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A Level Economics Theme 1 > 1.2 How markets work > Flashcards

1.2 How markets work Flashcards

1
Q

Inductive statement

A

Collect evidence

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2
Q

Deductive statement

A

Start with a hypothesis

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3
Q

Rational choice

A

involves weighing up costs and benefits and trying to maximise surplus of benefits over costs

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4
Q

Utility

A

measure of satisfaction that we get from purchasing and consuming a G/S

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5
Q

Consumer durables

A

Products that give steady flow of utility over their working life

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6
Q

Consumer non-durables

A

Products that are used up in the act of consumption

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7
Q

Demand

A

Quantity of a G/S that consumers are willing and able to buy at a given price at a given time period

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8
Q

Diminishing marginal utility

A

Marginal utility is change in satisfaction from consuming an extra unit of a G/S. Beyond a point, marginal utility may start to fall

As more of a good is consumed, the additional utility (satisfaction) from each extra unit consumed will fall. Because consumers are assumed to be rational, they will not pay more for a good than the additional utility it provides. Therefore, price and quantity demanded are inversely related.

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9
Q

Complement goods

A

Products used together - joint demand

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10
Q

Derived demand

A

demand that comes from demand for something else. Demand for machinery derived from demand for consumer goods

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11
Q

PED

A

Price elasticity of demand - responsiveness of demand for a product following a change in price

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12
Q

Substitute goods

A

Two alternative products that could be used for the same purpose

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13
Q

Competitive supply

A

Alternative products that a firm can produce with its resources. E.g. potatoes OR carrots

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14
Q

Supply

A

quantity of a G/S that a producer is willing and able to supply onto the market at a given price at a given time period

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15
Q

PES

A

Price elasticity of supply - responsiveness of supply of a product following a change in price

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16
Q

Equilibrium

A

situation where there is no tendency for change

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17
Q

Price mechanism

A

Decisions of consumers and firms interact to determine allocation of resources. Does not ensure equitable distribution of resources and can lead to market failure

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18
Q

Consumer surplus

A

difference between the total amount that consumers are willing and able to pay for a good or service

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19
Q

Producer surplus

A

difference between what producers are willing and able to supply a good for and the price they actually receive

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20
Q

Direct tax

A

tax levied directly on an individual or organisation

21
Q

Indirect tax

A

tax levied on a good or service

22
Q

Specific tax

A

Set tax per unit. Parallel shift in supply curve.

23
Q

Ad Valorem tax

A

Percentage of sales price tax. Non-parallel shift

24
Q

Subsidy

A

payments by government to suppliers to reduce COP.
Effect: increase supply, decrease market equilibrium price

25
Q

Computational weakness

A

When consumers find it difficult to calculate probability of something happening when they make purchasing decisions.

26
Q

Habitual consumption

A

Strong default choices. Repeat choices become automatic as they do not involve much mental effort.

27
Q

Rational choice model

A

independent choice
consistent tastes and preferences
complete info
optimal choice

Continue consuming until marginal benefit = marginal cost

28
Q

Bounded rationality

A

When consumers have limited attention, knowledge and ability to understand complex decisions

29
Q

Info gaps

A

Consumers have insufficient knowledge to make optimal decision

30
Q

Explain shape of demand curve

A

Income Effect: When the price of a good falls, the consumer can maintain the same consumption for less spending. Provided that the good is normal, some of the increase in real income is used to buy more

Substitution Effect: When the price of a good falls, ceteris paribus, the product is now relatively cheaper than an alternative and some consumers will switch their spending from an alternative good or service. The more substitutes there are in the market and the lower the cost and inconvenience of switching, the bigger the substitution effect is likely to be.

31
Q

Joint demand

A

demand for one product is positively related to demand for a related good or service - complements

XED = negative

32
Q

Composite demand

A

Product has more than one use

Demand increase leads to supply decrease

33
Q

Determinants of PED

A

No of substitutes: more substitutes - more price elastic
Cost of switching: expense in switching - inelastic
Necessity = inelastic
Luxury = elastic
Higher proportion of income = more elastic
More time to respond to price change = more elastic
Habitual = inelastic
Broad definition of G/S = inelastic

34
Q

Explaining upwards slope of supply

A

Profit motive: When market price rises following an increase in demand, it then becomes more profitable for businesses to increase their output

Production and costs: When output expands, a firm’s production costs tend to rise; therefore, a higher price is needed to cover these extra costs. This may be due to diminishing returns as more factors of production are added to production, but each extra input is less productive than the one before

New entrants into the market: Higher prices create an incentive for other businesses to enter the market leading to an expansion of supply

35
Q

Substitute in production

A

two or more goods that can be produced using the same resources

Producing one good prevents sellers from using resources to produce another. Produce one or produce the other, but not both.

36
Q

Joint supply

A

Joint supply is where an increase or decrease in the supply of one good leads to an increase or decrease in supply of a by-product.

cows can be utilized for milk, beef, and hide

37
Q

PES determinants

A

Spare capacity
Stock of finished products/components
Factor mobility (flexible labour market)
Time period and production speed

38
Q

Increase in demand

A

Excess demand at existing market price
SR rise in price and fall in available stock - signal to producer
Profit incentive leads to movement along supply curve

39
Q

Excess demand

A

Market price below EQ price
Results in queuing for G/S and upward pressure on price
Higher prices rations demand to those w effective demand
Stimulates expansion of supply to respond to high profit

40
Q

Causes of shifts in demand curve

A

Changes in price of substitutes/complements
Changes in real income
Changes in distribution of income
Changes in consumer tastes or preferences
Interest rates
Changes in size and age structure of population
Seasonal factors

41
Q

Normal goods (necessities and luxury)

A

Positive income elasticity of demand
Necessity: between 0 and 1, income inelastic
Luxury: >1

42
Q

Inferior goods

A

Negative income elasticity of demand

43
Q

Cross price elasticity of demand for substitutes and complements

A

Substitutes: positive
Complements: negative

44
Q

Price mechanism functions

A

Signalling: adjusts to demonstrate where resources are required. If prices rising due to high demand, it is a signal to expand production to meet rising demand. If there is excess supply, price mechanism will eliminate surplus allowing market price to fall.
Incentives: Higher prices act as incentive to raise output due to changing nature of needs and wants. Demand weaker in recession, supply contracts as producers cut back on output.
Rationing: when demand outstrips supply. Shortage, prices are big up and only those who are willing and able to pay will buy.

45
Q

Impact of indirect tax on consumers and suppliers

A

PED > 1, indirect tax absorbed mostly by supplier
PED < 1, indirect tax absorbed mostly by consumer

46
Q

Rational decisions require?

A

Time
Info
Ability to process info

47
Q

Bounded rationality

A

Due to lack of time, info and ability to process info.

habitual behaviour/consumer inertia
people influenced by behaviour of others
consumer weakness at computation

48
Q

Determinants of demand

A

Changes in age structure
Changes in income
Advertising
Changes in tastes/preferences

49
Q

XED

A

Cross elasticity of demand
Responsiveness of demand for one good to changes in price of another good.

Substitutes have positive XED.
Complements have negative XED.

A Level Economics Theme 1 (4 decks)

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