1.2 how markets work Flashcards
What are assumptions about consumer and producer objectives?
Consumers- Want to maximize their satisfaction.
Producers- Want to maximize their profit.
How can herd mentality prevent consumers acting rationally?
Herd mentality is when you follow the crowd to fit in and this is irrational because you may not even want what you are buying.
How can Habitual behavior prevent consumers acting rationally?
Habitual behavior is when you don’t change as you don’t like the concept of something new. This is irrational behavior because it may not be the best option for you.
How can computational weakness prevent consumers acting rationally?
Computational weakness is when you are unable to calculate the best for you. This is irrational because you are unaware of the best for you.
What is diminishing marginal utility?
The satisfaction levels that are decreasing from the consumption of goods.
Why is the demand curve downward sloping?
Because when the price level of a good decreases the quantity demanded with increase as the consumption of the good will increase marginal utility.
What factors can shift demand to the right?
An increase in income as it leads to an increase in disposable income.
Trends and fashions as if it is in trend then there will be a short run demand.
What might cause an extension along the demand curve?
When the price of goods overall have decreased at the same time the quantity demanded increases.
What might cause an contraction along the demand curve?
When the price of goods has increased and the quantity demanded also decreases.
Why is the supply curve upward sloping?
Because when more money is being invested into the production then there is an increase in the quantity demanded.
What is a factor that can shift supply to the right?
A decrease in the cost of production because then they can produce more goods for the same price.
What might cause an extension along the supply curve?
An increase in the cost of production and therefore a decrease in the quantity supplied.
What might cause a contraction along a supply curve?
A decrease in the cost of production and therefore and increase in the quantity supplied.
What is joint supply?
When an increase in supply of one thing leads to a decrease in supply of another.
What does competative supply mean?
How best to use the scarce resources for another’s disposal.
What is price elasticity of demand?
The responsiveness of demand to a change in price.
What is the formula for price elasticity of demand?
PED=% change in quantity demanded/ % change in price
What does it mean when PED is 0?
It is perfectly inelastic.
What does it mean when PED is between 0 and -1?
It is inelastic.
What does it mean when PED is exactly -1?
It is called unitary elasticity of demand.
What does it mean when PED is over -1?
It is elastic.
What is diminishing marginal utility?
When the more units consumed leads to a decrease it the satisfaction levels.
Why is the demand curve downward sloping?
Because as the price of a good gets cheaper the quantity demand will increase.
What can cause a shift to the right for the demand curve?
Population
Advertisement
Substitutes
Income
Fashions and trends
Interest rates
Complements
What might cause an extension along the demand curve?
When the price of the goods have decreased so the demand increases.
What might cause a contraction along the demand curve?
When the price of goods has increased the so demand has decreased.
Why is the supply curve upward sloping?
Because when the money invested increases the quantity of the product or services supply will also increase.
What can cause the supply curve to shift to the right?
Wages
Exchange rates
Taxes
Materials
Productivity
What might cause an extension along the supply curve?
An increase in the quantity supplied of a raw material.
What might cause a contraction along the supply curve?
A decrease in the quantity supplied of raw materials.
What is joint supply?
When the demand for one product will then lead to a decrease in another product for example if the demand for an apple iPhone goes up then the demand for a Samsung iPhone will go down.
What is competative supply?
How well the business uses the scarce raw materials at its disposal.
What is price elasticity of demand?
The responsiveness of demand to a change in price.
What does Income elasticity of demand mean?
The responsiveness of demand to a change in incomes.
What is the formula for income elasticity of demand?
YED=% change in demand/
% change in income
What is the YED of normal goods?
A positive number
What is the YED of inferior goods?
A negative number
What is the YED of luxury goods?
Over 1
What is the YED of neccesities?
Under one
What does the cross elasticity of demand mean?
The responsiveness in demand for good A when there is a price change in good B
What is the formula for XED?
XED= % change in demand for good A/
% change in price of good B
What XED do substitute goods have?
Positive.
What XED do complementary goods have?
Negative
What XED will unrelated goods have?
0
What does price elasticity of supply mean?
The responsiveness of supply to a change in price.
What is the formula for PES?
PES= % change in supply/
% change in price
What is a PES of 0?
Perfectly inelastic.
What is a PES of infinity?
Perfectly elastic.
What is a PES of 0-1?
Inelastic
What is a PES of 1-infinity?
Elastic
What is a PES of 1?
Unitary
What can affect PES?
Barriers to entry
Resources
Inventory
Time
Spare capacity
What is a consumer surplus?
When the consumer is willing to spend more that what they were willing to spend.
What is a producer surplus?
When producers sell goods for more than they expected.
What is a direct tax?
A tax that is levied on an income of a person.
What is an indirect tax?
Tax levied on a good or service.
What is ad valorem tax?
A tax that when you order more the tax per unit also increases.
What is a specific tax?
A tax that stays the same for every unit sold.
