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Microeconomics > 1.2 How markets work > Flashcards

1.2 How markets work Flashcards

1
Q

what is the law of diminishing marginal utility?

A

the more you consume of something the less utility you receive from it

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2
Q

what is the relationship between marginal and total utility

A

total utility is inversely proportional to marginal utility

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3
Q

define marginal utility

A

the additional utility gained from consuming one additional unit of good or service

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4
Q

define demand

A

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

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5
Q

what is notional demand

A

demand focused on wants but are not purchased

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6
Q

what is effective demand

A

demand backed up by a purchase

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7
Q

what is the relationship between price and quantity demanded

A

inverse

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8
Q

what is the substitution effect

A

if prices rise of a specific good then we are likely to find a cheaper substitute

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9
Q

what is the income effect

A

as prices fall our income allows us to buy more of a good

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10
Q

what does a shallow demand curve mean

A

the good is really sensitive to price changes

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11
Q

what does a steep demand curve mean

A

the good is not that sensitive to price changes

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12
Q

what does a horizontal demand curve mean

A

if the price changes then there is no demand for a product

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13
Q

what does a vertical demand curve mean

A

no matter the price change the demand for the product stays the same

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14
Q

what causes a contraction or extension along the demand curve

A

price changes

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15
Q

what causes a shift in the demand curve

A

quantity demanded changes

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16
Q

what is the acronym for non price determinants of demand

A

PIRATE

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17
Q

what does PIRATE stand for

A

P - population size and demography
I - income
R - related goods (price and availability of complements and substitutes
A - advertising and awareness
T - tastes and preferences (weather/season/fashion)
E - expectations of future price changes/changes in income/changes in factors that affect consumer and business confidence

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18
Q

define supply

A

the quantity of a good or service that producers are willing and able to produce at a given price in a given time period

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19
Q

what is notional supply

A

supply focused on wants but are not purchased

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20
Q

what is effective supply

A

supply backed up by a purchase

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21
Q

why does a supply curve slope upwards from left to right

A

if prices are rising business have a greater incentive to supply because they are receiving a higher return on their investment

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22
Q

what does a shallow supply curve mean

A

change in price significantly impact on supply

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23
Q

what does a steep supply curve mean

A

change in price has little to no impact on supply - this usually happens when supply has restrictions

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24
Q

what does a horizontal supply curve mean

A

there is only one price no matter the supply

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25
Q

what does a vertical supply curve mean

A

a set amount of quantity supplied no matter the price change - capacity constraints

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26
Q

what is the acronym that affects the supply curve

A

CREST

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27
Q

what does CREST stand for

A

C - costs of production
R - related goods and services
E - expectations of future prices
S - subsidies from government/taxes on goods and services
T - technology

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28
Q

what is market equilibrium

A

equilibrium is a state of equality or balance between market demand and supply

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29
Q

what does utility maximisation mean

A

total utility is maximised when marginal utility is 0

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30
Q

what is PED

A

price elasticity demand is a measure of the responsiveness of quantity demanded to change in price

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31
Q

PED: sign

A

the sign denotes the relationship between the two variables. PED has a - sign

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32
Q

PED: value

A

the value determines whether demand is price elastic or price inelastic

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33
Q

PED: 0

A

perfectly inelastic - a change in price has no effect on Qd

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34
Q

PED: 0 -1

A

relatively inelastic - a change in price causes a less than proportional change in Qd

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35
Q

PED: 1

A

unitary elastic - a change in price has a proportional change in Qd

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36
Q

PED: 1 - …

A

relatively elastic - a change in price causes a more than proportional change in Qd

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37
Q

PED: formula

A

% change in Qd / % change in P

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38
Q

PED: gradient of price elastic good

A

small gradient, shallow line

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39
Q

PED: gradient of price inelastic good

A

large gradient, steep line

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40
Q

what is revenue

A

price x quantity

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41
Q

what is XED

A

cross elasticity demand - the sensitivity of the quantity demanded for good A against the change in the price of good B

