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Economics > 1.2 How Markets Work > Flashcards

1.2 How Markets Work Flashcards

1
Q

What assumptions are made about the objectives of consumers and producers

A

Consumers - Make decisions to maximise utility
Producers- Make decisions to maximise profit

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2
Q

How does herd mentality may prevent consumers acting rationally

A

Herd like behaviour - Following the crowd
We are greatly influenced by consumption norms within the relevant group

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3
Q

How does habitual behaviour prevent consumers acting rationally

A

The ‘status quo’ bias is the tendency which individuals have of just sticking with their current situation
Often linked to individuals wanting to play it safe

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4
Q

How does computational weakness prevent consumers acting rationally

A

Consumers are not always willing or able to make comparison between prices and goods on offer
Prices and offers are often presented in ways where consumers find it difficult to do the mathematics required for comparison

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5
Q

Explain the concept of Diminishing Marginal Utility

A

Diminishing Marginal Utility means that when more of an additional good is consumed utility is reduced

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6
Q

Explain why the demand curve is downward sloping

A

As prices rise, fewer consumers can afford or are inclined to buy a good or service
As the quantity of consumption rises, the utility drops meaning consumers are only willing to pay less than before

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7
Q

What is an extension in demand

A

Prices falling along the demand curve

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8
Q

What is a contraction in demand

A

Prices rising along the demand curve

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9
Q

List the factors that affect demand

A

Population
Advertisement
Substitutes
Income
Fashion + Taste
Interest Rates
Complements

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10
Q

Explain why the supply curve is upward sloping

A

As prices rise producers have a greater incentive to produce more

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11
Q

List the factors that affect supply

A

Productivity
Indirect Taxes
Number of firms
Technology
Subsidies
Weather
Cost of production

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12
Q

What is meant by joint supply

A

When a rise in the output of one product leads to a rise in the supply of another product

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13
Q

What is meant by competitive supply

A

When an increase in the supply of one product leads to a fall in the supply of anotherwhat

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14
Q

what is meant by consumer surplus

A

The difference between how much buyers are willing to pay for a good and what they actually pay

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15
Q

what is meant by producer surplus

A

The difference between the price at which firms are prepared to supply and the price they receive

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16
Q

Represent consumer and producer surplus on a diagram

A

Powerpoint

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17
Q

Define price elasticity of demand

A

The responsiveness of demand to a change in price

18
Q

What is the formula for PED

A

Percentage Change in Qd / Percentage Change in Price

19
Q

What does PED = 0 mean

A

Perfectly Inelastic - A change in price has no change on demand

20
Q

What does PED between 0 and -1 mean

A

Price Inelastic - A change in price leads to a proportionally smaller change in demand

21
Q

What does PED = -1 mean

A

Unitary Elastic - A change in price leads to a proportionate change in demand, therefore a price change leads to no change in total revenue

22
Q

What does PED between -1 and negative infinity mean

A

Price elastic - A change in price leads to a proportionally larger change in demand

23
Q

What does PED = infinity mean

A

Perfectly Elastic - A change in price leads to an infinite change in demand , a price rise causes the demand to fall to 0

24
Q

List the factors affected PED

A

Proportion Of Income
Loyalty
Addictiveness
Necessities
Time
Substitutes

25
Q

Define price elasticity of supply

A

The responsiveness of supply to a change in price

26
Q

What is the formula for PES

A

Percentage Change in Qs / Percentage Change in Price

27
Q

What does PES = 0 mean

A

Perfectly Inelastic - A change in price leads to no change in supply

28
Q

What does PES = infinity mean

A

A change in price leads to an infinite change in supply

29
Q

What does PES between 0 and 1 mean

A

A change in price leads to a proportionally smaller change in supply

30
Q

What does PES greater than 1 mean

A

A change in price leads to a proportionally larger change in supply

31
Q

What does PES = 1 mean

A

A change in price leads to a proportionate change in supply

32
Q

List the factors affecting PES

A

Barriers to entry
Resources
Inventory
Time
Spare Capacity

33
Q

Are firms supply elastic or inelastic in the long term

A

Elastic - the more time you give firms the more responsive they will be to changes in price incentives

34
Q

Define income elasticity of demand (YED)

A

The responsiveness of demand to a change in income

35
Q

What is the formula for YED

A

Percentage Change in Qd / Percentage Change in income

36
Q

What YED do normal and inferior goods have

A

Normal - Positive values
Inferior - Negative values

37
Q

What YED values do luxury and necessity goods have

A

Luxury - YED greater than 1
Necessity - YED between 0 and 1

38
Q

Define cross elasticity of demand

A

The responsiveness in the change in demand for one product due to the change in price in another

39
Q

What is the formula for cross elasticity of demand (XED)

A

Percentage Change in Qd Good A / Percentage Change in Price Good B

40
Q

What XED values would substitutes, complementary and unrelated goods have

A

Substitutes - Positive
Complementary - Negative
Unrelated - 0

Economics (18 decks)

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