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Economics > 1.2. How markets work > Flashcards

1.2. How markets work Flashcards

1
Q

What assumptions are made about the objectives of consumers and producers

A

That consumers and businesses will act rationally
Consumers aim to maximise utility
Producers aim to maximise profit

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2
Q

Explain how herd mentality may prevent consumers from acting rationally

A

If a consumer sees another consumer acting irrationally they are likely to also react irrationally as to not miss out

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3
Q

Explain how habitual behaviour may prevent consumers from acting rationally

A

A consumer prefers to do what they have always done as it takes less effort to decide to do something else

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4
Q

Explain how computational weakness may prevent a consumer from acting rationally

A

Consumers are not always capable of comparing prices and offers of products
Prices and offers are often presented in difficult ways

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5
Q

Explain diminishing marginal utility

A

Satisfaction diminishes with the consumption of an additional good or service.

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6
Q

Explain why a demand curve is downward sloping

A

As prices rise fewer consumers are inclined to or can afford to buy a good or a service

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7
Q

Explain the factors that cause a demand curve to shift

to the right

A

Population - more people, more demand
Advertising - influence people into buying
Substitutes - price increase, demand decrease
Income - more disposable income, more consumption
Fashion and Taste - herd mentality and trends
Interest Rate - low interest rates, higher demand
Compliments - decreased price, more demand

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8
Q

Explain why the supply curve is upward sloping

A

The profit motive - higher prices create higher profit
Increased supply leads to higher costs which need to be covered by higher prices
Higher prices attract new firms into the market

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9
Q

Explain the factors that cause a supply curve to shift

to the right

A

Productivity - higher productivity, more supply
Indirect taxes - lower taxes, increased supply
Number of Firms - more producers, more supply
Technologies - better technologies, higher supply
Subsidies - more money to invest, increased supply

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10
Q

Explain, using an example, the meaning of joint supply

A

When two products are in joint supply, an increase in the suoplu of one will lead toan increase in the supply of the other.
For example: sheep and wool - wool is a by-product

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11
Q

Explain the meaning of a consumer surplus

A

The difference between how much a consumer is willing to pay and how much they actually pay

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12
Q

Explain the meaning of a producer surplus

A

The difference between the price at which a firm is willing to sell for and how much they actually sell for

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13
Q

Define “price elasticity of demand”

A

the responsiveness of quantity demanded to a change in price

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14
Q

What is the formula for price elasticity of demand

A

PED = % change in QD / % change in price

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15
Q

Explain the significance of a PED of 0

A

Perfectly inelastic

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16
Q

Explain the significance PED between 0 and -1

A

Inelastic

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17
Q

Explain the significance of a PED of -1

A

Unitary elasticity

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18
Q

Explain the significance of a PED between -1 and infinity

A

Elastic

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19
Q

Explain the significance of a PED of infinity

A

Perfectly Elastic

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20
Q

List the factors that influence PED

A

Proportion of Income
Luxury
Addictiveness
Necessity
Time between purchase
Substitutes

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21
Q

Define “price elasticity of supply”

A

The responsiveness of quantity supplied to a change in price

22
Q

What is the formula for price elasticity of supply

A

PES = % change in QS / % change in price

23
Q

Explain the significance of a PES of 0

A

Perfectly Inelastic

24
Q

Explain the significance of a PES between 0 and 1

A

Inelastic

25
Q

Explain the significance of a PES of 1

A

Unitary elasticity

26
Q

Explain the significance of a PES between 1 and infinity

A

Elastic

27
Q

Explain the significance of a PES of infinity

A

Perfectly elastic

28
Q

List the factors that influence PES

A 
Barriers to entry
Resources
Inventory
Times
Spare capacity
29
Q

Define “income elasticity of demand”

A

The responsiveness of demand to a change in income

30
Q

What is the formula for income elasticity of demand

A

YED = % change in QD / % change in Y

31
Q

What YED would you expect from a normal good

A

Positive values - when income rises, demand rises

32
Q

What YED would you expect from an inferior good

A

Negative values - when income rises, demand falls

33
Q

What YED would you expect from an luxury good

A

Value > 1 - more elastic

34
Q

What YED would you expect from a necessity good

A

Value between 0 and 1 - more inelastic

35
Q

Define “cross elasticity of demand”

A

The responsiveness of demand for one product to a change in price of another product

36
Q

What is the formula for cross elasticity of demand

A

XED = % change in QD for A / % change in P for B

37
Q

What XED values would you expect from a substitute good

A

Positive - price of A increase, demand of B increase

38
Q

What XED would you expect from a complementary goods

A

negative - price of A increases, demand of B decreases

39
Q

What XED would you expect from an unrelated good

A

0 - price of A increases, demand of B is unaffected

40
Q

Explain rationing

A

Prices ration scarce resources

When there is a shortage, prices increase, only those with the willingness to pay will purchase the product

41
Q

Explain incentive

A

Higher prices created by shortages are an incentive for producers to increase supply
Producers are motivated by profit
If there is a surplus, prices will be lower, this acts as an incentive to reduce supply

42
Q

Explain signalling

A

Prices adjust to demonstrate where resources are required and where they aren’t
Prices rises and fall to reflect scarcities and surpluses
e.g. if prices rise due to high demand, suppliers are signalled to expand to production to meet the demand

43
Q

Explain, with examples, what a direct tax is

A

A tax levied on income, wealth, profits of the person who pays it
e.g. income tax

44
Q

Explain, with examples, what an indirect tax is

A

A tax levied on goods or services

e.g. VAT

45
Q

Explain, with examples, what an ad valorem tax is

A

Tax based on the value of a transaction or of property

e.g. VAT

46
Q

Explain, with examples, what a specific tax is

A

A tax that is a fixed amount for each unit of a good sold

Excise duty

47
Q

Explain the meaning of consumer incidence

A

How much of the tax the consumer pays

48
Q

Explain the meaning of producer incidence

A

How much of the tax the producer pays

49
Q

Define “subsidy”

A

A grant from the government to firms, designed to lower the price of a good and encourage production, lowers the cost of production for firms

50
Q

Explain the meaning of “consumer gain” from a subsidy

A

The amount of money that the product has been lowered by andthe consumer no longer has to spend

51
Q

Explain the meaning of “producer gain” from a subsidy

A

The reduction in the cost to produce the product

Economics (12 decks)

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