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Theme 1 Economics A Level > 1.2 how markets work > Flashcards

1.2 how markets work Flashcards

1
Q

what is rational choice theory?

A

the theory that people are rational and self interested making decisions for highest personal utility (a dominant paradigm in economics)

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2
Q

what factors are people influenced by in the real world?

A

emotional, cognitive and social biases/influences

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3
Q

maximisation definition

A

economic agent trying to obtain the most they can from economic activity

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4
Q

utility def

A

satisfaction/benefit one gets from consuming a good/service

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5
Q

assumptions made in rational decision making

A
  • all information available is used
  • people unbiased by others
  • people want to maximise utility or satisfaction
  • consumers have stable preferences
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6
Q

reasons suboptimal decisions are made

A
  • limited calculating ability
  • importance and bias of social networks
  • emotion overtaking logic
  • altruism overtaking pure self interest
  • desire for instant reward
  • sticking to default choices rather than considering others
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7
Q

homo economicus model

A

agents can calculate every cost and benefit, can compute probabilities, do not feel any emotion/regret

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8
Q

behavioural economics def

A

study of the psychological reasons why people make decisions they choose

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9
Q

what is bounded rationality

A

limited decision making in individulas by limited intormation, intellect and time

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10
Q

what is bounded self control

A

individuals having difficulty controlling impulses

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11
Q

social norms

A

are the behavious accepted in a group
may cause marginal disutility if people are not making informed choices

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12
Q

what is nudge theory

A

an attempt to manipulate social norms in a positive and non coersive manner

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13
Q

what is habitual behavour

A

people following the same regular routine and it is hard to break out of

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14
Q

what is loss aversion

A

people trying to manitain status quo by trying to minimise losses rather than optimise gains

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15
Q

why is habitual behaviour important?

A

helps agents see patterns in demand as it is influenced by habitual behaviour

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16
Q

what is a heuristic

A

a simple rule individuals ise ot make a judge,ent when making a decision

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17
Q

who wrote about heuristics

A

kahneman and tversky

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18
Q

3 heuristics

A
  • availability: not using information available but only memories or info that is remembered
  • representativeness: categorising in a decision based on past experiences
  • anchoring and adjustment: use an arbitrary number when making an estimate of a differnt number
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19
Q

example of irrational behaviour

A

vaping in young people - not previously hooked or addicted to nicotine - social norm - 24% of 16-19 year olds in the UK

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20
Q

definition of demand

A

quantity of a g/s consumrs willing and able to consume at a given price

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21
Q

demand curve and afffected by what

A

downwards sloping straight line
change in price = movement along
anything else - shift

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22
Q

what is a veblen good and examlpe

A

as price increases demand increases
example: rolex watch or lamborghini

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23
Q

pasific!

A

population: if up, demand up
advertising: if good advertising, more demand - like coca cola advert at xmastime
substitutes: if price of sub down, demand down - example coffee and tea
income: if income up, inferior good demand down and normal good demand up (private vs public transport)
fashion trend: changing trends reflect in changes in demand
interest: higher - lower d as cost of borrowing up
complements: if price up, demand for original good down - purchased together like tea and sugar

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24
Q

what is a giffen good

A

demand up even if inferior as incomes increse - such as bread, wheat - necessities

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25
Q

labour demand

A

derived demand: demand for labour depends on demand of the g/s

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26
Q

marginal utility def

A

satisfaction gained for every additional unit consumed

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27
Q

law of diminishing marginal utiltiy

A

as consumption of a g/s increases, satisfaction dericed graduall increases at a decreasing rate to a point where increase is zero - total utility maximised

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28
Q

diminshin marginal utility

A

usually every unit additional product consumed is less satisfactory - consumers willing to pay a lower price for each additional unit (reflected in a downwards slopinf demand curve)

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29
Q

example of diminishing marginal utility

A

cheap clothing in fast fashion brands like SHEIN and h and m - people buy mroe and mroe but wear less and less so more trash - negative externalities and environmental effects

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30
Q

comaprision of total utility and marginal utility

A

at the peak of TU curve (negative parabola), will be same amount of units as y=0 on marginal utility graph