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41
Q

XED: formula

A

% change in QD Good A / % change in P Good B

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42
Q

XED: sign

A

it indicates whether the good is a complement or substitute
- = complement
+ = substitutes

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43
Q

XED: value

A

the value determines whether demand for good A is cross elastic or cross inelastic. this indicates the strength of the relationship between the two goods and how close they are complements or substitutes for each other

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44
Q

XED: 0

A

perfectly inelastic - a change in price of good B has no effect on Qd for good A

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45
Q

XED: 0 - 1

A

relatively inelastic - a change in price of good B has a less than proportional change on Qd for good A

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46
Q

XED: 1

A

unitary elastic - a change in price of good B has a proportional change on Qd for good A

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47
Q

XED: 1 - …

A

relatively elastic - a change in price of good B has a more than proportional change on Qd for good A

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48
Q

what is YED

A

income elasticity of demand (YED) measures the responsiveness of demand to a change in income

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49
Q

YED: formula

A

% change in Qd / % change in Y

50
Q

YED: basic goods

A

^income = same demand

51
Q

YED: luxury goods

A

^income = ^demand

52
Q

YED: inferior goods

A

vincome = ^demand

53
Q

YED: sign

A

the sign denotes the nature of the good, it indicates whether the good is basic, luxury or inferior.
+ = basic and superior
- = inferior

54
Q

YED: value

A

the value determines whether the good is income elastic or income inelastic

55
Q

YED: 0

A

perfectly inelastic - a change in income has no effect on Qd

56
Q

YED: 0 - 1

A

relatively inelastic - a change income causes a less than proportional change in Qd

57
Q

YED: 1

A

unitary elastic - a change income causes a proportional change in Qd

58
Q

YED: 1 - …

A

relatively elastic - a change income causes a more than proportional change in Qd

59
Q

YED: graph of normal good

A

positive gradient

60
Q

YED: graph of inferior good

A

negative gradient

61
Q

what is PES

A

price elasticity of supply - producers respond to changes in price by increasing or decreasing the quantity of a product they supply

62
Q

PES: formula

A

%change in quantity supplied/%change in price

63
Q

PES: sign

A

always positive

64
Q

PES: value

A

determines the level of elasticity of the product

65
Q

PES: 0

A

perfectly inelastic - a change in price has no effect on quantity supplied

66
Q

PES: 0-1

A

relatively inelastic - a change in price causes a less than proportional change in quantity supplied

67
Q

PES: 1

A

unitary elastic - a change in price causes a proportional change in quantity supplied

68
Q

PES: 1…

A

relatively elastic - a change in price causes a more than proportional change in quantity aupplied

69
Q

PES: inelastic graph

A

high gradient

70
Q

PES: elastic graph

A

low gradient

71
Q

PES: perfectly inelastic graph

A

vertical line

72
Q

PES: perfectly elastic graph

A

horizontal line

73
Q

what are the 11 things that effect PES of a good?

A
  1. time period under consumption
  2. perishability
  3. access to storage/stocks
  4. availability of imports
  5. spare production capacity
  6. flexibility of capital
  7. flexibility of labour
  8. market contestability
  9. impact of increase in sale costs
  10. bottlenecks in supply chain
  11. length of production process
74
Q

how does time period under consumption effect PES

A

becomes more elastic if a greater time period given to match the demand

75
Q

how does perishability affect PES

A

can build up storage if not perishable (stockpile)

76
Q

how does access to storage/stocks affect PES

A

able to use more of stock to produce products

77
Q

how does availability of imports affect PES

A

can rely on other countries to supply goods

78
Q

how does spare production capacity affect PES

A

ability to produce more if needed

79
Q

how does flexibility of capital affect PES

A

transferable to produce different things

80
Q

how does flexibility of labour affect PES

A

transferable time and skills to produce different things

81
Q

how does market contestability affect PES

A

the easier it is for a business to enter a market the more elastic supply

82
Q

what does market contestability mean

A

how easy it is for a firm to enter a market

83
Q

how does the impact of increase in scale of costs affect PES

A

increase costs - decrease elasticity

84
Q

how do bottlenecks in the supply chain affect PES

A

anything that stops the free flow of goods and services = inelastic

85
Q

how does the length of production process affect PES

A

shorter time = easier to produce quicker

86
Q

define indirect tax

A

can be passed on to a third party and not taken from the source

87
Q

define subsidy

A

a grant given which lowers the price of a good usually designed to encourage production or consumption of a good

