1.2 HOW MARKETS WORK Flashcards
i. What is utility?
-The satisfaction or benefit derived from consuming a good or set of goods
ii. What do consumers seek to maximise?
-economic welfare (satisfaction from consuming goods)
iii. What do firms seek to maximise?
-rewards from ownerships (maximising profits)
iv. What is irrational behaviour?
-When people make choices and decisions that go against the assumption of rational utility
vi. What is bounded rationality?
rationality is limited when individuals make decisions, they therefore make decisions that are sitisfactory rather than optimal
vii. What do workers seek to maximise?
-Maximise welfare at work
viii. What do governments seek to maximise?
-The welfare of the citizens
ix. What is rational behaviour?
-the fact that economic agents are able to rank the order of different outcomes from an action in terms of their net benefits to them. They then act in a way to maximise their net benefits.
i. What is demand?
-The quantity of goods and services that will be bought at any given price over a given time period
ii. Explain 3 reasons the demand curve is downward sloping
-Income and demand have a directly proportional relationship
-When peoples income increases they purchase more goods and vice-versa
vii. What are the 7 conditions of demand?
-Population
-Advertising
-Substitutes price
-Income
-Fashion
-Interest Rates
-Components price
viii. What is the law of diminishing marginal utility?
-the value or utility that individual consumers gain from the last product consumed falls the greater number consumed.
ix. Why do governments need to know the various elasticities of demand for various products?
-It is important for formulating government policies, including taxes
i. What is supply?
-The quantity of goods that sellers are prepared to sell at any given price over a period of time
ii. Explain 3 reasons why supply curves are upward sloping
-Product price and quantity supplied are directly related
vii. What are the conditions of supply?
-Productivity
-Indirect Tax
-No of firms
-Technology
-Subsidy
-Weather
-Costs of production
i. What is equilibrium price?
The price at which supply and demand are equal
ii. What is equilibrium quantity?
-when there is no shortage or surplus of a product in the market
iv. What is a shortage?
-When demand for a product exceeds its supply
vii. What is a surplus?
-The amount of an asset or resource that exceeds the portion that is utilized
x. Explain the 3 functions of the price mechanism
-Rationing: to discourage demand, conserve resources, and spread out their use over time
-Signalling: price adjusts to demonstrate where resources are required
-Incentive: producers to supply more because they provide the possibility or more revenue and increased profits
i. What is consumer surplus?
-when the price that consumers pay for a product or service is less than the price they’re willing to pay
iii. What is producer surplus?
the difference between the price a producer gets and its marginal cost
v. What is total economic welfare?
-the total extra benefit or happiness enjoyed by producers and consumers who feel they got a good price for the product being exchanged
i. What is the definition of price elasticity of demand?
-The proportionate response of changes in quantity demanded to a proportionate change in price
ii. Give the formula for PED
-PED = percentage change in quantity demanded / a percentage change in price
iii. What is meant by ‘price elastic demand’?
-When a price change causes a substantial change in demand
iv. What values would constitute ‘price elastic demand’?
-Between 1 and infinity
xii. What is meant by ‘unit elastic demand’?
-the economic theory that assumes a change in product price causes an equal and proportional change in the quantity demanded
xiii. What value would constitute ‘unit elastic demand’?
-1
xv. Give 4 factors which influence the PED of a product
1)availability of substitutes,
2) if the good is a luxury or a necessity,
3) the proportion of income spent on the good,
4) how much time has elapsed since the time the price changed
i. What is the definition of cross price elasticity of demand?
-Cross Price Elasticity of Demand (XED)measures the relationship between two goods when the price of one changes
ii. Give the formula for XED
-XED = percentage change in quantity demanded of good A/ percentage change in price of good B
iii. What is the definition of substitute goods?
-twogoodsaresubstitutes if the products could be used for the same purpose by the consumer
iv. What values of XED would constitute a substitute?
-positive
v. What is the definition of complementary goods?
-A complementary good isa product or service that provides value to another product or service
vi. What values of XED would constitute complementary goods?
-negative
vii. What would an XED of 0 indicate?
-Demand between the goods are perfectly price inelastic
i. What is the definition of income elasticity of demand?
-a measure of the responsiveness of quantity demanded given a change in income
ii. Give the formula for YED
-YED= percentage change in quantity demanded/percentage change in income
iii. What is the definition of an inferior good?
-An inferior good isone whose demand drops when people’s incomes rise
iv.What values of YED would constitute an inferior good?
-negative
v. What is a normal good?
-A normal good isa good that experiences an increase in its demand due to a rise in consumers’ income
vi. What values of YED would constitute a normal good?
-positive
vii. What is the definition of a luxury good?
-a good for which demand increases more than what is proportional as income rises
viii. What values of YED would constitute a luxury good?
0<1
x. What is the term for a normal good which is not a luxury good?
-normal necessity
i. Why do firms need to know the price elasticity of demand for their products?
-Price Elasticityhelps businesses understand how much they can stretch the price (hence the term elasticity) of any product before it impacts
-Helps influence stocks, employment and output
i. What is the definition of price elasticity of supply?
-Price elasticity of supplymeasures the responsiveness to the supply of a good or service after a change in its market price
ii. Give the formula for PES
-PES = Percentage change in quantity supplied/ percentage change in price
iii. What is meant by ‘price elastic supply’?
-A good or service has an elastic supplywhen the percentage change in the quantity supplied exceeds the percentage change in price
iv. What values would constitute ‘price elastic supply’?
1<
vii. What values would constitute ‘perfectly elastic supply’?
-infinity
ix. What is meant by ‘price inelastic supply’?
-a change in price will only have a smaller percentage change in quantity supplied
x. What values would constitute ‘price inelastic supply’?
-0
xii. Give 3 factors which influence the PES of a product
-Production lag
-Stocks
-Spare capacity
-Time
-Substitutability of factors of production
Why is PES more elastic in the long run?
-in the long run all factors of production can be utilized to increase supply
