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Micro Economics > 1.2 > Flashcards

1.2 Flashcards

1
Q

What are the underlying assumptions of rational economic decision making?

A
  • Consumers aim to maximise utility

- Firms aim to maximise profits.

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2
Q

What is maximisation?

A

When economic agents try to obtain the most they can from economic activity e.g.
Households aim to maximise utility, satisfaction and wages.
Firms aim to maximise profit, sales and growth.
Government aims to maximise welfare.

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3
Q

What is Profit maximisation?

A

When firms aim for the highest level of profit available with their production of goods/services.

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4
Q

What is profit satisficing?

A

A level of profit that satisfies the owner. May aim for this to work less hours.

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5
Q

What is sales maximisation?

A

Trying to maximise sails

to increase market share.

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6
Q

What is Behavioural economics?

A

Looks at the psychological reasons behind why people make decisions.

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7
Q

What is Bounded rationality?

A

Suggests when people make decisions, they are limited by:

  • information available to them
  • Intellectual limitations
  • Time available
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8
Q

Factors that can be used to influence peoples decisions

A
  • social norms
  • ## nudge theory
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9
Q

What are social norms?

A

Rules of behaviour that are accepted by society. People try fit in by following social norms.

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10
Q

What is the nudge theory?

A

An attempt to manipulate social norms through positive reinforcement in a non-coercive manner.

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11
Q

What is habitual behaviour?

A

When people follow the same routines, they repeat the same actions on a regular basis.
Although, people can adapt to new routines and find it hard to convert back to old ways.

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12
Q

What is loss aversion?

A

People have a tendency to prefer to avoid losses then gain the same gains. e.g. It is better to lose £10 then find it.

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13
Q

What is computation and why do people fail to think this way?

A

Computation - the ability to make correct decision with the information available.
However, people take mental shortcuts leading to the wrong decision.

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14
Q

Three processes leading to irrational behaviour

A
  • availability = making decisions due to events we remember
  • Representatives = making decisions on past information
  • Anchoring and adjustment = using a starting number when estimating a different number.
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15
Q

Definition of demand

A

The amount of a good or service that consumers are willing and able to pay at any give price

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16
Q

The Demand curve

A

Shows the inverse relationship between price and QD. Shows demand at any price.

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17
Q

What causes a movement along the demand curve and the difference between an extension and contraction?

A

A change in price.

If price increases, there is a contraction in demand and an extension if price falls of normal goods.

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18
Q

What is the snob effect?

A

People pay more for a product as the price increases due to the higher status. - Veblen

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19
Q

What is a normal good?

A

When price increases, demand decreases and vice versa.

When income increases demand increases and vice versa.

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20
Q

What causes a shift in demand?

A 
Population
Advertisement 
Substitutes (availability of)
Income
Fashion/trends
Interest rates
Complimentary goods (price of)

Increase in demand is a shift to the right, decrease is to the left

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21
Q

What is marginal utility?

A

The extra satisfaction gained from consuming an additional unit of a good or service

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22
Q

What is diminishing marginal utility?

A

The marginal utility of a good or service consumed will decrease as we consume more.
Showed by the demand curve.

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23
Q

What is elasticity?

A

Looks at the sensitivity of one variable in relation to another

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24
Q

How do you calculate Percentage change?

A

change in value/ original value X 100

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25
Q

What is Price Elasticity of Demand?

A

PED measures the responsiveness of demand to a change in price.

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26
Q

What is the formula for PED?

A

% change in Quantity demanded / % change in price

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27
Q

What does a PED between 0 and -1 mean?

A

The product/service is price inelastic. As prices increases, demand decreases less and sales revenue increase.
0 = perfectly inelastic.

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28
Q

What does a PED between 1 and infinity mean?

A

Price Elastic.
Decreasing prices increases demand and revenue.
infinity = perfectly elastic.

29
Q

What are the factors of PED?

A

Substitutes - More substitutes = more elastic.

Time - short-run products are more inelastic due to customer habits

Definition of the market - smaller market = more inelastic due to less competition

30
Q

What is income elasticity of demand?

A

A measure of the responsiveness of demand to a change in income.

31
Q

What is the formula for YED?

A

% change in quantity demanded /

% change in income

32
Q

What does a YED between -1 and 1 mean?

A

Income inelastic - demand at a lower proportion than income.

33
Q

What does YED 1 mean?

A

Income inelastic

Demand changes to a higher proportion then income.

34
Q

What is a normal good?

