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Economics > 1.2) how markets work > Flashcards

1.2) how markets work Flashcards

1
Q

what are the aims of consumers?

A

their aim is to maximise utility

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2
Q

what are the aims of firms?

A

their aim is to maximise profit

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3
Q

what are the 5 influences on demand?

A

1) the price of a good - this will cause movement along curve
2) the price of an other good-shift in demand
3) the income-shift in demand
4) tastes and preferences
5) time period over which demand is considered

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4
Q

what is the law of diminishing marginal utility?

A

a situation where individuals gain less additional utility from consuming a product, the more of it is consumed

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5
Q

what is the law of demand?

A

there is an inverse relationship between the price of a good and service or quantity demanded, cetiris paribus

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6
Q

state two reasons why the demand curve slopes downward?

A

1) the real income effect- at a higher price, consumers will have less income left over
2) the substitution effect- the more expensive a good the more likely a consumer will decide to purchase something else

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7
Q

define PED

A

a measure of how sensitive demand is to a change in price.

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8
Q

what are the 4 influences on PED?

A

1) availability of substitutes
2) if good is perceived as neccessity
3) proportion of income spent on good
4) time period for which ped is considered

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9
Q

how can you increase revenue at different PED

A

inelastic- increase price to increase revenue

elastic- decrease price to increase revenue

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10
Q

define YED

A

a measure of how sensitive demand is to a change in income

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11
Q

what are the types of good shown by YED?

A

1) inferior- x<0 - as income falls, demand rises faster- bus travel
2) normal -x>0- two categories, neccesity is good above 0 but less than 1, luxury is good above 1

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12
Q

formula for YED

A

%change in demand/%change in income

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13
Q

formula for PED

A

%change in demand/%change in price

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14
Q

define XED

A

a measure of the sensitivity of demand of one good to the change in price of another good

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15
Q

formula for XED

A

%change in demand of good X/ %change in price of good Y

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16
Q

what are the three relationships between goods in XED?

A

substitutes - x>0 - higher value of XED means closer
substitute
complementary- x<0 - coffee and sugar
unrelated - x=0

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17
Q

why is it hard to agree on YED?

A

it is usually a value judgement about if something is considered a luxury, therefore interpreted differently

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18
Q

what are the uses of PED?

A

-see how consumers respond to change in price- see
how to maximize revenue
-when imposing indirect taxes, gov can use ped to
forecast tax revenue
-when gov imposes subsidy, ped can access impact of
it

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19
Q

what are the uses of YED?

A

Firms will make use of income elasticity of demand by producing more luxury goods during periods of economic growth.
In a recession with falling incomes, supermarkets might be advised to promote more ‘value’ inferior goods.

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20
Q

what are the uses of XED?

A

anticipate changes in demand for one company from changes in price of another’s good.
can be used by the competition and market authoritys to see if firms have susbtitute goods

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21
Q

what does a perfectly elastic PED look like on a price against quantity graph?

A

horizontal line

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22
Q

what does a perfectly inelastic PED look like on a price against quantity graph?

A

vertical line

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23
Q

define supply?

A

the quantity of a good or service a firm is willing and able to supply at any given price, over a given period of time

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24
Q

define a firm?

A

a firm is an organisation that bring together the factors of production to produce output

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25
Q

what factors influence supply?

A

1-production costs-shift supply left
2-technology- if it improves , supply shifts right
3-taxes and subsidys- taxes shift left, subsidy shift right
4-prices of related goods- if price increases, firms may choose to increase production
5-expectations of future prices- if prices expected to rise then firms may choose to stockpile goods for future
6-number of firms in the market

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26
Q

define price elasticity of supply?

A

a measure of the sensitivity of supply of a good in response to a change of price of the good

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27
Q

what is the formula for PES?

A

percentage change in quantity supplied/ percentage change in price

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28
Q

what causes a firm to be elastic?

A

when they have stockpiles of goods available

when they are working below full capacity

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29
Q

what causes a firm to be inelastic?

A

when they have significant costs involved with increasing production ie paying overtime or hiring new machinery

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30
Q

in the short run are firms likely to be elastic or inelastic PES

A

they are likely to be inelastic as they can only vary one factor of production, typically labour, therefore they are less able to respond

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31
Q

in the long run are firms likely to be inelastic or elastic PES?

A

they are likely to be elastic as they can vary both capitol and labour so easier to respond to change in price

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32
Q

what does perfectly elastic supply mean and what does it look like on graph?

