to produce and how much they actually produce for

36
Q

what is an indirect tax

A

where the person who pays for the product is not responsible for the tax but they are charged tax which the business is required to pay

37
Q

what are the two type off indirect taxes

A

ad valorem- tax increases based on in proportion to the value of goods.

specific tax- an amount added to the price of the product

38
Q

how does tax affect the supply curve

A

shift to the left since cost of production increases

39
Q

what is the incidence of tax and how does the demand or supply elasticity affect it

A

tax burden on the taxpayer

if perfectly elastic, consumer will pay all tax

if demand curve perfectly inelastic, consumer will pay all tax

if demand curve is elastic, suppliers will pay all the tax

40
Q

what is a subsidy

A

subsidy is a grant given by the government.

41
Q
A

Microeconomics (3 decks)

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