1.2 How Markets Work Flashcards
What assumptions are made about the objectives of consumers and producers
Consumers - Make decisions to maximise utility
Producers- Make decisions to maximise profit
How does herd mentality may prevent consumers acting rationally
Herd like behaviour - Following the crowd
We are greatly influenced by consumption norms within the relevant group
How does habitual behaviour prevent consumers acting rationally
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
How does computational weakness prevent consumers acting rationally
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
Explain the concept of Diminishing Marginal Utility
Diminishing Marginal Utility means that when more of an additional good is consumed utility is reduced
Explain why the demand curve is downward sloping
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
What is an extension in demand
Prices falling along the demand curve
What is a contraction in demand
Prices rising along the demand curve
List the factors that affect demand
Population
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Substitutes
Income
Fashion + Taste
Interest Rates
Complements
Explain why the supply curve is upward sloping
As prices rise producers have a greater incentive to produce more
List the factors that affect supply
Productivity
Indirect Taxes
Number of firms
Technology
Subsidies
Weather
Cost of production
What is meant by joint supply
When a rise in the output of one product leads to a rise in the supply of another product
What is meant by competitive supply
When an increase in the supply of one product leads to a fall in the supply of anotherwhat
what is meant by consumer surplus
The difference between how much buyers are willing to pay for a good and what they actually pay
what is meant by producer surplus
The difference between the price at which firms are prepared to supply and the price they receive
Represent consumer and producer surplus on a diagram
Powerpoint
Define price elasticity of demand
The responsiveness of demand to a change in price
What is the formula for PED
Percentage Change in Qd / Percentage Change in Price
What does PED = 0 mean
Perfectly Inelastic - A change in price has no change on demand
What does PED between 0 and -1 mean
Price Inelastic - A change in price leads to a proportionally smaller change in demand
What does PED = -1 mean
Unitary Elastic - A change in price leads to a proportionate change in demand, therefore a price change leads to no change in total revenue
What does PED between -1 and negative infinity mean
Price elastic - A change in price leads to a proportionally larger change in demand
What does PED = infinity mean
Perfectly Elastic - A change in price leads to an infinite change in demand , a price rise causes the demand to fall to 0
List the factors affected PED
Proportion Of Income
Loyalty
Addictiveness
Necessities
Time
Substitutes
Define price elasticity of supply
The responsiveness of supply to a change in price
What is the formula for PES
Percentage Change in Qs / Percentage Change in Price
What does PES = 0 mean
Perfectly Inelastic - A change in price leads to no change in supply
What does PES = infinity mean
A change in price leads to an infinite change in supply
What does PES between 0 and 1 mean
A change in price leads to a proportionally smaller change in supply
What does PES greater than 1 mean
A change in price leads to a proportionally larger change in supply
What does PES = 1 mean
A change in price leads to a proportionate change in supply
List the factors affecting PES
Barriers to entry
Resources
Inventory
Time
Spare Capacity
Are firms supply elastic or inelastic in the long term
Elastic - the more time you give firms the more responsive they will be to changes in price incentives
Define income elasticity of demand (YED)
The responsiveness of demand to a change in income
What is the formula for YED
Percentage Change in Qd / Percentage Change in income
What YED do normal and inferior goods have
Normal - Positive values
Inferior - Negative values
What YED values do luxury and necessity goods have
Luxury - YED greater than 1
Necessity - YED between 0 and 1
Define cross elasticity of demand
The responsiveness in the change in demand for one product due to the change in price in another
What is the formula for cross elasticity of demand (XED)
Percentage Change in Qd Good A / Percentage Change in Price Good B
What XED values would substitutes, complementary and unrelated goods have
Substitutes - Positive
Complementary - Negative
Unrelated - 0