A

it means there PES=infinity, no change in price no matter the amount of quantity supplied, horizontal line

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33
Q

what does perfectly inelastic supply mean and what does it look like on graph?

A

it means PES=0, no change in quantity supplied no matter change in price, vertical line

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34
Q

define market equilibrium?

A

it occurs when in a market, the quantity demanded by consumers is directly balanced by quantity supplied by firms

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35
Q

what will happen the price is too high in a market?

A

it will act as a signal for firms to lower price so they can clear the excess supply

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36
Q

what happens when the price is too low?

A

the firms will realise that some consumers are willing to pay more so they will raise prices to clear the excess demand

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37
Q

define consumer surplus?

A

the value that consumers gain from consuming a good or service over and above the price paid ( consumers are willing to pay up to point where price=marginal utility, so if price is lower than MU then there will be consumer surplus)

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38
Q

what can the demand curve be seen as?

A

the marginal benefit curve

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39
Q

what is producer surplus?

A

the difference between price received by firms for a good or service and the price they were willing to supply at

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40
Q

what will affect the the size of consumer surplus?

A

shifts of the supply and demand curves

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41
Q

how can you work out the net welfare of society?

A

sum of consumer and producer surplus

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42
Q

what can the supply curve be seen as?

A

the marginal cost curve

43
Q

define the price mechanism?

A

a process by which resource allocation is influenced through rationing, incentives and signalling

44
Q

define a price signal?

A

where a price of a good carries information to producer or consumers that guides the market towards equilibrium and assists in resource allocation

45
Q

how will the market react to an increase in demand?

A

the demand curve will shift right creating a higher new equilibrium price, this will encourage firms to join market until the incentive is gone , so supply shifts right until the equilibrium is at original price at larger quantity

46
Q

define marginal cost?

A

the cost of producing an additional unit of output

47
Q

how do prices act as a rationing device?

A

if a firm cannot supply as much ie bad harvest, then supply will shift left increasing price, the increased price will then reduce demand until at original equilibrium price but at lower quantity

48
Q

what does free movement of firms mean for changes in price?

A

when a price is high firms will join market due to trying to maximise profits. when price is low firms will leave the market

49
Q

define productive efficency?

A

when a economy is using all avaliable factors of production

50
Q

define allocative efficency?

A

it is achieved when a society is producing a appropiate bundle of goods relative to consumer preferences, MC=Price

51
Q

in short run how do firms adjust to changes in demand?

A

movement along the supply curve

52
Q

in long run, how do firms react to changes in demand?

A

firms will leave or join a market depending on the relative profitability of the markets

53
Q

are prices in agricultural markets stable or volatile and why?

A

they are volatile due to the fact demand for food is inelastic however supply is affect by weather and climate so prices vary year to year

54
Q

how can you show agriculture volatility on graph?

A

on price and quantity graph show an inelastic demand with supply curve shifted (right for good harvest and left for bad harvest) this will then decrease or increase price

55
Q

how might the volatility be reduced in agricultural markets?

A

they can smooth out volatility by creating stores of surplus produce from previous years to stabalise the bad years

56
Q

are the prices in the commodity market stable or volatile and why?

A

the prices are volatile due to demand reasons. demand for goods vary during different parts of economic cycle so when economys are in a boom stage then the demand will be shifted right and price increases. the futures market also adds a speculative element as you can purchase future goods in present

57
Q

what is the nature of prices in the market for oil?

A

the price of oil is usually high due to the fact that the OPEC cartel restricts supply. there is also increase in price from increase in demand from the rising Chinese economy

58
Q

why is demand for oil inelastic in short run?

A

as there is not a good alternative for oil in short run when your car runs on oil and so does your house heating

59
Q

what is a cartel?

A

an agreement between firms in a market on price and output in order to maximise joint profits

60
Q

what is the nature of prices for the housing market?

A

the demand for housing is largely affected by the interest rate, the interest rate have been low recently so demand will shift right, the supply of houses are increasing slowly as it takes time to build and regulations. therefore price increases usually

61
Q

what is the type of demand in the foreign exchange market

A

it is derived demand as people don’t want the currency for the sake of having currency but to buy goods and services

62
Q

define the exchange rate?

A

the price at which two currency’s exchange

63
Q

what happens to domestic supply when exchange rate is high?

A

when exchange rate is high from pounds to euros, uk citizens will supply more pounds

64
Q

what does the acronym SPICED mean?

A

Strong Pound Imports Cheap Exports Dear

65
Q

why do people purchase stocks in the stock market?

