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1.0 Introduction to Markets & Market Failure > 1.2 How Markets Work > Flashcards

1.2 How Markets Work Flashcards

1
Q

What is diminishing marginal utility

A

The demand curve is downward sloping, showing the inverse relationship between satisfaction derived from a product and the number of times that product is used

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2
Q

What is a market

A

Where buyers and sellers come into contact for the purposes of exchange

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3
Q

What does utility refer to

A

It is the amount of satisfaction obtained from consuming a good or service.

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4
Q

What is demand

A

Demand refers to the quantity of a good or service purchased at a given price over a given time period.

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5
Q

What does a demand curve show

A

A demand curve shows the quantity of a good or service that would be bought over a range of different price levels in a given period of time.

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6
Q

What is the relation ship between price and demand

A

When price falls the demand for a good increases

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7
Q

What is an increase in demand on a demand curve

A

refers to the whole demand curve shifting outwards to the right at every price level.

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8
Q

What is a decrease in demand

A

A decrease in demand refers to the whole demand curve shifting inwards to the left at every price level

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9
Q

What is price elasticity of demand and how is it calculated

A

Price elasticity of demand (PED) is the responsiveness of the demand for a good to a change in its price. The formula to calculate it is:

PED = percentage change in quantity demanded of good A / percentage change in price of good

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10
Q

What does it mean if a good is price elastic

A

This means the PED is greater than one as the percentage change in demand is greater than the percentage change in price

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11
Q

What does is mean is a good is price inelastic

A

The PED of the good is less than 1 and that the percentage change in demand is less than the percentage change in price

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12
Q

What does it mean if a good has unit elasticity

A

This means the PED is equal to one as the percentage change in demand is equal to the percentage change in price

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13
Q

What does it mean if a good is perfectly inelastic

A

The PED is equal to zero and a change in price has no impact on a change in quantity demanded

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14
Q

What does i mean if a PED is perfectly elastic

A

This means the PED is infinite and the good is perfectly elastic

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15
Q

What is total revenue and how is calculated

A

The price per unit of a good multiplied by the quantity sold

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16
Q

What is marginal revenue

A

Revenue gained by a firm from selling one extra unit of output

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17
Q

what are some factors which determine the PED of a good

A
  • Availability of substitues
  • If the good is more of a luxery than necessity
  • The proportion of income spent on the good
  • How addictive the good is
  • Brand image
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18
Q

what are normal goods

A

Normal good A good with a positive income elasticity of demand, As real income rises, so too does demand for the good

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19
Q

what are inferior goods

A

A good with a negative income elasticity of demand, As real income rises, demand for the good falls

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20
Q

How is cross elasticity of demand calculated and what is it

A

Cross elasticity of demand The responsiveness of demand for good B to a change in price of good A

XED = percentage change in demand for good B/ percentage hcage in price of good A

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21
Q

what are substiute goods

A

Subsitute goods are in competitive demand and the XED is posotive for substitute goods along with a posotive gradient

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22
Q

What are complementary goods

A

Complementary goods are in joint demand they can be consumed. the XED is negtive along with a negative gradient

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23
Q

what are unrealeated goods

A

Unrealeted goods have and XED of zero

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24
Q

what is supply

A

The quantity of a good or service that firms are willing to sell at a given price and over a given period of time

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25
Q

what does a supply curve show

A

It shows the quantity of a good or service that firms are willing to sell to a market over a range of different price levels in a given period of time

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26
Q

what is the movement along a supply curve and what is it caused by

A

movment along a supply curve is caused by a change in price.

a rise in price causes an extension in supply

a fall in price causes a contraction in supply

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27
Q

what are shift along a supply curve

A

An increase in supply refers to the whole supply curve shifting outwards to the right at every price level. A decrease in supply refers to teh wohole supply curve shifting inwards to the left at every price level

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28
Q

what is price elasticity of supply and how is it calculated

A

The responsiveness of the supply of a good or service to a change in its price

PES = percentage change in supply of a good / percentage change in price of a good

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29
Q

what are some factors which determine price elatsticity of supply

A
  • level of spare capacity
  • state of the economy
  • level of stocks of finished goods in a firm
  • Perishability of the product
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30
Q

What is the equilibrium price

A

The price where the quantity demanded equals the quantity supplied for a good or service in a market

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31
Q

How is price determined

A

It is determined through the interaction of supply and demand in an competitive market.