A

Demand increases when incomes increase

35
Q

What is a inferior good?

A

Demand decreases when incomes increase.

36
Q

What are the factors of YED?

A
  • Whether the good is a luxury (elastic) or necessity (inelastic).
  • The level of income of a consumer - higher incomes = more luxuries.
  • Standards of living : wealthier countries buy more luxuries
  • The economic cycle
37
Q

What is cross elasticity of demand?

A

Is a measure of the responsiveness of demand for one good to a change in price of another good.

38
Q

What is the formula for XED?

A

% change in Quantity demanded of good A / % change in price of good B

39
Q

What does XED between -1 and 1 mean?

A

Inelastic

40
Q

What does XED 1 mean?

A

Elastic

41
Q

What are the factors of XED?

A
  • If the goods are substitutes XED will be positive
  • If the goods are compliments XED will be positive
  • If the goods are not relevant XED will be 0.
42
Q

How do firms change products to change XED?

A
  • differentiate products to reduce substitutes

- Produce compliment goods to accompany their core product

43
Q

How do government taxes effect PED inelastic and elastic products?

A

Inelastic - little effect on demand

Elastic - Decreases demand as firms must increase price subsidies will increase demand for elastic products

44
Q

What is the definition of Supply?

A

The amount of a good or service that producers are willing and able to sell at any given price.

45
Q

What are the factors of Supply?

A
  • The price of the good
  • The impact of changing costs of production
  • Changes in technology
  • Prices of other goods and services
  • Government policies (taxes/services)
  • Other factors e.g. expectations.
46
Q

What is the impact of Indirect Taxes on supply?

A

Make it more expensive to produce a product decreasing supply

47
Q

What is the impact of Subsidies on supply

A

Decreases costs increasing Supply

48
Q

What is the relationship between Supply and price?

A

As price increases supply increases as firms want more profit and vice versa.

49
Q

How does a change in price effect the supply curve?

A

Causes a movement along the supply curve

Increasing price extends supply, decreasing price contracts supply

50
Q

What factors shift supply?

A
  • Changes in the cost of production
  • New Technology
  • Indirect taxes
  • Subsidies

Increase in supply = shift right
Decrease in supply = shift left

51
Q

What is the definition of Price Elasticity of Supply?

A

A measure of the responsiveness of supply to a change in price.

52
Q

What is the formula for PES?

A

% Change in quantity supplied / % change in price

53
Q

What does a PES between 0 and 1 mean?

A

Inelastic
Supply changes to a lower proportion than price

0 = perfectly inelastic

54
Q

What does a PES between 1 and infinity mean?

A

Elastic
Supply changes to a higher proportion than price

infinity = perfectly elastic

55
Q

What are the factors that effect PES?

A
  • Price
  • Substitutes
  • Time - short-run = inelastic
56
Q

What is market equilibrium?

A

The point at which demand is equal to supply.
Market clearing price - no excess supply or demand.

Market forces push prices towards equilibrium.

A change in supply or demand causes a new equilibrium point.

57
Q

What is economic incentives?

A

The reason for economic agents to provide goods and services based on the price mechanism.

58
Q

What is the rationing function?

A

Increased demand/ reduced supply increases prices leading to some consumers no longer demanding the product/ service.
- demand

59
Q

What is the signalling function?

A

Changing prices gives a signal to consumer and producers as to whether leave or enter the market.
- supply

60
Q

What is the incentive function?

A

When a producer has the incentive to produce more due to higher prices.
- supply

61
Q

What is allocative efficiency?

A

Customer satisfaction is maximised in production

62
Q

What is Productive efficiency?

A

Maximum output is reached.

63
Q

What is economic efficiency?

A

Allocative and productive efficiency is reached at the same time.

64
Q

What is consumer Surplus?

A

The difference between the price a consumer is willing and able to pay for a product and the price they actually pay.
Reduction in supply reduces producer surplus.

65
Q

What is Producer Surplus?

A

The difference between the price a producer is willing and able to supply a product at and the price they actually receive
Reduction in demand reduces consumer surplus.

66
Q

Taxation

A

Taxation is the medium through which governments finance their spendings.

67
Q

Indirect/direct taxes

A

An indirect tax is a tax on goods/ services. They increase costs of production so shift supply left.
A direct tax is on an individual/ organisation

68
Q

Subsidies

A

A subsidy is a financial incentive to produce or consume a given product.
They reduce costs of production so shift supply right.

Micro Economics (9 decks)

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