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microeconomics- mr sutherland > 1.2 how markets work > Flashcards

1.2 how markets work Flashcards

1
Q

rational decision making

A

rational=action or decision someone made after considering consequence
utility=benefits to ourselves
-consumers aim to maximise utility
-firms aim to maximise profits

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2
Q

alternative views of consumer behaviour, why they may not behave ‘rationally’

A

1.influences of other people and social norms
2.influence of habitual behaviour (habits prevent conscious thinking)
3.consumer weakness as computation (e.g. not making comparisons and always thinking multipack is cheaper)

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3
Q

types of demand- effective

A

-desire to buy the product is backed up by a willingness and ability to pay

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4
Q

types of demand- latent/potential

A

-desire to buy the product but consumers lack purchasing power
-highly affected by advertising

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5
Q

types of demand- derived

A

-high demand for product X may be related to high demand in product Y
-e.g. demand for steel highly linked to demand for new cars

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6
Q

which factor causes movements along a demand curve

A

-price

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7
Q

which factors cause a shift in demand curve

A

-AKA(conditions of demand) -seasons/ trends
-inflation/ cost of living
-price of alternatives
-change in law + legislation
-advertising
-change in interest rates
-new version releases
-income

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8
Q

concept of diminishing marginal utility

A

-law of diminishing marginal utility states that if the consumption of a good or service increases, the satisfaction derived gradually increases but at a decreasing rate, to the point where it reaches zero. Total satisfaction is maximised when marginal utility is zero.

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9
Q

influence of diminishing marginal utility on the shape of demand curve

A

-demand curve slopes downward, showing inverse relationship between p+q
-utility represents satisfaction gained by customer as a result of consumption
-this explains why curve slopes down- if more of a good is consumed, less satisfaction is derived from the good

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10
Q

PED equation

A

PED= %change in quant demanded
%change in price

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11
Q

what does PED measure

A

-how responsive quantity demanded is to changes in price

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12
Q

what is PED affected by

A

-number of substitutes (more subs=more elastic)
-time (longer time period, becomes more elastic)
-necessities tend to be inelastic
-luxuries tend to be elastic
-% of consumer income allocated to the good

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13
Q

uses of PED

A

-helps firms determine optimum price to charge
-helps firms decide to inc or dec prices
-used to calculate impact of change on sales rev

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14
Q

limitations of PED

A

-values based on estimates
-info used to calculate PED may become outdated
-other factors may shift demand curve
-doesn’t follow that increase in revenue leads to more profit
-elasticity likely to change overtime

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15
Q

YED equation

A

YED=
%change in quant demanded
%change in income

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16
Q

what does YED measure

A

-how responsive quantity demanded is to changes in income

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17
Q

normal goods

A

-e.g. crisps, electricity
-have a positive income elasticity
->0
-when incomes rise demand for these goods rises

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18
Q

inferior goods

A

-e.g. own brand supermarket goods
-have a negative income elasticity
-<0
-when incomes rise demand for these goods falls as consumers buy higher quality alternatives

19
Q

superior goods

A

-normal goods which are seen as luxuries
-demand for these increases when incomes rise
-they are also income elastic as demand changes by a greater amount that income has risen by
-value over 1

20
Q

uses of YED

A

-knowledge of income elasticity helps firms make predictions
-helps business spread risk by offering products at different price points
-product switching depending on changes in income

21
Q

limitations of YED

A

-values based on estimates
-forecasting changes in demand is very difficult
-info becomes outdated
-elasticity likely to change overtime

22
Q

equation for XED

A

XED=
%change in quant demanded of X
% change in price of Y

23
Q

what does XED measure

A

-how responsive quantity demanded of one good is to changes in price of another good

24
Q

substitutes

A

-two goods that are substitutes have a positive cross elasticity
-e.g. increase in price of one leads to increase in demand for another

25
Q

complements

A

-two goods that are complements will have negative cross elasticity
-e.g. increase in price of one leads to decrease in demand of another

26
Q

unrelated goods

A

-cross elasticity of 0

27
Q

uses of XED

A

-helps classify goods as complementary or substitute
-helps determine pricing point
-complements help decide whether to decrease price of one thing as people will buy more of another

28
Q

limitations of XED

A

-values based on estimates
-forecasting changes in demand is difficult
-info used to calculate XED may become outdated
-elasticity likely to change overtime

29
Q

which factor causes movements along a supply curve

A

-price

30
Q

4 factors which cause a shift in supply curve

A

-AKA conditions of supply
1. cost of production
2. new technology
3. number of producers
4.government (e.g. anti pollution)

31
Q

PES equation

A

PES=
%change in quant supplies
%change in price

32
Q

what does PES measure

A

-how responsive quantity supplied is to changes in price

33
Q

factors which effect PES- time based

A

-shorter time makes it harder for producers to switch from making one product to another
-longer it takes to make a product the more elastic supply will be
-high spare capacity makes supply more inelastic and vice versa
-if it is hard to stock PES becomes inelastic

34
Q

uses of PES

A

-firms want to be able to respond quickly to changes in price and demand
-to do so they need to make their supply as elastic as possible
-need to take measures to improve elasticity (e.g. train flexible staff, update tech)

35
Q

limitations of PES

A

-values based on estimates
-info becomes outdated
-ignores cost data
-elasticity likely to change in long term

36
Q

price determination- equilibruim

A

-refers to a point where there are no more forces to bring about change
-where supply=demand
also known as market clearing because everything supplies is bought

37
Q

excess supply

A

-occurs when producers set prices too high
-overproduction of goods
-overcome by lowering prices

38
Q

excess demand

A

-prices too low and customers willing to pay more
-overcome by people willing to pay more or people will not get what they wanted and demand will decrease

39
Q

consumer surplus

A

-the difference between the price the consumer is willing to pay and the price they actually pay set by the price mechanism

40
Q

producer surplus

A

-the difference between the price the supplier is willing to produce at and the price they actually produce it at

41
Q

what is the price mechanism

A

-in free market economies, price mechanisms allocate resources
-price is determined by interactions of supply and demand
-prices rise when buyers want to purchase more than suppliers can sell
-Adam Smith described it as the ‘invisible hand’ of the market

42
Q

functions of price mechanism- rationing function

A

-a way of rationing goods because when prices increase some people may not be able to afford the good and therefore cannot buy it
-limited resources are rationed and allocated to those who can afford them

43
Q

functions of price mechanism- signalling function

A

-acts as signal of where resources should be used
-when prices rise, resources are moved to the manufacturing of that product

44
Q

functions of price mechanism- incentive function

A

-acts as an incentive for people to work hard, the more money they have the more they can buy
-suppliers produce more goods to make more money

microeconomics- mr sutherland (7 decks)

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