88
Q

define specific tax

A

tax levied on volume

89
Q

define ad valorem tax

A

tax levied as a percentage of the value of a good

90
Q

shifts on specific tax graphs

A

parallel

91
Q

for taxes what is the top box on the graph

A

consumer

92
Q

for taxes what is the bottom box on the graph

A

producer

93
Q

what are the purposes of subsidies

A
  1. reduce the price of merit goods and services (increase production and consumption)
  2. reduce the price of positive externalities (increase production and consumption)
  3. reduce the costs of production and allow domestic firms to compete internationally (protect domestic jobs)
94
Q

for taxes what happens to the supply curve

A

shifts inwards

95
Q

for subsidies what happens to supply

A

shifts outwards

96
Q

what it the top box on a subsidy graph

A

producer

97
Q

what is the bottom box on a subsidy graph

A

consumer

98
Q

define consumer surplus

A

the difference between the total amount that consumers are willing and able to pay, and the total that they actually pay (market price)

99
Q

subsidywhat does an ad valorem tax graph look like

A
100
Q

what does an ad valorem tax graph look like

A
101
Q

what does a specific subsidy graph look like

A
102
Q

what does a specific tax graph look like

A
103
Q

what is consumer surplus affected by

A

a shift in supply

104
Q

what happens to consumer surplus if supply shifts inwards

A

loss

105
Q

what happens to consumer surplus if supply shifts outwards

A

gain

106
Q

what does a graph of consumer surplus look like if supply shifts inwards

A
107
Q

what does a graph of consumer surplus look like if supply shifts outwards

A
108
Q

define producer surplus

A

a measure of producer welfare. it is measured as the difference between what producers are willing to supply a good for, as shown by the supply curve, and the price they actually receive

109
Q

what does producer surplus depend on

A

a shift in demand

110
Q

what happens to producer surplus if demand shifts outwards

A

gain

111
Q

what happens to producer surplus if demand shifts inwards

A

loss

112
Q

what does a graph of producer surplus look like if demand shifts outwards

A
113
Q

what does a graph of producer surplus look like if demand shifts inwards

A
114
Q

what does a graph of consumer and producer surplus look like after a specific tax has been applied

A
115
Q

what does a graph of consumer surplus look like after a specific subsidy has been applied

A
116
Q

name some types of irrational behaviour

A
  1. herding
  2. habits
  3. weakness at computation
117
Q

what is herd behaviour

A

individuals are influenced by societal norms, known as a bias

118
Q

what is habitual behaviour

A

people have habits and these reduce the amount of time it takes to do something, as they no longer have to think consciously about their decisions

119
Q

what is weakness at computation

A

consumers aren’t willing or an unable to make comparisons between prices so they will buy more expensive goods than needed

120
Q

what are the three parts of the pricing mechanism

A
  1. rationing
  2. signalling
  3. incentive
121
Q

what is the rationing function

A

a way of rationing goods because when the price increases, some people will no longer be able to or desire to buy the product. limited resources can be rationed and sold to people able to afford them and those who value them the highest

122
Q

what is the signalling function

A

acts a signal where resources should be used. when prices rise, producers move resources into manufacturing the product. the change in prices indicates to suppliers and consumers that the market conditions have changes and the quantity demanded and sold should be adjusted accordingly

123
Q

what is the incentive function

A

acts as an incentive for people to work hard. buyers realise that the more money they have the more they are able to demand. suppliers realise that if they produce more of the goods, they will make more money.
low prices = consumers buy more goods
high prices = suppliers want to produce more goods

Microeconomics (11 decks)

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