1.2 How markets work Flashcards
What is demand?
The ability and willingness to buy a particular good at a given price and time
What causes a movement along a demand curve?
A change in price
What causes a shift in demand?
PACIFIC
Population
Advertising
Substitutes
Interest rates
Fashion/trends
Income tax
Complements
What is total utility?
The satisfaction gained by a consumer as a result of their consumption
What does the Law of Diminishing Marginal Utility state?
As more of a good is consumed the satisfaction derived will decrease
PED - Prices elasticity of demand
% change in quantity demanded / % change in price
Values of PED
Between 0 - 1 is inelastic
Between 1 and infinity is elastic
Factors influencing PED
Availability of substitutes
Time
Necessity
Addictive
Income elasticity of demand - YED
% change in quantity demanded / % change in income
Valued of YED
Less than 0 is an inferior good
More than 0 is a normal good
More than 1 is a luxury good
XED - Cross elasticity of demand
% change in quantity demanded of good A / % change in price of good B
Values of XED
Less than 0 is a substitute
More than 0 is a complementary good
What is supply?
The ability and willingness to provide a good or service at a particular price and time
What causes a movement along a supply curve?
A change in price of the good
What causes a shift of the supply curve?
PINTSWC
Productivity
Indirect Tax
Numbers of firms in the market
Tech
Subsidies
Weather
Cost of production
PES - Price elasticity of supply
% change in quantity supplied / % change in price
Values of PES
Less than 1 is inelastic
More than 1 is elastic
What is price equilibrium?
Where supply is equal to demand
Price Mechanism
SIRA
Signalling - prices adjust to show where resource are required
Incentive - When the price of the product rises
Ration - Price serve to ration scarce resources
Allocating - Allocating scarce resources
What is a consumer surplus?
The difference between the price the consumer is willing to pay and the price they actually pay
What is a producer surplus?
The difference between the price the supplier is willing to produce their product and the price they actually produce at
What is an indirect tax?
A tax on expenditure
What are the 2 types of indirect tax?
Ad Valorem - where the tax payable increases in proportion to the value of the good
Specific Tax - where an amount is added to the price
What is the incidence of tax?
The burden on the taxpayer
What is a subsidy?
A grant given by the government to encourage production/consumption of a good or service
Why do consumers not always behave rationally? (consumer behaviour)
Influences of other people
Influence of habitual behaviour
Consumer weakness at computation
What is the underlying assumption for all rational decision making that consumers aim to maximise?
Maximise utility
