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Economics (Micro) > 1.2: How Markets Work > Flashcards

1.2: How Markets Work Flashcards

1.2 Includes: -1.2.1 Rational Decision Making -1.2.2 Demand -1.2.3 Price, Income And Cross Elasticities Of Demand -1.2.4 Supply -1.2.5 Elasticity Of Supply -1.2.6 Price Determination -1.2.7 Price Mechanism -1.2.8 Consumer And Producer Surplus -1.2.9 Indirect Taxes And Subsidies -1.2.10 Alternative Views Of Consumer Behaviour

1
Q

A graph with PED = ∞ is perfectly price __________

A

Elastic

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2
Q

An inelastic demand curve has a PED of ?

A

< 1

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3
Q

A graph with PED > 1 is price __________

A

Elastic

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4
Q

A perfectly inelastic curve has a PED of ?

A

0

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5
Q

A movement along the demand/supply curve is caused by what?

A

A change in price

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6
Q

State:

Factors that cause a shift in demand

A

Non-price factors like PASIFIC:
Population
Advertising
Substitutes
Income
Fashion & Trends
Interest Rates & Gov Policies
Compliments

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7
Q

State:

Factors that cause a shift in supply

A

Non-price factors like PINTS WEC:
Productivity
Indirect Taxes
Number of firms entering the market
Technology
Subsidies
Weather/Climate
E
Costs of Production

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8
Q

Explain:

Difference between an extension and contraction of demand

A

Contraction is a movement up the demand curve (to the left); extension is a movement down the demand curve (to the right). Caused by a change in price.

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9
Q

Explain:

Difference between an extension and contraction of supply

A

Contraction is a movement down the supply curve (to the left); extension is a movement up the supply curve (to the right). Caused by a change in price.

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10
Q

Explain:

What is Diminishing Marginal Utility?

A

A principle that states that as a person consumes more of a particular good or service, the additional utility (satisfaction) that they derive from each additional unit will eventually decline.

For example, if a person eats one slice of pizza, they will experience a certain level of satisfaction. If they eat a second slice, they may experience a slightly lower level of satisfaction, and if they eat a third slice, they may experience even less satisfaction

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11
Q

Define:

Price Elasticity of Demand

A

A measurement of the responsiveness of the quantity demanded of a good or service to a change in price.

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12
Q

Define:

Price Elasticity of Supply

A

A measurement of the responsiveness of the quantity supplied of a good or service to a change in price.

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13
Q

PED Calculation

A

%ΔQD / %ΔP

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14
Q

PES Calculation

A

%ΔQS / %ΔP

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15
Q

A graph with PED = 1 is ?

A

Unitary Price Elastic

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16
Q

What is income elasticity of demand?

A

A measure to show how responsive the demand for a product is to change in (real) income.

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17
Q

What is the formula for YED?

A

%ΔQD / %Δreal income

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18
Q

Which type of goods have a positive YED?

A

Normal Goods

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19
Q

Which types of goods have a negative YED?

A

Inferior goods

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20
Q

Goods where YED is >+1

A

Luxury Goods

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21
Q

Goods where YED is >0 and <+1

A

Necessities

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22
Q

What are counter-cyclical goods?

A

Products whose demand varies inversely to the macroeconomic cycle; demand rises in a downturn. Inferior goods are counter-cyclical.

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23
Q

Real Household Disposable Income (RHDI)

A

Income after taxes and benefits and adjusted for inflation

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24
Q

During times of recession, which type of goods are likely to experience increased demand?

A

Inferior goods

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25
Q

Which producers may benefit from economic hard times?

A

Those that sell inferior goods. For example, Greggs and stores like Lidl and Aldi experienced growth during the 2008/2009 financial crisis.

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26
Q

What is cross price elasticity?

A

A measure of the responsiveness of demand for good x following a change in the price of related good y.

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27
Q

The formula for Xed

A

(%ΔQD for good x) / (%ΔP of good y)

28
Q

Which types of products are in competitive demand?

A

Substitutes

29
Q

Which type of products are in joint demand?

A

Compliments

30
Q

Products with a positive Xed

A

Substitutes, with the stronger the Xed signalling the stronger the relationship between the two products is

31
Q

Products with negative Xed

A

Compliments, with the lower the Xed showing how close they are

32
Q

What are the 4 main functions of the price mechanism?

A

-Allocate
-Rationing
-Signalling
-Incentives

33
Q

What is Rationing?

