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Micro economics > 1.2 How markets work > Flashcards

1.2 How markets work Flashcards

1
Q

when making economic decisions what is assumed?

A
  • consumers aim to maximize utility
  • firms aim to maximize profits
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2
Q

what’s demand?

A

the quantity of a good/service that consumers are willing and able to buy at a given price in a given time period

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3
Q

what is a movement in the demand curve?

A

when the point on the line moves,as price goes down demand will go up moving the point on the line

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4
Q

what causes a movement in the demand curve?

A

a change in the price of the good/service

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5
Q

what is a shift in the demand curve?

A

when the price stays the same even though demand/supply changes causing a new line of demand to be made

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6
Q

what causes a shift in the demand curve?

A

any non-price factor EG
- Income
- employment rate
- price of other goods
- trends

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7
Q

what is supply?

A

the quantity of a good that sellers are prepared to produce at a given price in a given time period

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8
Q

If prices rise what happens to supply?

A

quantity supplied rises

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9
Q

what does a supply curve show?

A

the relationship between the market price and how much a firm is willing to sell

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10
Q

what’s a movement on a supply curve?

A

a change in the point on the supply curve,as price increases the quantity produced will rise

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11
Q

what causes movement on a supply curve?

A

a change in price

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12
Q

what’s a shift on a supply curve?

A

how the supply will change due to other factors than price,a new line is created

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13
Q

what causes a shift of the supply curve?

A

-cost of production
-new technologies
-price of other (capital) goods
-the government
-weather
these all effect how easily the product will be made and how likely it is to sell

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14
Q

definition of equilibrium price?

A

a state of equality/balance between market demand and supply - there is no excess demand or supply

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15
Q

how is equilibrium shown on a supply demand diagram?

A

it’s the point where the price and quantity meet the cross of supply and demand curves

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16
Q

what’s excess supply?

A

when supply is greater than demand and there are unsold goods in the market which puts a downwards pressure on price

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17
Q

what do suppliers have to do if they have excess supply ?

A

lower price until they find equilibrium,if they have to sell at higher price there will be a shift in supply as they will have to produce less as they are selling less

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18
Q

how can you see excess supply on a supply demand diagram?

A

when the points don’t create an equilibrium,the space between the two points of quantity eg Q2 and Q3

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19
Q

what’s excess demand?

A

when quantity demanded exceeds supply resulting in queuing and putting an upwards pressure one price

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20
Q

what do suppliers have to do to deal with excess demand ?

A

increase their prices as more quantity will be supplied as firms are able to make more money

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21
Q

what’s consumer surplus?

A

the difference between what a consumer would pay for a product and what they actually pay

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22
Q

where is consumer surplus on the diagram?

A

from the top of demand curve point to the pe point of axis to the equilibrium point

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23
Q

what is the producer surplus?

A

the difference between what producers are willing and able to supply of a good and what they actually receive (what the goods actually worth)

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24
Q

where is producer surplus shown on the diagram?

A

from the pe point to the equilibrium to the bottom of the supply curve

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25
Q

what is marginal utility?

A

the additional satisfaction a consumer gets from consuming one more unit of the product,as more is consumed the marginal utility (satisfaction) will decrease (diminishing marginal utility)

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26
Q

what is the function of the price mechanism?

A

to allocate resources through : rationing,incentives and signalling

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27
Q

what are the rules of elasticity?

A

0 - perfectly inelastic
>1 - elastic
<1 - inelastic
1 - unitary elastic

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28
Q

definition of price elasticity of demand?

A

measurement of how responsive quantity demanded of a product is after a change in its price

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29
Q

formula for PED?

A

% change in demand/% change in price

30
Q

what does it mean if the price elasticity of demand is higher?

A

the more price elastic the demand is, a high responsiveness to changes in price

31
Q

uses of ped?

A
  • determine optimum price
  • calculate the impact of change or price on revenue
  • decided on non-price strategies to increase demand
  • price discriminate
  • aim to be price inelastic
32
Q

limitation of ped?

A
  • values based on estimates
  • info may become outdated
  • other factors may cause demand to shift
33
Q

whats ped affected by?

A

SPLAT
Substitutes
Percentage of income
Luxury/neccesity
Addictive
Time period

34
Q

what happens when demand is price inelastic?

A

a rise in price won’t have a significant impact on demand as the product is a necessity

35
Q

what happens if demand is price elastic?

A

the quantity demanded is very sensitive to price

36
Q

what does cross price elasticity of demand measure?

A

how responsive demand for good x is following a change in price of good y

37
Q

what are substitutes?

A

have a positive cross price elasticity of demand, an increase int he price of one product will lead to a rise in demand for its substitutes

38
Q

how can you tell if products are close substitutes?

A

if there’s a high value, very elastic

39
Q

what are complementary goods?

A

negative cross price elasticity,an increase in the price of good t will lead to a contraction in demand for t and fall in demand for s

40
Q

formula for XED?

A

%change in demand of x/% change in price of y

41
Q

are plus and minus considered when looking at price elasticity of demand?

A

no, they are not considered during the final calculation

42
Q

what does inelastic mean?