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31
Q

supply def

A

quantity of g/s suppliers are willing and able to sell at a given price

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32
Q

supply curve

A

upwards sloping straignt line
movement along-change in price
anything else-shift

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33
Q

determinants of supply - pintswc

A

productivity: more efficient or productive produciton lines - more supply
indirect tax: makes production more expensive so decreases supply
number of firms and their prices: if prices are rising, more firms enter the market and are willing to supply more
technology: technological advances up efficiency so up s
subsidies: lower CoP so can supply more at lower prices
weather: if crop dictated by weather, supply harder to change
cost of production: depending on this - created by input factors of production - the lower, the more i supply

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34
Q

example of subsidies in the UK

A

EVs, automotives, clean energy

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35
Q

market equilibrium def

A

point at which demand is equal to supply

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36
Q

market clearing price def

A

the price at which d=s.
all goods sold with nothing left over and no one left to satisfy

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37
Q

surplus def and in diagram

A

area above equilibrium, excess supply so prices need to be lowered

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38
Q

shortage def and in diagram

A

excess demand - below equilibrium - prices need to be raised

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39
Q

real life example of price determination and shrotage

A

shortage of avocados since 2018 so increased illegal activity and crime as well as massibve price increases to try get prices back to equlitlbrium
since they have been classed a superfood

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40
Q

what are economic incentives

A

things that provide economic agents with reasons to provide goods and services

41
Q

what is the price mechanism

A

method by which prices of goods and services are achieved

42
Q

what are the 3 functions of the price mechanism?

A

rationing, signalling, incentive

43
Q

rationing function of PM

A

if there’s increased demand or decreased supply, prices rise

44
Q

signalling function of PM

A

changing prices show consumers.producers whether to join or leave a market

45
Q

incentive function of PM

A

consumer/producer motivate to a course of action - suhc as higher prices leading to a supplier supply more.

46
Q

graph for rationing funciton of PM

A

demand curve with P1 below equilibrium, and Q1 too much - too much demand not enough suply shift to equlilbrium

47
Q

graph for incentive function oF PM

A

demand curve with P1 above equilibrium, and Q1 too much - too much supply not enough demand shift to equlilbrium

48
Q

allocative efficiency

A

when consumer satisfaction maximised in production - Demand = supply

49
Q

productive efficiency

A

when an economy uses minimum inputs to produce max output at lowest cost

50
Q

economic efficiency

A

when there is both productive and allocative efficiency together

51
Q

def of PED

A

responsiveness of demand to a change in price

52
Q

formula PED

A

%change QD/ %change price

53
Q

coefficients of PED

A

0: perfectly inelastic (vert. line)
0-1: price inelastic (slight slant - demand change less than price)
1: unitary elasticity: exact proportional change
1-inf: price elastic (close to horizontal - demand change more than price)
infinity: perfectly elastic - horiz line

54
Q

factors affecting PED

A

proportion of income
luxury vs necessity
addictive good
number of uses
time - SR inelastic LR elastic
substitutes: mroe subs, more elastic
width of market: brand or indistry

55
Q

example for factor affecting elasticity - tax on cigarettes

A

although many brands, all taxed - so price elastic if switch to ecigs or vapes but still negative

56
Q

YED def

A

responsiveness of demand to change in income

57
Q

yed formula

A

%change QD/ %change income

58
Q

pos neg meaning yed

A

positive: normal good
negative: inferior good - as income rises demand falls

59
Q

determinants of YED

A

necessity vs luxury
level of income - lower likely to spend higher proportion on necessity
standards of living - firms using YED in richer countries to produce more normal products / superior products

60
Q

example of wealthy antions

A

2024 - Qatar, singapore. luxembourg

61
Q

necessity YED value

A

low elasticity but positive

62
Q

cross elasticity of demand def

A

responsiveness of a good to change in price of another good

63
Q

XED formula

A

%change QD of x/ %change price of y

64
Q

coefficient meaning of XED

A

positive: subsittutie
negative: complement
the more elastic the value, the closer the priducts

65
Q

complements def

A

products bought together to be consumer alongside one another

66
Q

example of company producing complements for more revenue`

A

apple - iphones and airpods, apple pen and ipad and keybpard etc
substitute with samsung or MS products