A

Prices serve to ration scarce resources when market demand outstrips supply

34
Q

What is signalling?

A

When prices adjust to demonstrate where resources are required, and where they aren’t.

35
Q

What is meant by Allocation?

A

Allocating scarce resources among competing uses

36
Q

What is meant by incentives?

A

E.g. when the price of a product rises, quantity supplied increases as businesses respond!

37
Q

What is the rationing function?

A

When there is a shortage of a product, price will rise and deter some consumers from buying the product

38
Q

What is the signalling function?

A

Changes in price provides information to both producers and consumers about changes in market conditions

39
Q

What is consumer surplus?

A

A measure of the welfare that people gain from consuming goods and services.
-The difference between the total amount consumers are willing and able to pay for a good or service (shown by the demand curve) and the total amount they actually do pay (I.e. the market price)

40
Q

What is consumer surplus indicated by on a demand curve?

A

It is indicated by the area under the demand curve and above the market price.

41
Q

Consumer surplus when demand is inelastic

A

There is a greater consumer surplus because some buyers are willing to pay a very high price to continue consuming the product

42
Q

Consumer surplus when demand is elastic

A

Elastic demand means a relatively low consumer surplus as consumers aren’t willing to pay a very high price to continue consuming the product

43
Q

What is Producer Surplus?

A

The difference between 2 price levels
-it is the difference between the price producers are willing and able to supply a good or service for and the price they actually receive.

44
Q

What is producer surplus shown by on a supply curve?

A

Shown by the area above the supply curve and below the current market price.

45
Q

What are indirect taxes?

A

A tax imposed by the government that increases the supply costs faced by producers

46
Q

What is specific tax?

A

A tax set per unit. E.g. £5 tax per unit sold

47
Q

What is ad valorem tax?

A

A percentage tax. E.g. 20% on the unit price.
The main UK indirect tax is VAT, which generates ~£110bn annual tax

48
Q

What are subsidies?

A

Any form of government support- financial or otherwise- offered to producers and (occasionally) consumers

49
Q

Justifications for subsidies for producers

A

For a number of economic, social and political reasons
-help poorer families
-encourage output and investment in fledgling sectors
-protect jobs in loss-making industries
-Make some healthcare treatments more affordable

50
Q

Choice architecture

A

Describes how the decisions we make are affected by the layout/sequencing/range of choices that are available

51
Q

Often seen in financial markets as we often make decisions based in part on who is around us and the choices they make

A

Herd behaviour

52
Q

Habitual behaviour

A

The idea that people prefer to carry on behaving as they have always done; repeat choices/purchases often becoming automatic because default choices don’t involve cognitive effort

53
Q

Anchoring

A

Value is often set by anchors or imprints in our minds which we use as mental reference points

54
Q

Priming

A

Our behaviour by cues that work subconsciously and prime us to behave/choose in certain ways

55
Q

Framing

A

Framing a question or offering in a different way often generates a new response by changing the comparison set it is viewed in

56
Q

Asymmetric framing

A

Includes involving an obvious inferior 3rd choice or a hyper-expensive 3rd option rather than a simple expensive/cheap option can guide consumers to more expensively-priced items

57
Q

Define:

Externalities

Externalities

A

Spill-over effects from production and consumption for which no appropriate consumption is paid/received.

They are a major cause of market failure and are likely in every market.

58
Q

Define:

Private Costs

Externalities

A

Costs faced by the producer or consumer directly involved in a transaction.

59
Q

Define:

Private Benefits

Externalities

A

Benefits for producers and/or consumers directly involved in an economic transaction.

60
Q

Social costs and benefits

Externalities

A

Social Costs = Private Cost + External Cost
Social Benefits = Private Benefit + External Benefit

61
Q

Exists when Social Costs > Private Costs

Externalities

A

Negative Externalities

62
Q

Exists when Social Benefits > Private Benefits

Externalities

A

Positive Externalities

63
Q

List:

How do Economists value externalities?

Externalities

A
  • Shadow Pricing
  • Compensation
  • Revealed Preference
64
Q

Define:

Compensation

Externalities

A

The estimated cost of ‘putting right’ an externality

65
Q

Define:

Revealed Preference

Externalities

A

How much people are willing to pay to avoid an externality

66
Q

Define:

Negative Externalities

Externalities

A

Occur when production and/or consumption impose external costs on 3rd parties outside of the market for which no compensation is paid.

Economics (Micro) (4 decks)

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