A

when the price goes up, consumers’ buying habits stay about the same, and when the price goes down, consumers’ buying habits also remain unchanged.

43
Q

what does elastic means?

A

where a change in price leads to a significant shift in demand

44
Q

what does the sign tell you about goods?

A

if its positive they are SUBSTITUTES
if its negative they are COMPLEMENTS

45
Q

what does the size tell you about how income elasticity of demand for that good is to changes in income?

A

how elastic demand for that good is to changes in income, the higher the number the more income elastic it is

46
Q

what does price elasticity of supply measure?

A

how responsive quantity supplied is to changes in price

47
Q

formula for working out PES?

A

%change in quantity supplied/%change in price

48
Q

what will the answer for PES always be?

A

positive, represents how if supply rises price will too

49
Q

whats PES affected by?

A

PSSST
Product Lag
Stocks, hard to hold stock = inelastic
Spare capacity, if a business is operating close to full capacity then it will be more difficult to increase supply
Substitutability of FoP
Time, the longer it takes to make a product the more inelastic it will be

availability of producer substitutes, if a product has many substitutes then the business can easily alter production if prices rise/fall – many substitutes = high elasticity

50
Q

whats income elasticity of demand?

A

YED = % change in demand/% change of income

51
Q

what are normal goods?

A

goods which have a positive income elasticity of demand ➡️ as incomes rise more of the good is demanded
- elasticity between 0 and 1

52
Q

what are luxury goods?

A

have an income elasticity of demand above one, demand rises more proportionally in comparison to income

53
Q

what are inferior goods?

A

negative income elasticity ➡️ demand falls as incomes rise (people buy superior goods instead, eg branded food instead of supermarket own brands)

54
Q

what does the short-run aggregate supply refer to?

A

period of time where one factor of production is fixed, PES will be relatively inelastic

55
Q

what does the long-run aggregate supply refer to?

A

period of time in which all factors of production are variable, PES will be relatively elastic

56
Q

why is there an inverse relationship of demand?

A
  1. the income effect, when the price of a good falls the consumer can enjoy it for less which effectively ‘rises’ real incomes
  2. the substitution effect, when the price of a good falls it becomes relatively ‘cheaper’ than alternatives
  3. the Law of Diminishing Marginal Utility, as more of a good is consumer the additional utility from each extra unit will fall ➡️because consumers are assumed to be rational, they will not pay more for a good than the additional utility it provides
57
Q

what happens to the market when there is excess demand?

A

queuing ➡️ upwards pressure on price

58
Q

what happens to the market when there is excess supply?

A

downwards pressure on price

59
Q

what does the price mechanism describe?

A

how decisions made by suppliers and consumers work together to determine the allocation scarce resources between competing resources through
- signalling (if prices are too high this is signalled by not enough supply)
- incentives function (through choices consumers send messages to producers about their changing wants and needs)
- rationing function ( when demand is high for scarce resources price increases by a lot)

60
Q

why is the price mechanism important?

A
  • incentives matter as for competitive markets to work they need to take into account all appropriate price signals in the market
  • market failure occurs when signalling and incentive functions fail
61
Q

how do governments intervene in the price mechanism?

A
  • incentives of consumers and producers can be changed by government intervention ➡️if prices change due to tax or subsidies this will impact consumer spending
    BUT
  • economic agents may not always respond to incentives in the way it would be expected, ‘the law of unintended consequences’
62
Q

what is a consumer surplus?

A

the difference between what consumers are willing to pay and what they actually pay (a measure of welfare of what consumers get from consumption)

63
Q

Consumer surplus and price elasticity of demand?

A
  • when demand is perfectly elastic elastic, consumer surplus is zero because the price that people pay matches what they are willing to pay
    -when demand is perfectly inelastic, consumer surplus is infinite, quantity demanded does not respond to a price change, whatever the price, the quantity demanded remains the same.
64
Q

what is producer surplus?

A
  • the difference between the price producers are willing and able to supply a product for and the price they get in the market
65
Q

what are indirect taxes?

A

is a tax imposed by the government that increases the supply costs faced by producers
- impact depends on elasticity of demand

66
Q

why are the types of indirect tax?

A
  • a specific tax per unit
  • ad valorem tax is a percentage tax added
67
Q

what is the effect of ad valorem tax?

A

causes a pivotal shift in the supply curve ➡️ pushes prices up
- because the tax is a percentage of the unit cost of supplying the product

68
Q

what are subsidies?

A

any form of government support offered to producers (and sometimes consumers)

69
Q

what the justifications for government subsidies?

A
  • help lower-income families
  • protect jobs during a recession
  • reduce the cost of training
  • more distribution of wealth
70
Q

what are the assumptions behind rational behaviour + economic agents ?

A
  • agents choose independently of each other
  • an agent has a fixed and stable tastes and preferences
  • an agent gathers information on all other options
  • always make an optimal choice with given preferences
    ➡️ the key assumption is that people make choices to maximise the satisfaction (or utility) they get from
    spending a limited budget
71
Q

economic agents in reality?

A
  • have limited capacity to calculate all costs and benefits
  • are influenced by their own social networks
  • lack self control and seek immediate satisfaction
72
Q
A

Micro economics (11 decks)

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