1.2 How markets work Flashcards
what is demand?
being willing and able to buy something
draw the demand curve
inverse realtionship between quanitty demanded and price
What is an extension in demand
When prices decrease……there is an expansion in demand
Assuming ceteris Paribus (other factors like competitors ignored)
What is a contraction in demand ?
If price increases…l there will be a contraction in demand
What will happen to the demand curve if there is an increased amount of advertising?
More advertising means more demand for the same price, so there will be a shift outwards in the demand curve
Define demand
The quantity of a good or service purchased at a given price over a given time period
what are the two assumptions in econimics ?
- consumers wish to maximise utility
- firms wish to maximise profit
what is ‘utility’?
the hapiness recieved
* the satisfaction/ benefit derivd from consuming a good
why may consumers not act rationally?
- herd behaviour: influenced by other people
- habitual behaviour: doing same thing again and again- loosing out on utility
- consumer inertia: fear of the unknown
- consumer weakness at computation (understanding data)
so they don’t switch
what do economic agents require to make rational decisions?
- time
- information
- ability to process information
what factors cause shifts in the demand curve?
conditions of demand
-
seasons (christmas trees)
2.price of other goods (income and subsititues) - advertising, fashion & trends
-
population and age structure (larger population/ more older people)
5.** i**ncome
SOAPI
what are normal and inferior goods?
- inferior: when icome increases demand decreases
- basic goods (ms mollies)
as income increases, demand decreases, shifting demand out ot the right - normal : as income increases, demand increases
how do substitute goods and complinentary goods affect demand
CAUSE MOVEMENTS OF CURVE (EVEN THO PRICE RELATED)
* Substitute goods : inversley proprtional (apple & samsung)
* complimentary goods : propetional (iphone+ apps)
what is supply?
when a producer is willing and able to sell a good
draw a supply curve
as the price of a good increases, the profit that can be made for the producer incraeses and so they have more of an incentive to supply a larger quantity
define supply
the quanitity of a good or service that firms are willing to sell at a given price over a given time period
what are the assumptions of a supply curve?
- firms want to maximise profits
- doesn’t consider why the price increases
- just tells us what were to happen if price increases
what are the conditions of supply?
- weather
- technology
- cost of production (profit & incentive, cannot afford)
- number of suppliers
- productivity
shift inwards/ outwards
what happens when the price of soomething increases?
- a contraction in demand (less consumers can afford)
- an extention in supply (producers can make more profits)
demand: consumer POV
supply: producer POV
what is excess supply/ surplus?
the gap between supply and demand at a given price
* producers will decrease their prices to get eliminate excess supply
* (when price is above equalibrium price)
when is there equilibrium?
quantity supplied = quantity demanded
supply and demand meet
what is the excess supply/demand at
* 90p
* 40p
* 50p
what happens when there is excess demand/shortage?
(when price is below equilibrium price)
* consumers bid up their price
* only those who can pay high prices can afford
eliminating excess demand
incease in supply
- s1 to s2
- leading to p1 to p2 (decrease in price)
- because Q1 to Q2 (quantity supplied increased)
what is direct tax?
tax paid directly to the government.
Levi dead directly on an individual or organisation
* income tax
* corporation tax
what is income tax
What is indirect tax?
tax on goods and services
* VAT
what are the two types of indirect tax?
- specific tax
- ad velorum tax
both are paid by producers
what is specific tax
a fixed amount of tax paid on each unit sold
fixed tax of £4 per item, if 5 units sold then £20, if 100 items sold then £400
affects producers
how specific tax impact graph
impacts supply curve as producers are the ones that have to pay.
* Shift vertically upwatds creating new line S tax
* difference between original line and S tax is the specific tax applied
* because peoducers require higher prices to make up for the tax
what will the new price equalibrium be after the £4 specific tax?
as price increases, the quantity demanded also decreases
what is the tax revenue that the goverment recieves in total?
sixe of speciic tax × quantity sold (of new equailibrium)
what is the incidence of tax on consumers?
how much the consumers pay on the total tax revenue
differnec between selling prices × quanitity sold
top box
what is the incidence of tax on producers?
how much of the total tax revenue the producers have to pay
draw a speific tax diagram
what is ad velorum tax?
a percentage of the price of a good/serive
eg: VAT
draw an ad valoreum diagram?
what are the two purposes of tax?
- discourage production and consumption of harmful goods
- increase goverment revenue