1.2 How markets Work Flashcards
what is utility?
Utility is the measure of satisfaction?
what does marginal mean?
additional
what does the law of marginal utility mean?
this law states that as the amount of a commodity increases. the utility derived by the consumer from the additional units decreases.
total utility
the total satisfaction from a given level of consumption
marginal utility
the charge of satisfaction from a given level of consumption
what makes an expansion in demand occur?
when price falls
what makes a contraction occur?
when price increases
what causes a shift in the demand curve?
a factor other than price changes
what factors cause a change in supply?
-changes in price of substitutes in competitive demand
-changes in the complements
-changes in the real income of consumers
-changes in distribution of income
-effects of advertising and/or marketing
-interest rates
-change in population
-seasonal factors
-social +`emotional factors
which way does a decrease in demand shift?
left
which way does a increase in demand shift?
right
which way does a reduction in supply go?
left
which way does an increase in supply go?
right
what does the supply curve show?
how much of a product producers will supply onto the market at each price
Factors that affect the supply curve
-changes in cost of production
-natural factors
-government taxes and subsidies
-change in technology
what does it mean to be elastic?
Where % change in demand is greater than % change in price
what does it mean to be inelastic?
where % change in demand is less than % change in price
When is it equilibrium?
when demand and supply are equal
what makes a shortage occur?
if the price is lower than the equilibrium price then there will be a shortage of the good because firms will want to supply less onto the market than consumers want to buy
what makes a surplus occur?
if the price is higher than the equilibrium price then there will be a surplus because firms will want to supply moreonto the market than consumers want to buy
derived demand
the demand for a product is derived from the demand for another product
price elasticity of demand
the responsiveness of demand to changes in price
price elastic
where % change in demand is greater than % change in price
price inelastic
where % change in demand is less than % change in price
price elasticy demand equation
% change in quantity demaded
PED= ——————————————-
% change in price
percentage change
difference
————– x100
original
if the value is >1 it is ______
elastic
if the value is <1 it is ______
inelastic
if the value is =1 it is ______
unit elastic
if the value is =0 it is ______
perfectly inelastic
perfectly inelastic
% stays the same no matter change in price
if the value is infinite it is ______
perfectly elastic
if demand is price elastic increasing price will
reduce total revenue
if demand is price elastic decreasing price will
increase total revenue
price elasticity of supply
the responsiveness of supply to the change in price
determinants of elasticity of supply
-time
-spare capacity
-spare stock and components
-the 4 factors of production; land, labour, enterprise, capital
income elasticity of demand
the responsiveness of demand to change in income
income elasticity of demand formula
% change in quantity demanded
YED= ——————————————–
% change in income
normal good
demand rises as income rises and vice versa
inferior good
demand fall as income rises and vice versa
luxury good value
a value more than +2
cross elasticity
the responsiveness of demand of one good to changes in the price of a related good - either a complement or a substitute
cross elasticity formula
% change of quantity demanded of good A
XED= ———————————————————–
% change in price of good B
price mechanism
-the rationing function
-the signaling function
-the incentive function
the rationaling function
-whenever resources are particularly scarce, demand exceeds supply and prices are risen up, this discorages demand and conserve resources
the signaling function
-price changes send contrasting messages to consumers and producers about whether to enter or leave a market
-rising prices give a signal to consumers to reduce demand and withdraw from the market
the incentive function
-something that motivates a producer or consumer to follow a course action or to change behaviour
-higher prices provide an incentive to supply more
local price mechanism
The coronavirus pandemic has disrupted supply chains across the planet, and many countries have blocked imports to prevent the spread of the virus. If we take
the example of British supermarkets, less imports from other countries means there are fewer goods on supermarket shelves. As the demand for food is high but the supply is low, the price of food rises to ration off the excess demand so that only the consumers who value the food most highly buy them. This is an example of the
rationing function.
national price mechanism
The price of housing differs across the UK, from being high in the south and low in the north. There are multiple reasons to explain these discrepancies. London,
not only the capital, is the second largest financial centre in the world, as well as home to many tourist attractions. As the population of London is high relative to the
rest of the UK, house prices will rise through the rationing function, i.e. to ration off excess demand and only provide houses to those who value them the most. The
high house prices in London also offer an incentive for firms to allocate resources to the production of more houses, as there is profit to be made in this industry. This is an example of the incentive function.
global price mechamisation
In 1973 the Organisation for Petroleum Exporting Countries (OPEC) proclaimed an oil embargo (i.e. restricted the supply of oil on an insurmountable
scale), due to geopolitical factors regarding America and the Middle East. This sent the price of oil at record-breaking levels across the planet, as oil was an invaluable
resource to countries. This perfectly exemplifies the rationing function because the disequilibrium of supply and demand meant the high prices deterred consumers who didn’t value oil highly, which left the market open only to those consumers who did. By raising the price of oil, the market once again returned to a state of equilibrium
consumer surplus
the difference between the total amount that consumers are willing to pay and the total amount they actually pay (market price). Changes with supply and demand, increase in supply increases consumer surplus
producer surplus
the difference between the amount the producer is willing to supply and the actual amount they recieve
how does an increase in demand effect producer and consumer surplus?
increase in producer and consumer surplus
how does an decrease in demand effect producer and consumer surplus?
decrease in producer and consumer surplus
how does an increase in supply effect producer and consumer surplus?
increase in producer an consumer surplus
how does an decrease in supply effect producer and consumer surplus?
decrease in producer and consumer surplus
Indirect tax
a tax on expenditure where the person who is ultimately charged the tax is not the person responsible for paying the sum to the government
Two types of indirect tax
-ad valerom
-flat tax
ad valerom
where the tax payable increases in proportion to the value of the good. The tax is a percentage of the cost of the good, for example VAT.
flat tax
where an amount is added to the price. The tax increases with the amount bought rather than the value of goods. For example, excise duties on alcohol, tobacco and petrol are a specific amount (e.g. 10p a litre).
Incidence of tax
the tax burden on the taxpayer
If the demand curve (PED) is perfectly elastic, or the supply curve (PES) is perfectly inelastic, who will pay the tax
the supplier
If the demand curve is perfectly inelastic, or the supply curve is perfectly elastic, who will pay the tax
the consumer
What does it mean when the consumer pays the tax
This means that, all other things being equal, the more inelastic the demand curve, the higher the revenue of tax for the government because quantity demanded falls
less and the more goods that are bought, the higher the tax revenue.
what is a subsidy
a grant given by the government and is the opposite of a tax, an extra payment to encourage production/consumption of a good or service
reasons consumers may not behave rationally
-influence of other people
-influence of habitual behaviour
-consumer weakness at computation
influences of other people
Rationality assumes people act individually to maximise
their own benefits but sometimes individuals are influenced by social norms, known as a bias. For example, someone may buy something to ‘fit-in’ or because everyone else has it, and so they are expected to too.
influence of habitual behaviour
Most people have habits and these habits reduce the amount of time it takes to do something, because consumers no longer have to consciously think about their actions. Habits create a barrier to decision making since they limit or prevent consumers considering an alternative.
consumer weakness at computation
Many consumers aren’t willing or able to make comparisons between prices and so they will buy more expensive goods than needed, for example many customers buy multipack goods because they assume they are cheaper but this is not always the case.
total value of subsidy
height x amount of peole
reasons for subsidies
-keep prices down
-encourages merit goods and positive externalities
-reduce the cost of capital investment