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32
Q

What is excess supply

A

Where the quantity supplied exceeds the quantity demanded for a good at the current market price

33
Q

What are the three functions of price mechanisms

A

Rationing
Incentivising
Signalling

34
Q

What is excess demand

A

Where the quantity demanded exceeds the quantity supplied for a good at the current market price

35
Q

What is a price mechanism

A

The use of market forces to allocate resources in order to solve the economic problem of what, how and for whom to produce

36
Q

Why does the price mechanism act as a rationing device

A

Resources are scarce and therefore the price mechanism provides a way for those who are willing to pay the most to get the good. This means price will fall until equilibrium between quantity supplied and demanded

37
Q

Why does the price mechanism act as an incentive device

A

Rising prices mean that firms are more likely to produce more of a product in response to a rise in its price. Furthermore the increased profits will negate the extra costs of increasing out put

38
Q

Why can the price mechanism act as a signalling device

A

If a good is high in demand this can cause a firm to expand their production and increase their cost however if a good is in higher supply than demand a firm can take resources away from that product.

39
Q

What is a consumer surplus

A

A consumer surplus is the extra amount of money a consumer is willing to pay for a product past what they actually pay

40
Q

What is a producer surplus

A

Extra amount of money paid to producers above what they are willing to accept to supply a good or service

41
Q

What is the impact of an increase in demand on producer surplus and consumer surplus

A

This is likely to raise producer and consumer surplus

42
Q

What is the impact in a decrease in supply on consumer producer surplus

A

This is likley to reduce both consumer and producer surplus.

43
Q

What are indirect taxes

A

A tax imposed on goods or services supplied by businesses It includes both specific and ad valorem taxes

44
Q

What is an add valoren tax

A

This is a tax which is charged as a percentage of the price of a good

45
Q

What is the effect of a specific and AD valorem tax

A

A specific tax causes the supply curved to shift to the left

An ad valorem tax causes a pivotal rotation of the left to the supply curve

46
Q

What is the incidence of tax

A

The distribution of the tax paid between consumers and producers

47
Q

How does the incidence of tax differ when compared to elastic and inelastic demand

A

On elastic goods often have the tax on consumer and producer where as inelastic goods mainly put the tax onto the consumer

48
Q

What is a subsidy

A

Subsidy A government grant to firms, which reduces production costs and encourages an increase in output

49
Q

Why is the government willing to give out subsidies

A

The government knows that producers will often respond by increasing output which causes the market price to fall and passes some of the gain onto consumers.

50
Q

What does rational decision making need consumer and producers to have

A
  • Perfect market information
  • computational skills and judgment
  • the ability to take decisions free from the behaviour of others
  • sufficient time to take decisions
51
Q

What is a default option

A

The default option is the option that a consumer “selects” if he or she does nothing e.g organ donations

52
Q

What are the factors which shift the demand curve

A
  • Population
  • Income
  • Related goods
  • Advertising
  • Tastes and fashions
  • Expectations
  • Seasons
53
Q

What are all the effects of a subsidy

A
  • increases output and lowers costs for consumers
  • reduces inequality in society
  • they can help control inflation, by keeping production cost low
  • encourage consumption of demerit goods
  • if demand is price inelastic it will have a large egg et on equilibrium price
54
Q

What is the assumption made about consumers and producers

A

Consumers aim to maximise utility and producers aim to maximise profit. However people do not always behave rationally

55
Q

Why influences of other people cause the consumer to behave irrationally

A

Rationality assumes people act individually to maximise their own benefit is but sometimes they are influenced by social norms.

56
Q

How does the influence of habitual behaviour cause the consumer to behave irrationally

A

Most people have habits these reduce the amount of time it takes to do something as consumers no longer have to think about their actions. This can cause consumers to stick with what they know rather than expanding to the rational change

57
Q

How can the consumers weakness at computation cause the consumer to make irrational choices

A

Consumers cannot make comparisons so buy more expensive goods then they need.