A

they purchase them in order to receive dividends (cut of profit) or capital gains ( increase in value of company)

66
Q

why do firms sell stocks?

A

in order to raise funds for investment

67
Q

what affects the demand for stocks?

A

the demand for stocks are affected by expectations of future success of firm, and expectation of price increase of stock, also the interest rate as if you gain more from holding stocks compared to holding it in banks then you will purchase stocks

68
Q

what affects the supply of stocks?

A

expectations of future demand for the companys product as that will determine the level of investment necessary

69
Q

why are the prices of stocks volatile?

A

the prices of stocks are volatile due to the fact they are based on expectations so they are value judgements, therefore expectations can be self fulfilling ( if stock is expected to fall in price , people may sell stocks which through that , causes stock to fall in price)`

70
Q

what does the demand for money depend on?

A

the demand for money depends on the number of transactions people wish to undertake

71
Q

what can the price of money be viewed as?

A

the opportunity cost of not spending money is the interest earned from saving so the price of money can be interpreted as interest rate

72
Q

when interest rate is high, what is the demand for money?

A

the demand for money is low as people aren’t making as many transactions rather they are just saving

73
Q

what determines the supply of money?

A

the bank of england so it is not affected by the interest rate ( vertical line on interest quantity graph)

74
Q

what is an indirect tax

A

a tax levied on expenditure on goods and services

75
Q

what is the difference between direct and indirect tax

A

direct tax is on income, indirect is on expenditure

76
Q

what is a specific tax?

A

a tax with a fixed rate for example £5 tax on each good

77
Q

what is the incidence of a tax

A

how the burden of the tax is split between consumer and producer

78
Q

what affects the incidence of a tax?

A

the price elasticity of demand and supply

79
Q

what would be the incidence of a tax for perfectly inelastic demand

A

complete burden on consumer

80
Q

what would be the incidence of a tax for perfectly elastic demand

A

complete burden on producer

81
Q

how does an indirect tax affect the supply curve

A

it shifts it upwards by the amount of the tax

82
Q

what does an indirect tax do the output of a good?

A

it reduces the output that suppliers are willing to produce

83
Q

how does an indirect tax affect price?

A

increases cost of production so increases price

84
Q

what are examples of indirect taxes?

A

fuel duties, landfill taxes , alcohol duties, sugar taxes, tobacco duties

85
Q

what is an ad valorem tax

A

a tax on the percentage of the price of good , 10% tax will equal £1 on £10 good, £2 on £20 good.

86
Q

what is the difference between the supply + tax curve to supply curve for ad valaorem tax

A

the supply + tax curve is steeper

87
Q

what an advantage for society for a indirect tax

A

it internalises the externality, produces at social optimum output, welfare maximised

88
Q

what is advantage of a indirect tax for government?

A

raises revenue, can be used to solve externality other way ie education - eval : depends on effectiveness of revenue

89
Q

what is a disadvantage about information failure?

A

difficult to target tax due to not knowing size of externality

90
Q

what is a disadvantage about conflicting objectives?

A

conflicting objectives between government revenue and solving externality

91
Q

what is disadvantage about the effect of tax

A

if demand is inelastic then the tax will not be effective at reducing output

92
Q

what is the effect of indirect tax on different groups of people?

A

indirect taxes are regressive, disproportionately affect the poor as they spend higher amount of their income on them

93
Q

what is a subsidy

A

a grant given by the government to producers to encourage the production of a good or service

94
Q

how does a subsidy affect the supply curve

A

shifts supply curve downwards by the amount of the subsidy

95
Q

what is the advantage about a subsidy?

A

it achieves the socially optimum, social welfare is maximised

96
Q

what is the disadvantage about government spending?

A

as governments have to spend a lot for a subsidy, there is a high opportunity cost

97
Q

what is a disadvantage of subsidy about information failure

A

hard to target subsidy due to fact its hard to work out true size of externality

98
Q

what is the disadvantage of a subsidy for the producers?

A

they may become inefficient, especially if subsidy is in place for long time

99
Q

what is a disadvantage for the government of subsidy?

A

difficult to remove once subsidy has been put in place

100
Q

what are examples of markets where subsidies are used

A

wind farms, railways, apprenticeship schemes, solar panels, biofuels

101
Q

how does the elasticity affect the imposition of a subsidy?

A

the more inelastic demand, the greater the percentage share of the benefits for the consumer

102
Q

the demand is inelastic, who has the larger share of the benefit?

A

consumer

103
Q

the demand is elastic, who has the larger share of the benefit?

A

producer

Economics (19 decks)

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