67
Q

pes def

A

the responsiveness of supply to a change in price

68
Q

formula for PES

A

%change QS / %change price

69
Q

businesses relation to PED

A

more inelastic PED - more control over prices - can increase prices more

70
Q

determinants to PES

A

price: firms are profit maxiimisers so if prices are higher they want to supply as much as possible
substitutes/mobility: if they can switch what they are producing easily, more likley to up QS
time: short run inelastic but long run more elastic to have time to adapt

71
Q

what is consumer surplus

A

a measure of economic benefit/gain that consumers recieve when they can buy g/s at a price cheaper than what they are willing to pay
- difference of what consumers are willing to and must pay in market

72
Q

consumer surplus on a graph

A

area below demand curve and above market price

73
Q

production surplus def

A

difference between price producers are willing and able to supply a product and the price they recieve in the market

74
Q

producer surplus on a graph

A

area above supply curve below market price

75
Q

change in d and s on prod/cons surplus

A

increase in demand - increased CS and PS
increase in supply - increased CS, PS depends on elasticity
decrease in demand: decreased both
decrease in supply: deacrease in PS, decrease in CS

76
Q

indirect tax def

A

tax on good or service increaseing supply costs for producers - collected by intermediaries on consumption, sale or use of g/s

77
Q

specific tax and example

A

a tax per unit of consumption
ex: sugar tax in UK - 24p for 8g or above,5-8g 18p tax per litre

78
Q

effect of sugar tax

A

sugar tax in UK - 24p for 8g or above,5-8g 18p tax per litre
effect - 2015-19 - drinks with over 5g of sugar fell by 34% in supermarkets

79
Q

excise duty

A

tax on tobacco, alcohol and road fuel

80
Q

government revenue from vat

A

2022-23 - £160 billion

81
Q

government revenue from tobacco tax

A

2024 - est £10.4 billion

82
Q

landfill tax UK

A

£94/tonne

83
Q

direct tax def

A

tax on an individual or organisation paid straight to government

84
Q

reduced VAT rates and examples

A

5% - womens sanitary products, children’s car seats, contraceptives
0% (zero rated) - books, children clothes, bus fare, prescription drugs
exempt: private education (subject to change), burial or cremation service, national health service

85
Q

what is stamp duty land tax

A

tax paid when buying property above a certain price - 500k pounds starting

86
Q

regressive tax def

A

tax taking higher proportion of low income earners’ income

87
Q

ad valorem tax def

A

indirect tax expressed as a percentage

88
Q

ad valorem tax diagram

A

pivotal shift of supply curve in - absolute amount of tax goes up as market price increases

89
Q

specific tax diagram

A

shift by constant amount - vertical
does not depend on market price

90
Q

plastic packaging tax

A

£200 / tonne of plastic packaging if not made up of at least 30% recycled plastic

91
Q

justifications for indirect taxes

A

provides government revenue, can alter consumer and producer behaviour, addresses market failure

92
Q

eval for indirect taxes

A
  • who pays the tax?
  • how much incident on consumer vs producer?
  • how much revenue is made?
  • how is the rev used?
  • consequences of inequality?
  • elasticity of good?
  • consequences at all - unintended?
93
Q

subsidy def

A

any form of government support offered mainly to producers that reduces marginal cost of supply

94
Q

what does the UK government subsidise

A

biofuel - to farmers, furlough scheme to labourers, renewable electricity generaiton tech - feed in tarrif scheme

95
Q

furlough scheme

A

uk gov spent £70 bn for 12 million jobs during Covid pandemic

96
Q

diagram for subsidies

A

supply curve shifts out as cost of supply decrease - shared by consumer and producer

97
Q

justificaitons for subsidies

A
  • can help poorer families in crisis
  • protecting jobs in industries hit by economic shocks
  • can help increase geographical mobility of labour by making transport and housing cheaper (initial role of HS2 and bridging north south div)
  • reducing costs of training and employing workers
98
Q

drawbacks of subsidies

A
  • firms may become overreliant
  • distotrion of resource allocation
  • excess production and environmental risk
  • expensive afffff
  • may be government failure if there is political lobbying
99
Q

UK steel industry case study

A
  • crises because of high international competition with high domestic costs
  • 2021 had £21 bn output and over 30k jobs in small areas
  • 2022 - Tata steel (largest) had a loss of £176 mill
  • subsidy of £200 mil
  • could be bad as supporting a failing industry - sunset
  • decarbonisation costs very high

Theme 1 Economics A Level (4 decks)

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