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Micro Economics > 1.2 - How Markets Work > Flashcards

1.2 - How Markets Work Flashcards

1
Q

What are the assumptions of rational economic decision making

A

Consumers aim to maximise utility (satisfaction)
Firms aim to maximise profit
Governments aim to maximise social welfare

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2
Q

What is demand

A

The willingness to buy a good at a moment in time

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3
Q

What causes movement along the demand curve

A

A change in the price of the good

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4
Q

What causes a shift in demand

A

Caused by a change in any of the factors which affect demand

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5
Q

What’s a contraction in demand

A

When demand moves back. Quantity demanded falls because of price increase

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6
Q

What’s extension in demand

A

When demand moves forwards. Demand rises due to a decrease in price

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7
Q

What are the conditions/factors of demand

A

Population, Income, Related goods, Advertising, Taste/fashion, Expectations, Seasons, Government legislation

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8
Q

What is total utility

A

The satisfaction a customer gets from consuming a good

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9
Q

What is the Law of Diminishing Marginal Utility

A

The satisfaction coming from a good will decrease the more a good is consumed

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10
Q

What is elasticity of demand

A

A measure of how much is demanded due to a change in other variables
Elastic = responsive
Inelastic = unresponsive

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11
Q

What is Price Elasticity of Demand (PED)

A

The responsiveness of demand to a change in the price of goods

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12
Q

Price elasticity of demand (PED) equation

A

% change in quantity demanded
———————————————
% change in price

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13
Q

What are the numerical values for PED

A

> 1 is relatively elastic
< 1 is relatively inelastic
= ♾ is perfectly elastic
= 0 is perfectly inelastic

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14
Q

Factors affecting PED

A

Availability of substitutes
Time
Necessity
How much of % of income it takes
Addictiveness

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15
Q

What happens to tax if demand has a steep (inelastic) curve

A

Consumers pay more tax
Producers pay less tax

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16
Q

What happens to tax if demand has a flat (elastic) curve

A

Producers pay more tax
Consumers pay less tax

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17
Q

What is income elasticity of demand (YED)

A

The responsiveness of demand to a change in income

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18
Q

Numerical values for YED

A

< 0 is inferior good (rise in income leads to fall in demand)
> 0 is normal good (rise in income leads to rise in demand)
> 1 is a luxury good (type of normal good)

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19
Q

Equation for income elasticity of demand (YED)

A

% change in quantity demanded
———————————————
% change in income

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20
Q

What is cross elasticity of demand

A

The responsiveness of demand for one product to the change in price of another product

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21
Q

Numerical values for XED

A

> 0 is substitutes (increase price of good B increases demand for good A)
< 0 is complimentary goods (increase price of good B decreases demand for good A)
= 0 is complimentary goods (change price of good B has no impact on good A)

22
Q

What is supply

A

The willingness to provide a good/service at a specific price at a moment in time

23
Q

What causes movement along the supply curve

A

A change in price of the good

24
Q

What causes a shift in the supply curve

A

A change in any of the factors which affect supply

25
Q

What are the conditions/factors of supply

A

Cost of production, Price of other goods, Weather, Technology, Government legislations, Taxes and subsidies

26
Q

What is Price Elasticity of Supply (PES)

A

The responsiveness of supply to a change in price of the good

27
Q

Price Elasticity of Supply equation

A

% change in quantity supplied
——————————————
% change in price

28
Q

PES numerical values

A

> 1 is relatively elastic PES
< 1 is relatively inelastic PES
= ♾ is perfectly elastic
= 0 is perfectly inelastic

29
Q

Factors that affect PES

A

Time, Stocks, Working below full capacity, Availability of factors of production, Availability of substitutes

30
Q

What is price equilibrium

A

Where supply is equal to demand

31
Q

What is excess demand

A

Where the price is set below demand

32
Q

What is excess supply

A

Where the price is set higher than the equilibrium

33
Q

What is the rationing function

A

When there is limited resources and too much demand, price can be increased in order to keep up with supply.

34
Q

What’s the signalling function

A

If prices are rising because of high demand from consumers, this is a signal to suppliers to expand production to meet the higher demand

35
Q

What’s the incentive function

A

It encourages producers to supply more when prices rise, because of the possibility of greater profit

36
Q

What’s consumer surplus

A

The difference between the price the consumer is willing to pay and the price they actually pay.

37
Q

What’s the producer surplus

A

The difference between the price the supplier is willing to produce their product at and the price they actually produce at

38
Q

What does decrease in demand do to producer and consumer surplus

A

Decrease in demand leads to a fall in producer and consumer surplus

39
Q

What does an increase in demand do to producer and consumer surplus

A

Increase in demand leads to an increase in producer and consumer surplus

40
Q

How does decrease in supply affect producer and consumer surplus

A

Decrease in supply leads to fall in producer and consumer surplus

41
Q

How does increase in supply affect producer and consumer surplus

A

Increase in supply leads to an increase in producer and consumer surplus

42
Q

What is indirect tax

A

Where the person charged the tax is not responsible for paying it to the government

43
Q

What’s ad valorem tax (indirect tax)

A

A tax where it’s a percentage of the good. (E.g. VAT)

44
Q

What’s specific tax (indirect tax)

A

A tax where an amount is added to the price of the product. (E.g 10p per litre on petrol)

45
Q

What’s the incidence of tax

A

Who pays more tax, the consumer or producer

46
Q

What happens if demand is elastic or supply is inelastic, for tax

A

The producer pays more of the tax

47
Q

What happens if demand is inelastic or supply is elastic, for tax

A

The consumer pays more of the tax

48
Q

What are subsidies

A

Money given by the government to firms

49
Q

Why do people not always behave rationally

A

Influences of other people
Influences of habitual behaviour
Consumer weakness at computation (consumers can’t compare prices)

50
Q

Why may people not behave rationally

A

Influences of other people
Influences of habitual behaviour
Consumer weakness of comparing prices

Micro Economics (5 decks)

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