58
Q

What are the underlying assumptions of rational economic decision making

A

Consumers aim to maximise utility

Firms aim to maximise profit

Governments aim to maximise social welfare

59
Q

Draw a demand curve

A

Check psy math tut

60
Q

What are the key conditions which result in a change in demand

A

PIRATES

Population
Income
Related goods
Advertising
Taste/fashion
Expectations
Seasons

61
Q

What is the effect of population on demand

A

If population rises, we would expect demand for all products to increase and so the demand curve will shift to the right. This is because the more people there are in the country, the more people who will want a good.

62
Q

What is the effect of income on demand

A

For most goods, if income increases, demand increases because a person can afford to buy more of the product. If there is a fall in income then the demand would decrease and shift to the left. However, for some goods an increase in income can lead to a fall in demand and vice versa, this is a concept called income elasticity of demand.

63
Q

What is the effect of related goods on demand

A

If goods are complements or substitutes of each other then a change in the price of another good can cause a shift in the demand curve.

64
Q

What is the effect of advertising on demand

A

If a firm carries out a successful advertising campaign, demand is likely to increase. If a competitor firm carries out a successful advertising campaign, demand for the first firm will fall. A successful advertising campaign by Tesco will increase demand for Tesco but reduce demand for Asda.

65
Q

What is the effect of taste/fashion on demand

A

If something becomes more fashionable, we expect demand to increase and if it becomes less fashionable, then demand will fall.

66
Q

What is the effect of expectations on demand

A

Expectations of what might happen in the future can have a big impact on the level of demand for some goods. If people expect a shortage of something, or that price will rise in the future, then demand for that product will increase. If people expect that price will fall in the future, demand will decrease.

67
Q

What is the effect of season on demand

A

Some products will find their demand affected by the weather. For example, hot summers cause an increase in demand for sun cream whilst wet summers cause a decrease in demand for umbrellas.

68
Q

Why are the PED and PES important

A

The price elasticity of demand, along with the price elasticity of supply, determine the effects of the imposition of indirect taxes and subsidies.

69
Q

What does an increased elasticity mean in terms of tax which is paid onto the consumer

A

The more elastic the demand curve, the lower the incidence of tax on the consumer. This means that when PED is elastic, a tax will only lead to a small increase in price and the supplier will have to cover the majority of the cost of the tax.

70
Q

What does Increased inelasticity mean in terms of tax which is paid by the consumer

A

When demand is inelastic, the tax will be mainly passed onto the consumer. Since consumers are relatively unresponsive to the price of this good, quantity demanded will not fall by a large amount. This means that the tax will be ineffective at reducing output. However, it also means that there is higher tax revenue for the government. The more inelastic the demand curve, the higher the tax revenue for the government.

71
Q

Draw a diagram which displays the consumer burden and producer burden

A

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72
Q

Why is cross elasticity of demand important

A

Firms need to be aware of their competition and those producing complementary goods. They need to know how price changes by other firms will impact them so they can take appropriate action.

73
Q

What are some of many factors which effect supply

A

Costs of production

Price of other goods

Weather

Technology

74
Q

Draw a diagram which presents a producer/ consumer surplus

A

Psy math tut

75
Q

Draw a diagram which presents producer and consumer gain from a surplus

A

Check psy math tut

76
Q

What are the three main reasons why people do not follow underlying assumptions on consumer behaviour

A

Influences of other people

Influence of habitual behaviour

Consumer weakness at computation

77
Q

How do the influecnes of other people result in people not following the underlying assumption about consumer behaviour

A

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. Consumers become unwilling to change the bias, even if doing so will benefit them, if it goes against the norms of society. ‘Herding behaviour’ occurs when an individual copies the actions of a large group. One example is the stock market, and this causes huge market bubbles.

78
Q

How the influence of habitual behaviour result in people not following the underlying assumption about consumer behaviour

A

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. Habitual behaviour includes addictions and so this influences people’s decisions, for example consumers will buy more drugs/alcohol even though they know they should give up. Another habit many consumers have is buying their products at eye level so supermarkets tend to keep higher priced products near the top and lower priced products lower.

79
Q

How does consumer weakness at computation result in people not following the underlying assumption about consumer behaviour

A

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. Also, consumers are sometimes poor at self-control and so do things they know they shouldn’t. Similarly, consumers will make decisions without looking at the long term effects, and so make irrational decisions. One example of this is consumers saving up for their pensions: many put off doing this because they fail to look long term.

1.0 Introduction to Markets & Market Failure (4 decks)

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