1.2 - How Markets Work Flashcards
Consumers aim to maximise ______, firms aim to maximise ______, and the Government aims to maximise ______ ________.
- Utility
- Profits
- Social Welfare
What is utility?
The satisfaction gained from consuming a good/ service.
What is Demand?
The ability and willingness to buy a particular good at a given price and time.
What causes a movement along the demand curve?
Caused by a change in the price of the good.
What are the factors that cause Demand to shift?
- Population
- Income
- Related goods
- Advertising
- Tastes
- Expectations
- Seasons
(PIRATES)
What assumption is made to predict or explain how consumers will spend their money?
We have to assume consumers will behave rationally, and expect them to spend according to what gives them the greatest level of satisfaction (or welfare).
What is Total Utility?
The satisfaction gained by consumers from overall consumption of a good.
What is marginal Utility?
The change in satisfaction as a result of consuming another unit of good.
What is the Law of Diminishing Utility?
The satisfaction derived from consuming another unit of a good will decrease as more of the good is consumed.
What is Price Elasticity of Demand (PED)?
The responsiveness of demand to change in the price of the good.
What are the 5 factors influencing PED?
- Availability of Substitutes
- Time
- Necessity
- How large of a % total expenditure (e.g. how much it makes up of someone’s total spending)
- Addictiveness
If a Demand curve is more elastic, what will this mean for the consumer (in terms of the incidence of tax)?
The incidence of tax (for the consumer) will be lower, meaning tax will only lead to a small increase in price for consumer
(and the supplier covers a majority of the cost of the tax)
Why would taxes be ineffective at reducing output if a good is inelastic?
Consumers are relatively unresponsive to the price of an inelastic good, therefore output would not fall too much.
What causes an increase in revenue for an elastic demand curve?
A decrease in price.
What is Income Elasticity of demand (YED)?
The responsiveness of demand to a change in income.
What is Cross elasticity of Demand (XED)?
The responsiveness of demand for one product (A) to the change in price of another product (B).
What is a complementary good? Give an example.
An increase in the price of good B will decrease the demand for good A. (XED > 0)
- e.g, DVD’s and DVD players
What is supply?
The ability and willingness to provide goods/services at a given price and time.
What are the factors that cause supply to shift?
- Productivity
- Indirect Tax
- Number of Firms
- Technology
- Subsidies
- Weather
- Cost of Production (most important)
(PINTSWC)
What is Price Elasticity of Supply (PES)?
The responsiveness of supply to a change in price of the good.
what are the 6 factors that affect PES?
- Time
- Stocks
- working below full capacity
- Availability of factors of production
- Ease of entry into the market
- Availability of substitutes
what is the rationing function of the price mechanism?
A way of rationing goods to where only the people who value them the highest can afford them
what is the signalling function of the price mechanism?
The price mechanism acting as a signal for where resources should be used
- i.e. producers moving resources into the manufacture of a product that has had an increase in demand
what is the incentive function of the price mechanism?
Price mechanism acts as an incentive for people to work hard
- because they know the more money they have, the more products they can afford; suppliers know if they cab produce more goods, the more money they can make…
what is consumer surplus? what does it show?
The difference between the price the consumer is willing to pay and the price they actually pay
- Shows the welfaire gained by consumers (total satisfaction)
what is producer surplus? what does it show?
The difference between the price the supplier is willing to produce their product at and the price they actually produce it at
- Shows economic gain for producers
what is an indirect tax? what are the two types?
A tax on expenditure (goods/services)
- Specific tax: a fixed amount of tax placed on a particular good (or per-unit tax)
- Ad Valorem tax: and imposed tax on a good/service depending on its value (e.g. VAT)
what is a subsidy?
A grant given by the government
(extra payment to firms to encourage/ increase production of good/service)
what is influence of habitual behaviour? what limits can it have to consumer judgement?
Habits consumers have, which reduce time it takes so do something because their actions are subconsious
- Can prevent consumers from making beneficial decisions for themselves e.g., buying alcohol when trying to stop
what is the influences of other people? what limits can it have to consumers judgement?
Individuals influenced by social norms to ‘fit-in’ (because everyone had or is doing something)
- Can prevent making individual decisions that benefits them (herd behaviour)
